Use these links to rapidly review the documentSEPRACOR INC. INDEX



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended March 31, 2004                
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 0-19410

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

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

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

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

Indicate by check mark whether the registrant is 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 April 30, 2004 was: 85,586,673 shares.



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SEPRACOR INC.        INDEX



|Part IFinancial Information |  |                                                                                                     
|---------------------------- |  | ----------------------------------------------------------------------------------------------------
|Item 1.                      |  | Consolidated Financial Statements (Unaudited)                                                       
|                             |  | Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 (Unaudited)                  
|                             |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 (Unaudited)
|                             |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited)
|                             |  | Notes to Consolidated Interim Financial Statements                                                  
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations               
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                          
|Item 4.                      |  | Controls and Procedures                                                                             
|Part IIOther Information    |  |                                                                                                     
|Item 1.                      |  | Legal Proceedings                                                                                   
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                    
|                             |  | Signatures                                                                                          
|                             |  | Exhibit Index                                                                                       

2

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SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

|                                                                                                                                                                            |  | March 31, 2004 |            | December 31, 2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ----------------- | -
|Assets                                                                                                                                                                      |  |                |            |                   |  
|Current assets:                                                                                                                                                             |  |                |            |                   |  
|Cash and cash equivalents                                                                                                                                                   |  | $              | 412,082    |                   | $
|Restricted cash                                                                                                                                                             |  |                | 1,500      |                   |  
|Short-term investments                                                                                                                                                      |  |                | 67,411     |                   |  
|Accounts receivable, net                                                                                                                                                    |  |                | 43,003     |                   |  
|Inventories                                                                                                                                                                 |  |                | 9,607      |                   |  
|Other assets                                                                                                                                                                |  |                | 21,366     |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total current assets                                                                                                                                                        |  |                | 554,969    |                   |  
|Long-term investments                                                                                                                                                       |  |                | 49,279     |                   |  
|Property and equipment, net                                                                                                                                                 |  |                | 69,678     |                   |  
|Investment in affiliate                                                                                                                                                     |  |                | 2,872      |                   |  
|Patents and other intangible assets, net                                                                                                                                    |  |                | 30,368     |                   |  
|Other assets                                                                                                                                                                |  |                | 605        |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total assets                                                                                                                                                                |  | $              | 707,771    |                   | $
|                                                                                                                                                                            |  |                |            |                   |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                                              |  |                |            |                   |  
|Current liabilities:                                                                                                                                                        |  |                |            |                   |  
|Accounts payable                                                                                                                                                            |  | $              | 15,278     |                   | $
|Accrued expenses                                                                                                                                                            |  |                | 96,757     |                   |  
|Current portion of notes payable and capital lease obligation                                                                                                               |  |                | 1,109      |                   |  
|Current portion of convertible subordinated debt                                                                                                                            |  |                |           |                   |  
|Other current liabilities                                                                                                                                                   |  |                | 32,287     |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total current liabilities                                                                                                                                                   |  |                | 145,431    |                   |  
|Notes payable and capital lease obligation                                                                                                                                  |  |                | 2,389      |                   |  
|Long-term deferred revenue                                                                                                                                                  |  |                |           |                   |  
|Other long-term liabilities                                                                                                                                                 |  |                | 30,671     |                   |  
|Convertible subordinated debt                                                                                                                                               |  |                | 1,190,000  |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total liabilities                                                                                                                                                           |  |                | 1,368,491  |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Stockholders' equity (deficit):                                                                                                                                             |  |                |            |                   |  
|Preferred stock $1.00 par value, 1,000 shares authorized, none outstanding at March 31, 2004 and December 31, 2003                                                          |  |                |           |                   |  
|Common stock, $.10 par value, 240,000 and 240,000 shares authorized; 85,425 and 85,025 shares issued and outstanding, at March 31, 2004 and December 31, 2003, respectively |  |                | 8,542      |                   |  
|Additional paid-in capital                                                                                                                                                  |  |                | 694,211    |                   |  
|Accumulated deficit                                                                                                                                                         |  |                | (1,380,269 | )                 |  
|Accumulated other comprehensive income                                                                                                                                      |  |                | 16,796     |                   |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total stockholders' equity (deficit)                                                                                                                                        |  |                | (660,720   | )                 |  
|                                                                                                                                                                            |  |                |            |                   |  
|Total liabilities and stockholders' equity (deficit)                                                                                                                        |  | $              | 707,771    |                   | $
|                                                                                                                                                                            |  |                |            |                   |  

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

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SEPRACOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Per Share Amounts)

|                                                                      |                                             | Three Months Ended       |  
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | -
|
|Revenues:                                                             |                                             |                          |  
|                                                                      | Product sales                               |                          | $
|                                                                      | Royalties and other                         |                          |  
|                                                                      |                                             |                          |  
|                                                                      |                                             | Total revenues           |  
|                                                                      |                                             |                          |  
|Costs and expenses:                                                   |                                             |                          |  
|                                                                      | Cost of product sold                        |                          |  
|                                                                      | Cost of royalties and other                 |                          |  
|                                                                      | Research and development                    |                          |  
|                                                                      | Selling, marketing and distribution         |                          |  
|                                                                      | General and administrative and patent costs |                          |  
|                                                                      |                                             |                          |  
|                                                                      |                                             | Total costs and expenses |  
|                                                                      |                                             |                          |  
|                                                                      | Loss from operations                        |                          |  
|Other income (expense):                                               |                                             |                          |  
|                                                                      | Interest income                             |                          |  
|                                                                      | Interest expense                            |                          |  
|                                                                      | Loss on redemption of debt                  |                          |  
|                                                                      | Equity in investee (losses)                 |                          |  
|                                                                      | Other income (expense), net                 |                          |  
|                                                                      |                                             |                          |  
|                                                                      | Net loss                                    |                          | $
|                                                                      |                                             |                          |  
|                                                                      | Basic and diluted net loss per common share |                          | $
|Shares used in computing basic and diluted net loss per common share: |                                             |                          |  
|                                                                      | Basic and diluted                           |                          |  

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

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SEPRACOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

|                                                                            |                                                              | Three Months Ended |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------ | -
|
|Cash flows from operating activities:                                       |                                                              |                    |  
|                                                                            | Net loss                                                     |                    | $
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                              |                    |  
|                                                                            | Depreciation and amortization                                |                    |  
|                                                                            | Equity in investee losses                                    |                    |  
|                                                                            | Loss on redemption of debt                                   |                    |  
|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                          |                    |  
|                                                                            | Change in other assets                                       |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net cash provided by (used in) investing activities          |                    |  
|                                                                            |                                                              |                    |  
|Cash flows from financing activities:                                       |                                                              |                    |  
|                                                                            | Redemption of convertible subordinated debentures            |                    |  
|                                                                            | Net proceeds from issuance of common stock                   |                    |  
|                                                                            | Proceeds from sale of convertible subordinated debt          |                    |  
|                                                                            | Costs associated with sale of convertible subordinated debt  |                    |  
|                                                                            | Repayments of long-term debt and capital leases              |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net cash used in financing activities                        |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Effect of exchange rate changes on cash and cash equivalents |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net decrease in cash and cash equivalents                    |                    |  
|                                                                            | Cash and cash equivalents at beginning of period             |                    | $
|                                                                            |                                                              |                    |  
|                                                                            | Cash and cash equivalents at end of period                   |                    | $
|                                                                            |                                                              |                    |  
|Non cash activities:                                                        |                                                              |                    |  
|                                                                            | Additions to capital leases                                  |                    |  

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

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The year-end consolidated condensed balance
sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The consolidated interim financial statements, in
the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended March 31, 2004
and 2003. Certain prior amounts have been reclassified to conform to current year presentation.

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

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

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

2. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", or FIN 46, and, in December 2003, issued a revision to that interpretation. FIN 46R replaces FIN 46 and addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. A variable interest entity, or VIE, is defined as (a) an ownership, contractual or monetary interest in an entity where the ability to influence financial
decisions is not proportional to the investment interest or (b) an entity lacking the invested capital sufficient to fund future activities without the support of a third party. FIN 46R
establishes standards for determining under what circumstances VIEs should be consolidated with their primary beneficiary, including those to which the usual condition for consolidation does not
apply. We adopted FIN 46 in the year ended December 31, 2003, and adopted FIN 46R in the first quarter of 2004, for non-special purpose entities created prior to February 1,
2003. Our adoption of FIN 46R has not had a material effect on our financial statements.

3. Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent
shares during the period. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed conversion of preferred stock, convertible subordinated debt and the assumed exercise of outstanding stock options,

6

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the
proceeds of which are then assumed to have been used to repurchase outstanding stock options using the treasury stock method. Purchased call options are also not included in the per share
calculations because including them would be anti-dilutive.

For
the three months ended March 31, 2004 and 2003, basic and diluted net loss per common share is computed based on the weighted-average number of common shares outstanding
during the period because the effect of common stock equivalents would be anti-dilutive. Certain securities were not included in the computation of diluted earnings per share for the three
months ended March 31, 2004 and 2003 because they would have an anti-dilutive effect due to net losses for such periods. These excluded securities include the following:

Options
to purchase shares of common stock:

(in thousands, except price per share data)

March 31, 2004

March 31, 2003Number of options


13,987


12,348Price range per share

$
2.63 to $87.50

$
2.50 to $87.50


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

(in thousands)

March 31, 2004

March 31, 20037% convertible subordinated debentures due 2005



1,7925% convertible subordinated debentures due 2007

4,763

4,7635.75% convertible subordinated notes due 2006



7,166Series A 0% convertible senior subordinated notes due 2008

7,839

Series B 0% convertible senior subordinated notes due 2010

16,756

29,358

13,721


4. Accounting for Stock-Based Compensation

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

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

Three Months Ended March 31,(in thousands, except per share data)2004

2003Net loss attributable to common stockholders

$
(50,441
)
$
(29,759
)Total stock-based employee compensation expense determined under fair value based method for all awards


(11,038
)

(14,403
)Pro forma net loss

$
(61,479
)
$
(44,162
)Amounts per common share:Basic and dilutedas reported

$
(0.59
)
$
(0.35
)Basic and dilutedpro forma

$
(0.72
)
$
(0.52
)


5. Inventories

Inventories consist of the following:

(in thousands)

March 31, 2004

December 31, 2003Raw materials

$
1,887

$
1,062Work in progress


2,118


1,295Finished goods


5,602


4,509$
9,607

$
6,866


6. Patents and Other Intangible Assets

The following schedule details the carrying value of our patents and other intangible assets as of March 31, 2004 and December 31, 2003:

(in thousands)

March 31, 2004

December 31, 2003Deferred finance costs, gross

$
35,106

$
42,957Accumulated amortization


(9,556
)

(13,136
)Deferred finance costs, net

$
25,550

$
29,821Patents, gross

$
7,223

$
7,223Accumulated amortization


(2,405
)

(2,231
)Patents, net

$
4,818

$
4,992


Amortization
expense was $1,554,000 and $2,082,000, including amortization expense of $1,380,000 and $1,222,000 related to deferred financing costs for the three months ended
March 31, 2004 and 2003, respectively. We currently estimate that our amortization expense will be $4,496,000, $5,990,000, $5,965,000, $4,328,000 and $3,935,000 for the remainder of 2004 and
for the years ending December 31, 2005, 2006, 2007 and 2008, respectively.

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7. Convertible Subordinated Debt

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

|(in thousands)                                             |  | March 31, 2004 |           | December 31, 2003
|---------------------------------------------------------- |  | -------------- | --------- | -----------------
|5.75% convertible subordinated notes due 2006              |  | $              |          |                  
|5% convertible subordinated debentures due 2007            |  |                | 440,000   |                  
|Series A 0% convertible senior subordinated notes due 2008 |  |                | 250,000   |                  
|Series B 0% convertible senior subordinated notes due 2010 |  |                | 500,000   |                  
|                                                           |  |                |           |                  
|Total                                                      |  | $              | 1,190,000 |                  
|                                                           |  |                |           |                  

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

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

8. Comprehensive Loss

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

Three Months Ended(in thousands)

March 31, 2004

March 31, 2003Comprehensive loss:Net loss

$
(50,441
)
$
(29,759
)Net foreign currency translation adjustment


820


(9
)Net unrealized gain (loss) on available-for-sale securities


3,769


16Total comprehensive loss

$
(45,852
)
$
(29,752
)


9. Commitments and Contingencies

We enter into standard indemnification agreements in our ordinary course of business where we indemnify and hold harmless certain parties against claims,
liabilities and losses brought by a third party to the extent that the claims arise out of (1) injury or death to person or property caused by defect in our product or product candidates,
(2) negligence in the manufacture or distribution of our product or product candidates or (3) a material breach by us. We have no liabilities recorded for these guarantees at
March 31, 2004. If liabilities were incurred, we have insurance policies covering product liabilities, which should mitigate, but may not eliminate, losses.

We
have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity.
The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of

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future
payments we could be required to make under these indemnification agreements is unlimited; however, we believe the fair value of these indemnification agreements is minimal.

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

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

We
are unable to reasonably estimate any possible range of loss related to these lawsuits due to their uncertain resolution.

10. Ross Agreement Amendment

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

11. Subsequent Event

On April 30, 2004, we announced an amendment to our agreement with MedPointe Inc., or MedPointe, for the co-promotion of
ASTELIN® brand azelastine HCl for the treatment of allergic rhinitis. Under the terms of the amendment, which becomes effective on July 1, 2004, we will only be responsible for
providing sample coverage for ASTELIN under a fee-based compensation program. If we meet the sample coverage requirement for the three months ended September 30, 2004, we will earn
$1,000,000. In addition, effective October 1, 2004, both parties have the unilateral right to terminate the agreement without cause. If the agreement is terminated by either party, we will
receive a termination payment from MedPointe of $6,950,000, less any amount we earned prior to October 1, 2004 related to the sample coverage.

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

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

Executive Overview

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

Significant 2004 Developments

On April 30, 2004, we announced an amendment to our agreement with MedPointe Inc., or MedPointe, for the co-promotion of
ASTELIN® brand azelastine HCl for the treatment of allergic rhinitis. Under the terms of the amendment, which becomes effective on July 1, 2004, we will only be responsible for
providing sample coverage for ASTELIN under a fee-based compensation program. If we meet the sample coverage requirement for the three months ended September 30, 2004, we will earn
$1,000,000. In addition, effective October 1, 2004,
both parties have the unilateral right to terminate the agreement without cause. If the agreement is terminated by either party, we will receive a termination payment from MedPointe of $6,950,000,
less any amount we earned prior to October 1, 2004 related to the sample coverage.

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

On
February 27, 2004, we received an "approvable" letter from the United States Food and Drug Administration, or FDA, for our New Drug Application, or NDA, for
ESTORRA brand eszopiclone for the treatment of insomnia characterized by difficulty falling asleep, and/or difficulty maintaining sleep during the night and early morning. Contingent upon
approval from the FDA, we would expect the recommended dosing to achieve sleep maintenance to be 2 mg or 3 mg for adult patients and 2 mg for elderly patients, and for elderly patients whose primary
complaint is difficulty falling asleep, we would expect the recommended dosing to be 1 mg. The FDA has not requested additional clinical or

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preclinical
trials for final approval. Based on discussions with the FDA we expect the FDA to characterize our resubmission as a class II resubmission, which will be reviewed by the FDA within
a six month period. As a result we are currently planning on an end of 2004 product launch. We are currently expanding our sales force in anticipation of marketing ESTORRA to primary care physicians
and psychiatrists, the principal prescribers of sleep medications. If the FDA delays or denies final approval of our NDA for ESTORRA, then commercialization of ESTORRA may be delayed or terminated,
which could have a material adverse effect on our business.

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

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

Critical Accounting Policies

We identified critical accounting policies in our annual report on Form 10-K for the year ended December 31, 2003. These critical
accounting policies relate to product revenue recognition, royalty revenue recognition, rebate and return reserves, patents, intangibles and other assets, accounts receivable and bad debt, induced
conversion of debt and inventory write-downs. These policies require us to make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty inherent in
these matters, our actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently
aware of any reasonably likely events or circumstances that would result in us reporting materially different amounts. Additionally, no changes to these critical accounting policies have taken place
in the three months ended March 31, 2004.

Three Month Periods ended March 31, 2004 and 2003



Product revenues were $85,056,000 and $72,156,000 for the three months ended March 31, 2004 and 2003, respectively, an increase of approximately 18%. The
increase for the three-month period ended March 31, 2004 as compared with the same period in 2003 is due primarily to an increase in unit volume sales of XOPENEX of approximately 20%, offset by
a decrease in the net selling price per unit of XOPENEX of approximately 2%. The decrease in the net selling price per unit of XOPENEX is due primarily to an increase in sales rebates and allowances
of approximately 7%, which are accounted for as a reduction to gross product sales, offset by a gross unit price increase of approximately 5%. The increase in sales rebates and allowances is due
primarily to an increase in supplemental Medicaid and Medicare allowances of approximately 171% that are impacted materially by our sales of 1.25 mg XOPENEX product as the rebate per unit on this
dosage is higher than the rebate per unit on our other dosages of XOPENEX. Gross unit sales of our 1.25 mg XOPENEX product increased by approximately 64% for the three months ended March 31,
2004 as compared with the same period in 2003. We believe that the increase in total XOPENEX unit volume is due to market share increases that can be attributed to increased demand for XOPENEX as a
result of positive experiences reported by patients and physicians and our targeted marketing to high volume prescribers.

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Royalties
and other revenues were $14,422,000 and $12,350,000 for the three months ended March 31, 2004 and 2003, respectively, an increase of approximately 17%. The increase for
the three months ended March 31, 2004 as compared with the same period in 2003 is primarily due to an increase in royalties earned, particularly in Japan, on sales of ALLEGRA® under
our agreement with Aventis. Offsetting the increase in royalties earned on sales of ALLEGRA is a decrease in royalties earned on sales of CLARINEX® under our agreement with Schering-Plough
Corporation. Royalties earned on sales of CLARINEX continue to be adversely impacted by the availability of other allergy drugs without a prescription. Included in other revenues for the three months
ended March 31, 2004 are co-promotion revenue of $902,000 received from MedPointe for our co-promotion of ASTELIN® and $219,000 of other MedPointe related
revenue as compared with $0 for the three months ended March 31, 2003.



Cost of product sold was $8,860,000 and $6,949,000 for the three months ended March 31, 2004 and 2003, respectively, an increase of approximately 28%. Cost
of product sales as a percentage of product sales was approximately 10% for both the three months ended March 31, 2004 and 2003. The increase for the three months ended March 31, 2004 as
compared with the same period in 2003 is primarily due to the increase in product sales of 18% and, to a lesser extent to a reduction in the cost of products
sold of $771,000 in the three months ended March 31, 2003 due to a favorable outcome of a quality control issue. This was partially offset by a lower manufacturing cost per unit, which resulted
from an increase in the number of units of XOPENEX produced in the three months ended March 31, 2004 as compared with the same period in 2003.

Cost
of royalties and other revenues was $240,000 and $256,000 for the three months ended March 31, 2004 and 2003, respectively, a decrease of approximately 6%. Our cost of
royalties and other revenues consists primarily of an obligation to a third-party as a result of royalties we receive from Schering-Plough Corporation based upon its sales of CLARINEX. The decrease
for the three months ended March 31, 2004 as compared with the same period in 2003 resulted from the decrease in royalties we earned on sales of CLARINEX.



Research and development expenses were $37,296,000 and $53,183,000 for the three months ended March 31, 2004 and 2003, respectively, a decrease of
approximately 30%. The decrease for the three months ended March 31, 2004 as compared with the same period in 2003 is partially due to our decreased spending on ESTORRA brand eszopiclone, for
which we submitted an NDA to the FDA in January 2003. The decrease is also due to our reduced spending on our tecastemizole and (S)-oxybutynin programs. We discontinued our development of
tecastemizole in December 2003, and we have elected not to fund the (S)-oxybutynin clinical program at this time. Our decreased spending in these programs was partially offset by our increased
spending on the XOPENEX hydrofluoroalkane metered-dose inhaler, or HFA MDI, and arformoterol programs.

Drug
development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an Investigational New Drug
Application, or IND, which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study:
Phases I, II and III. The most significant costs in clinical development are in the Phase III clinical trials as they tend to be the longest and largest studies in the drug development process.
Following successful completion of Phase III clinical trials, an NDA must be submitted to, and accepted by, the FDA, and the FDA must approve the NDA, prior to commercialization of the drug. As
further discussed below, we currently have two product candidates in Phase III clinical trials and one NDA submitted in January 2003 and currently under FDA review. The successful development
of our product candidates is highly uncertain. Product

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

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

Below
is a summary of our product candidates representing 10% or more of our direct project research and development spending during the three months ended March 31, 2004. 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 March 31, 2004, and the three product candidates listed accounted for approximately 87% of our direct project research and development spending during this
period.

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

---

Below
is expenditure information related to our product candidates representing 10% or more of our direct project research and development spending during the three months ended
March 31, 2004 and 2003, respectively, as well as the costs incurred to date on these projects. The costs in this analysis include only direct costs and do not include certain indirect labor,
overhead or other costs which benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

|(in thousands)        |  | Project costs for the three months
ended March 31, 2004 |       | Project costs to date through
March 31, 2004 |   | Project costs for the three months
ended March 31, 2003 |  | Project costs to date through
March 31, 2003
|--------------------- |  | ------------------------------------------------------- | ----- | -------------------------------------------- | - | ------------------------------------------------------- |  | --------------------------------------------
|Arformoterol          |  | $                                                       | 8,536 |                                              | $ | 126,660                                                 |  | $                                           
|XOPENEX HFA MDI       |  |                                                         | 8,270 |                                              |   | 119,033                                                 |  |                                             
|ESTORRA (eszopiclone) |  |                                                         | 5,537 |                                              |   | 141,267                                                 |  |                                             

Due
to the length of time necessary to develop a product, the uncertainties related to the ability to obtain governmental approval for commercialization and the difficulty in estimating
costs of projects, accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA approved status is extremely difficult. We do not believe it is possible to estimate,
with any degree of accuracy, the costs of product candidates which are in stages earlier than Phase III. The table below estimates the cost ranges to bring our active phase III product candidates to
an NDA filing:

XOPENEX HFA MDI

$15 to $20 million (based on an expected NDA submission in the second quarter of 2004)Aformoterol

$27 to $32 million (based on an expected NDA submission in the first quarter of 2005)


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

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



Selling, marketing and distribution expenses were $84,434,000 and $35,681,000 for the three months ended March 31, 2004 and 2003, respectively, an increase
of approximately 137%. Of the 137% increase, 86% is due to an accrual for $30,671,000, which represents the present value of the termination payments totaling $33,000,000 that we will make to Ross.
Pursuant to an amendment to the agreement in March 2004, we agreed to terminate the XOPENEX co-promotion agreement with Ross effective December 31, 2004. The remaining
increase of 51% is primarily due to increased XOPENEX sales commission expense paid to internal sales representatives and to Ross in 2004 as a result of the increase in sales of XOPENEX for the three
months ended March 31, 2004. Additionally, during 2004, we implemented our sales force expansion for, and have incurred increased marketing and training expenses related to, ESTORRA, which we
expect to commercialize in 2004, if we receive final approval from the FDA.



General and administrative and patent expenses were $7,034,000 and $5,842,000 for the three months ended March 31, 2004 and 2003, respectively, an increase
of approximately 20%. The increase for the three months ended March 31, 2004 as compared with the same period in 2003 is primarily due to payroll and related expenses resulting from an increase
in headcount related to permanent and temporary employees and contracted service providers to support the expected commercialization of ESTORRA.



Interest income was $1,255,000 and $1,931,000 for the three months ended March 31, 2004 and 2003, respectively. The decrease for the three months ended
March 31, 2004 as compared with the same period in 2003 is due primarily to lower average cash and short- and long-term investment balances available for investment and a slight
decrease in the interest earned on investments in 2004.

Interest
expense was $6,124,000 and $13,657,000 for the three months ended March 31, 2004 and 2003, respectively. The decrease for the three months ended March 31, 2004 as
compared with the same period in 2003 is due to lower outstanding average balances on our interest-bearing debt. The average outstanding balance on our interest-bearing debt for the first quarter of
2004 was $655,000,000 as compared to the average outstanding balance in the first quarter of 2003 of approximately $981,870,000.

Loss
on debt redemption was $7,022,000 and $0 for the three months ended March 31, 2004 and 2003, respectively. The loss in the three months ended March 31, 2004 resulted
from our redemption of the remaining outstanding $430,000,000 face value of our 5.75% convertible subordinated notes due 2006 for aggregate cash consideration of $430,000,000, excluding accrued
interest. The loss represents the write-off of $7,022,000 of deferred financing costs related to the debentures.

Equity
in investee (losses) were ($147,000) and ($625,000) for the three months ended March 31, 2004 and 2003, respectively. The loss for the three-month periods ended
March 31, 2004 and 2003 represents our portion of BioSphere losses.

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Recent Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities" and, in December 2003, issued a revision to that
interpretation. FIN No. 46R replaces FIN No. 46 and addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. A variable
interest entity, or VIE, is defined as (a) an ownership, contractual or monetary interest in an entity where the ability to influence financial decisions is not proportional to the investment
interest, or (b) an entity lacking the invested capital sufficient to fund future activities without the support of a third party. FIN No. 46R establishes standards for determining under
what circumstances VIEs should be consolidated with their primary beneficiary, including those to which the usual condition for consolidation does not apply. We adopted FIN No. 46 in the year
ended December 31, 2003, and adopted FIN No. 46R in the first quarter of 2004, for non-special purpose entities created prior to February 1, 2003. Our adoption of FIN
No. 46R has not had a material effect on our financial statements.

Liquidity and Capital Resources

Cash, cash equivalents and short- and long-term investments totaled $530,272,000 at March 31, 2004, compared to $840,388,000 at
December 31, 2003.

The
net cash used in operating activities for the three months ended March 31, 2004 was $27,729,000. The net cash used in operating activities includes a net loss of $50,441,000
adjusted by non-cash charges of $11,457,000, which includes a loss on early debt extinguishment of $7,022,000. Accounts receivable decreased by $7,588,000 due primarily to the decreased
sales of XOPENEX during March 2004 as compared to December 2003 due to customary seasonal fluctuations. Inventory increased by $2,741,000 due to shifts in product mix as well as in
anticipation of production down time as our contract manufacturer qualifies upgraded production equipment. On a combined basis, accounts payable and accrued expenses decreased by $27,507,000 primarily
due to lower research and development costs. Other current liabilities increased by $3,530,000 primarily due to additional accruals for product revenue rebates and return reserves related to XOPENEX
revenues. Other liabilities increased by $30,452,000 primarily due to an accrual for $30,671,000, which represents the present value of a termination payment we will make to Ross.

The
net cash provided by investing activities for the three months ended March 31, 2004 was $17,683,000. Cash was provided by net sales and maturities of short- and
long-term investments of $20,098,000. We also made purchases of property and equipment of $2,351,000.

The
net cash used in financing activities for the three months ended March 31, 2004 was $283,654,000. We used $433,709,000 to redeem the remaining outstanding $430,000,000 face
value of our 5.75% subordinated notes due 2006 at face value plus accrued interest. We received proceeds of $150,000,000, offset by $4,125,000 of issuance costs, from the issuance of 0% convertible
senior subordinated notes. We also received proceeds of $4,344,000 from the issuance of common stock upon the exercise of stock options issued under our stock option plans. We used $164,000 to repay
capital lease obligations and long-term debt.

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

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product
sales. Our actual future cash requirements and our ability to generate revenue, however, will depend on many factors, including:



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

Based
on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when due. If we are not
able to commercialize ESTORRA, it is likely that our business would be materially and adversely affected and that we would be required to raise additional funds in order to repay our outstanding
convertible debt. In addition, if we are not able to commercialize XOPENEX HFA MDI, we may be required to raise additional funds. We cannot assure that, if required, we would be able to raise the
additional funds on favorable terms, if at all.

Off-Balance Sheet Arrangements

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

Contractual Obligations

Our contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31, 2003 has not materially changed
since we filed that report, except for:



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Factors Affecting Future Operating Results

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

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

We have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses on a consolidated basis of
approximately $50.4 million for the three months ended March 31, 2004 and $135.9 million for the year ended December 31, 2003. We expect to continue to incur significant
operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues or
that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the
future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition
will be materially and adversely affected.

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

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

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



18

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We received an "approvable" letter from the FDA for ESTORRA on February 27, 2004; however, we cannot be certain that the FDA will approve the ESTORRA NDA.

Our
success significantly depends on our continued ability to develop and market new products. There can be no assurance that we will be able to develop and introduce new products in a
timely manner or that new products, if developed, will achieve market acceptance. In addition, our growth is dependent on our continued ability to penetrate new markets where we have limited
experience and competition is intense. There can be no assurance that the markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that
our products will achieve customer acceptance in these markets, that competitors will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain
profits in these markets.

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

The FDA issues an "approvable" letter when it believes it can approve an NDA if the applicant submits specific additional information or agrees to specific
conditions. In order to receive approval, the applicant must satisfy the requests made and/or answer the questions posed by the FDA, through a resubmission of the NDA. On February 27, 2004, we
received an "approvable" letter from the FDA for our ESTORRA NDA. We intend to resubmit the NDA and, assuming we satisfactorily respond to the issues raised by the FDA, we expect to receive approval
during 2004. However, we cannot be certain that we will satisfactorily respond to the issues raised by the FDA or that the FDA will grant us approval during 2004, if at all. If the FDA delays or
denies approval of our NDA for ESTORRA, or any other NDA that we file in the future, then commercialization of ESTORRA or our other products under development, may be delayed or terminated, which
would have a material adverse effect on our business.

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

We have entered into a collaboration agreement with 3M Drug Delivery Systems Division for the scale-up and manufacturing of XOPENEX HFA MDI, and we
may enter into additional development collaboration agreements in the future. Under our agreement with 3M, 3M is responsible for manufacturing an MDI formulation of XOPENEX. We are responsible for
conducting clinical trials using the 3M-manufactured formulation. If the trials are successful, we would be responsible for submitting an NDA to the FDA for XOPENEX HFA MDI. If 3M is unable to
manufacture a XOPENEX HFA MDI formulation, or our clinical trials are unsuccessful, we may be unable to proceed with the development of XOPENEX HFA MDI. If 3M, or any future development or
commercialization collaborator, does not devote sufficient time and resources to its collaboration arrangement with us, breaches or terminates its agreement with us, fails to perform its obligation to
us in a timely manner or is unsuccessful in its development and/or commercialization efforts, we may not realize the potential commercial benefits of the arrangement and our results of operations may
be adversely affected. In addition, if regulatory approval of XOPENEX HFA MDI or any other product candidate under development by or in collaboration with a partner is delayed, denied or includes
limitations on indicated uses for which the product may be marketed, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.

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

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

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

In May 2001, an advisory panel to the FDA recommended that the FDA allow certain popular allergy medications to be sold without a prescription. In
November 2002, the FDA approved CLARITIN, an allergy medication, to be sold without a prescription. In the future, the FDA may also allow the sale of other allergy medications
without a prescription. The sale of CLARITIN and/or, if allowed, the sale of other allergy medications without a prescription, may have a material adverse effect on our business because the market for
prescription drugs, including ALLEGRA and CLARINEX, for which we receive royalties on sales, has been and may continue to be adversely affected. We expect revenues from royalties earned on both
CLARINEX and ALLEGRA to decrease slightly in 2004 due to the continued adverse impact on sales of these prescription allergy drugs resulting from the availability of competitor allergy drugs without a
prescription.

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

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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 three months ended March 31, 2004 and the years ended December 31, 2003 and 2002 and substantially
all of our product revenues for the year ended December 31, 2001, resulted from sales of XOPENEX. If the FDA grants final marketing approval for our ESTORRA NDA, we do not expect to launch
ESTORRA until late 2004 at the earliest. Accordingly, we expect that sales of XOPENEX will represent all of our product sales and a majority of our total revenues through at least the third quarter of
2004. 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
health care
professionals that the benefits of XOPENEX justify the higher price. If XOPENEX does not continue to compete successfully against competitive products, our business will not be successful.

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

Our success depends in part on our ability to obtain, maintain and enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully
will largely depend upon our ability to obtain and maintain patents of sufficient scope to prevent third parties from developing similar or competitive products. In the absence of patent and trade
secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products and technology. It is also possible that we could incur
substantial costs if we are required to initiate litigation against others to protect or enforce our intellectual property rights.

We
have filed patent applications covering composition of, methods of making and methods of using, single-isomer or active-metabolite forms of various compounds for specific
applications. Our revenues under collaboration agreements with pharmaceutical companies depend in part on the existence and scope of issued patents. We may not be issued patents based on patent
applications already filed or that we file in the future and if patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements. We do not
receive royalty revenue from sales of products licensed under collaboration agreements in countries where we do not have a patent for such products. The issuance of a patent in one country does not
ensure the issuance of a

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

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

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

Our success depends in part on our ability to operate without infringing upon the proprietary rights of others. Third parties, typically drug companies, hold
patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for most of the drug candidates for which we have patents or patent applications.
Third parties also hold patents relating to drug delivery technology that may be necessary for the development or commercialization of some of our drug candidates. In each of these cases, unless we
have or obtain a license 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
February 2004, we received an "approvable" letter from the FDA for our NDA for ESTORRA. If the FDA delays or denies approval of our NDA for ESTORRA, or delays or denies
acceptance or approval of any other NDA that we file in the future, then commercialization of ESTORRA or our other products under development may be delayed or terminated, which could have a material
adverse effect on our business.

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



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

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

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



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

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

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

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been
approved for marketing. For example, although we do not expect to receive marketing approval from the FDA for ESTORRA until late 2004, if at all, we have already expanded our sales force in
anticipation of receiving such marketing approval. In addition, if we enter into co-promotion arrangements or market and sell additional products directly, we will need to expand our sales
force.

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

If we do not maintain current Good Manufacturing Practices, then the FDA could refuse to approve marketing applications.

We do not have the capability to manufacture in sufficient quantities all of the products that may be approved for sale, and developing and obtaining this
capability will be time consuming and expensive. The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices regulations. The
failure by us, our collaborative development partners or third-party manufacturers to maintain current Good Manufacturing Practices compliance and/or our failure to scale up our manufacturing
processes could lead to refusal by the FDA to approve marketing applications. Failure in either respect could also be the basis for action by the FDA to withdraw approvals previously granted and for
other regulatory action.

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

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

Cardinal Health, Inc. 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.

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

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

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

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

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

We may be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of human health care products. These claims
could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Although we maintain product liability insurance coverage for both the clinical trials and commercialization of our products, it is possible that we will not
be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all potential claims.

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

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

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

As of March 31, 2004, our total long-term debt excluding the current portion, was approximately $1.2 billion and our stockholders'
equity (deficit) was ($660.7 million). None of the 5% convertible subordinated debentures due 2007, the 0% Series A notes due 2008 nor the 0% Series B notes due 2010 restricts our
ability or our subsidiaries' ability to incur additional indebtedness, including debt that ranks senior to the notes. The Series A notes and the Series B notes are senior to our 5%
debentures. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity with the

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notes.
Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The conversion prices for the 5%
debentures, 0% Series A notes and 0% Series B notes are $92.38, $31.89, and $29.84, respectively. If the market price for our common stock does not exceed the conversion price, the
holders of our outstanding convertible debt may not convert their securities into common stock.

Historically,
we have had negative cash flow from operations. For the three months ended March 31, 2004, net cash used in operating activities was approximately
$27.7 million. Our annual debt service through 2006, assuming no additional 5% debentures are converted, redeemed, repurchased or exchanged, is approximately $22.0 million. Unless we are
able to generate sufficient operating cash flow to service our outstanding debt, we will be required to raise additional funds or default on our obligations under the debentures and notes. If we are
not able to commercialize ESTORRA, it is likely that our business would be materially and adversely affected and that we would be required to raise additional funds in order to repay our outstanding
convertible debt. In addition, if we are not able to
commercialize XOPENEX HFA MDI, we may be required to raise additional funds. There can be no assurance that, if required, we would be able to raise the additional funds on favorable terms, if at all.

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

As of March 31, 2004, we had approximately $1.2 billion of outstanding convertible debt. In order to reduce future payments due at maturity and, in
the case of our 5% debentures, future cash interest payments, we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for
shares of our common stock, warrants, preferred stock, debt or other consideration; or a combination of any of the foregoing. If we exchange shares of our capital stock, or securities convertible into
or exercisable for our capital stock, for outstanding convertible debt or use the proceeds from the issuance of convertible debt to fund the redemption of outstanding convertible debt with a higher
conversion ratio, the number of shares that we might issue as a result of such exchanges would significantly exceed the number of shares originally issuable upon conversion of such debt and,
accordingly, such exchanges would result in material dilution to holders of our common stock. We cannot assure you that we will repurchase or exchange any additional outstanding convertible debt.

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

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related
disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be
no assurance, however, that our estimates, or the assumptions underlying them, will be correct. For example, our royalty revenue is recognized based upon our estimates of our collaboration partners'
sales during the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income would be reduced. This, in turn, could adversely affect our stock
price.

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

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit of regulatory approvals,
license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied

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our
funding needs through collaboration arrangements with corporate partners and equity and debt financings. These funding sources may not be available to us when needed in the future, and, if
available, they may not be on terms acceptable to us. Insufficient funds could require us to delay, scale back or eliminate certain of our research and product development programs or to enter into
license agreements with third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash requirements may vary materially from those now
planned because of factors including:



We expect to face intense competition and our competitors have greater resources and capabilities than we have.

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

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.

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

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

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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. We filed a motion to dismiss both consolidated amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did
allow much of the case to proceed. The discovery process will begin shortly.

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

Fluctuations in the demand for products, the success and timing of collaboration arrangements and regulatory approval, any termination of development efforts,
expenses and the results of operations of our subsidiaries will cause fluctuations in our quarterly operating results, which could cause volatility in our stock price.

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



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

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

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provisions
could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors. These provisions include:



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

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

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

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and financial condition. These
risks are described in our annual report on Form 10-K for the year ended December 31, 2003. As of May 6, 2004, there have been no material changes to the market risks
described in our annual report on Form 10-K for the year ended December 31, 2003. Additionally, we do not anticipate any near-term changes in the nature of our
market risk exposures or in our management's objectives and strategies with respect to managing such exposures.

ITEM 4. CONTROLS AND PROCEDURES



PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

We
and several of our current and former officers and a current director are named as defendants in several purported class action complaints which have been filed on behalf of certain
persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002.
These complaints allege violations of the Exchange Act and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily they allege that the defendants made
certain materially false and misleading statements relating to the testing, safety and likelihood of FDA approval of SOLTARA. On April 11, 2003, two consolidated amended complaints were filed,
one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our debt securities. These consolidated

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amended
complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. We filed a motion to
dismiss both consolidated amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did allow much of the case to proceed. The
discovery process will begin shortly.

We
are unable to reasonably estimate any possible range of loss related to these lawsuits due to their uncertain resolution.

ITEMS 25. NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

| |  | 10.1 |  | Amendments No. 1, 2 and 3, dated January 19, 2000, January 1, 2001 and March 19, 2004, to the Co-Promotion Agreement between Abbott Laboratories, Inc. and the Registrant.
| |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                    
| |  | 31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                    
| |  | 32.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        
| |  | 32.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                  |  | SEPRACOR INC.
|----------------- |  | -------------
|Date: May 6, 2004 |  | By:          

|Date: May 6, 2004 |  | By: | /s/ROBERT F. SCUMACIRobert F. Scumaci Executive Vice President, Finance and Administration, and
Treasurer (Principal Accounting Officer)
|----------------- |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1       |  | Amendments No. 1, 2 and 3, dated January 19, 2000, January 1, 2001 and March 19, 2004, to the Co-Promotion Agreement between Abbott Laboratories, Inc. and the Registrant.
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                    
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                    
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        

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