SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q/A

AMENDMENT NO. 1

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended September 30, 2007            
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 0-19410

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

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                |  | 22-2536587(IRS Employer
Identification No.)
|------------------------------------------------------------------------------------- |  | -------------------------------------------
|84 Waterford Drive
Marlborough, Massachusetts(Address of Principal Executive Offices) |  | 01752(Zip Code)                            
|Registrant's telephone number, including area code:(508) 481-6700                    

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o


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

The number of shares outstanding of the registrant's class of Common Stock as of October 31, 2007 was: 107,442,154 shares.



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EXPLANATORY NOTE    Restatement of Consolidated Financial Statements

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2007,
originally filed on November 9, 2007, which we refer to as the September 30, 2007 Form 10-Q, to restate our unaudited, condensed consolidated financial statements as
of and for the three and nine months ended September 30, 2007 and 2006. Please refer to Note 12 to the accompanying unaudited, condensed consolidated financial statements for additional
information.

As
announced in our Current Report on Form 8-K, which we filed with the Securities and Exchange Commission, or SEC, on January 28, 2008, we concluded that our
previously filed financial statements, which include our unaudited, condensed consolidated financial statements filed in our September 30, 2007 Form 10-Q, should no longer be
relied upon due to matters relating to our government pricing discussed in this Explanatory Note and Note 12 "Restatement of Financial Statements Based on Review of Government Pricing" to our
unaudited, condensed consolidated financial statements included in this report and elsewhere in this Form 10-Q/A.

Revenue
is recognized for amounts that are fixed or determinable assuming all other applicable criteria are met. We recently determined that Public Health Service, or PHS, discounts were
provided to non-PHS covered entities. This circumstance creates uncertainty as to whether a new best price was set in prior periods. If a new best price was set, additional Medicaid
rebates will be required to be paid. A portion of the revenue we previously recognized is therefore contingent on the outcome of this matter. Revenue has been reduced and rebate liabilities increased
to adjust for the amounts previously invoiced and received that are contingent and do not qualify for revenue recognition. The restatement for such contingent amounts reflects our best estimate of the
net revenue that should have been recognized in the respective periods.

Under
the Medicaid rebate program, we are obligated to pay a rebate to each participating State Medicaid program for each unit of product reimbursed by Medicaid. The amount of the rebate
is set by law as the greater of (a) 15.1% of the average manufacturer price, which is referred to as AMP, or (b) the difference between AMP and the Medicaid best price, which is the
lowest price available from us to any customer not excluded by law from that determination. The determination of whether a new best price was set is uncertain and is a matter of judgment that is
subject to disclosure to the Centers for Medicare and Medicaid Services, or CMS. In January 2008, we notified CMS of the possible errors in our Medicaid best price. A determination of the actual
amount of payments required may change as a result of future interactions with CMS and we cannot be certain that we will not be subject to fines, penalties and interest.

As
a result of this matter, our management, with the oversight of our Audit Committee, is reviewing our government pricing activities affected by the material weakness described below.
The aggregate amount by which we have reduced revenues as a result of the matter discussed above in all affected periods through the filing of our annual report on Form 10-K for the
year ended December 31, 2007 is $60.2 million. The aggregate amount by which we have reduced revenues in the fiscal years ended December 31, 2006, 2005, 2004, 2003 and 2002 is
approximately $13.4 million, $19.8 million, $7.8 million, $8.0 million and $3.0 million, respectively. The amount by which we have reduced revenues for the three and
nine months ended September 30, 2007 and 2006 is $3.2 million and $8.3 million and $2.5 million and $9.5 million, respectively. Included in the accumulated deficit
balance at January 1, 2006 is the cumulative impact of $38.6 million in reduced revenue.

The
amounts by which we have reduced revenues for contingent rebates were based on management's best estimates and assumptions made prior to any concurrence by CMS. These amounts may
change as a result of future interactions with CMS and we cannot be certain that we have not overestimated the amount of additional rebates we may be required to pay, that the amount of any additional
rebate payments or other payments we may owe will not exceed our current estimates, or that we will not be subject to fines, penalties or interest. The restatement and its impact on the fiscal

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year
ended December 31, 2006 is discussed in more detail in Note 12 to our unaudited, condensed consolidated financial statements, which are included herein.

While
we have restated our financial statements for the years ended December 31, 2006 and 2005 and our quarterly reports on Form 10-Q for the fiscal quarters
ended March 31, June 30 and September 30, 2007 and 2006, we have not amended and do not intend to amend any of our other previously filed reports for the periods affected by the
restatement. As we have previously announced, the consolidated financial statements and related information contained in such previously filed reports should no longer be relied upon.

Identification of Material Weakness

In connection with the restatement of our Medicaid rebate reserve, we identified a material weakness in our disclosure controls and procedures and internal
controls over financial reporting as of September 30, 2007 and reported those to our Audit Committee. The material weakness, which is further described below in Item 4 of this
Form 10-Q/A, resulted in the restatement of our prior period financial information included in this report.

For
the convenience of the reader, this Form 10-Q/A restates the September 30, 2007 Form 10-Q in its entirety. However, we have not modified
or updated disclosures presented in the September 30, 2007 Form 10-Q in this Form 10-Q/A,
except as required to reflect the effects of the matters discussed above. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the
September 30, 2007 Form 10-Q or modify or update those disclosures affected by subsequent events or discoveries. Therefore, this Form 10-Q/A should be read
in conjunction with our Annual Report on Form 10-K for the period ended December 31, 2007 and the filings subsequent thereto that we have made with the SEC. Accordingly, we
have amended disclosures, to the extent relevant, in only the following items:



In
addition, in accordance with applicable SEC rules, this Form 10-Q/A includes updated certifications from our Chief Executive Officer and Chief Financial Officer as
Exhibits 31.1, 31.2, 32.1 and 32.2.

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SEPRACOR INC.    INDEX

|Part IFinancial Information |  |                                                                                                                               
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Item 1.                      |  | Condensed Consolidated Interim Financial Statements (Restated and Unaudited)                                                  
|                             |  | Consolidated Balance Sheets as of September 30, 2007 (Restated and Unaudited) and December 31, 2006 (Restated)                
|                             |  | Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (Restated and Unaudited)
|                             |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Restated and Unaudited)          
|                             |  | Notes to Condensed Consolidated Interim Financial Statements (Restated and Unaudited)                                         
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                         
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    
|Item 4.                      |  | Controls and Procedures                                                                                                       
|Part IIOther Information    |  |                                                                                                                               
|Item 1.                      |  | Legal Proceedings                                                                                                             
|Item 1A.                     |  | Risk Factors                                                                                                                  
|Item 6.                      |  | Exhibits                                                                                                                      
|                             |  | Signatures                                                                                                                    
|                             |  | Exhibit Index                                                                                                                 

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SEPRACOR INC.        CONSOLIDATED BALANCE SHEETS        (In Thousands)

|                                           |                                                                                                                                                                                                                                           | September 30,
2007 |           | December 31,
2006 |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | --------- | ----------------- | -
|
|Assets                                     |                                                                                                                                                                                                                                           |                    |           |                   |  
|Current assets:                            |                                                                                                                                                                                                                                           |                    |           |                   |  
|                                           | Cash and cash equivalents                                                                                                                                                                                                                 |                    | $         | 387,241           |  
|                                           | Short-term investments                                                                                                                                                                                                                    |                    |           | 324,777           |  
|                                           | Accounts receivable, net                                                                                                                                                                                                                  |                    |           | 154,486           |  
|                                           | Inventories                                                                                                                                                                                                                               |                    |           | 49,459            |  
|                                           | Other assets                                                                                                                                                                                                                              |                    |           | 31,407            |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total current assets                       |                                                                                                                                                                                                                                           |                    | 947,370   |                   |  
|                                           | Long-term investments                                                                                                                                                                                                                     |                    |           | 220,284           |  
|                                           | Property and equipment, net                                                                                                                                                                                                               |                    |           | 85,231            |  
|                                           | Investment in affiliate                                                                                                                                                                                                                   |                    |           | 4,344             |  
|                                           | Deferred financing costs and patents, net                                                                                                                                                                                                 |                    |           | 8,566             |  
|                                           | Other assets                                                                                                                                                                                                                              |                    |           | 81                |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total assets                               |                                                                                                                                                                                                                                           | $                  | 1,265,876 |                   | $
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Liabilities and Stockholders' Equity       |                                                                                                                                                                                                                                           |                    |           |                   |  
|Current liabilities:                       |                                                                                                                                                                                                                                           |                    |           |                   |  
|                                           | Accounts payable                                                                                                                                                                                                                          |                    | $         | 17,240            |  
|                                           | Accrued expenses                                                                                                                                                                                                                          |                    |           | 123,948           |  
|                                           | Current portion of notes payable and capital lease obligation                                                                                                                                                                             |                    |           | 1,199             |  
|                                           | Current portion of convertible subordinated debt                                                                                                                                                                                          |                    |           |                  |  
|                                           | Product sales allowances and reserves                                                                                                                                                                                                     |                    |           | 197,347           |  
|                                           | Other current liabilities                                                                                                                                                                                                                 |                    |           | 164               |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total current liabilities                  |                                                                                                                                                                                                                                           |                    | 339,898   |                   |  
|                                           | Notes payable and capital lease obligation                                                                                                                                                                                                |                    |           | 2,225             |  
|                                           | Long-term deferred revenue                                                                                                                                                                                                                |                    |           | 24,794            |  
|                                           | Convertible subordinated debt                                                                                                                                                                                                             |                    |           | 720,820           |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total liabilities                          |                                                                                                                                                                                                                                           |                    | 1,087,737 |                   |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Stockholders' equity:                      |                                                                                                                                                                                                                                           |                    |           |                   |  
|                                           | Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at September 30, 2007 and December 31, 2006                                                                                                                   |                    |           |                  |  
|                                           | Common stock, $.10 par value, 240,000 shares authorized at September 30, 2007 and December 31, 2006; 111,679 and 110,040 shares issued, 107,418 and 105,779 shares outstanding, at September 30, 2007 and
December 31, 2006, respectively |                    |           | 11,168            |  
|                                           | Treasury stock, at cost (4,261 shares at September 30, 2007 and December 31, 2006)                                                                                                                                                        |                    |           | (232,028          | )
|                                           | Additional paid-in capital                                                                                                                                                                                                                |                    |           | 1,848,379         |  
|                                           | Accumulated deficit                                                                                                                                                                                                                       |                    |           | (1,466,715        | )
|                                           | Accumulated other comprehensive income                                                                                                                                                                                                    |                    |           | 17,335            |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total stockholders' equity                 |                                                                                                                                                                                                                                           |                    | 178,139   |                   |  
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  
|Total liabilities and stockholders' equity |                                                                                                                                                                                                                                           | $                  | 1,265,876 |                   | $
|                                           |                                                                                                                                                                                                                                           |                    |           |                   |  

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

1

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SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands)

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

|                                                                        |                                     | Three Months Ended       |   | Nine Months Ended |        
|----------------------------------------------------------------------- | ----------------------------------- | ------------------------ | - | ----------------- | -------
|
|
|Revenues:                                                               |                                     |                          |   |                   |        
|                                                                        | Product sales                       |                          | $ | 271,837           |        
|                                                                        | Royalties and license fees          |                          |   | 8,921             |        
|                                                                        |                                     |                          |   |                   |        
|                                                                        |                                     | Total revenues           |   |                   | 280,758
|                                                                        |                                     |                          |   |                   |        
|Costs and expenses:                                                     |                                     |                          |   |                   |        
|                                                                        | Cost of product sold                |                          |   | 26,226            |        
|                                                                        | Cost of royalties                   |                          |   | 194               |        
|                                                                        | Research and development            |                          |   | 49,025            |        
|                                                                        | Selling, marketing and distribution |                          |   | 154,648           |        
|                                                                        | General and administrative          |                          |   | 20,477            |        
|                                                                        | Litigation settlement, net          |                          |   |                  |        
|                                                                        |                                     |                          |   |                   |        
|                                                                        |                                     | Total costs and expenses |   |                   | 250,570
|                                                                        |                                     |                          |   |                   |        
|                                                                        | Income from operations              |                          |   | 30,188            |        
|Other income (expense):                                                 |                                     |                          |   |                   |        
|                                                                        | Interest income                     |                          |   | 11,173            |        
|                                                                        | Interest expense                    |                          |   | (88               | )      
|                                                                        | Equity in investee losses           |                          |   | (37               | )      
|                                                                        | Other expense                       |                          |   | (621              | )      
|                                                                        |                                     |                          |   |                   |        
|                                                                        | Income before income taxes          |                          |   | 40,615            |        
|                                                                        | Income taxes                        |                          |   | 907               |        
|                                                                        |                                     |                          |   |                   |        
|                                                                        | Net income after income taxes       |                          | $ | 39,708            |        
|                                                                        |                                     |                          |   |                   |        
|                                                                        | Basic net income per common share   |                          | $ | 0. 37             |        
|                                                                        |                                     |                          |   |                   |        
|                                                                        | Diluted net income per common share |                          | $ | 0.34              |        
|                                                                        |                                     |                          |   |                   |        
|Shares used in computing basic and diluted net income per common share: |                                     |                          |   |                   |        
|                                                                        | Basic                               |                          |   | 107,318           |        
|                                                                        | Diluted                             |                          |   | 116,033           |        

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

2

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

|                                                                                  |                                                         | Nine Months Ended |         
|--------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------- | --------
|
|
|Cash flows from operating activities:                                             |                                                         |                   |         
|                                                                                  | Net income                                              |                   | $       
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                         |                   |         
|                                                                                  | Depreciation and amortization                           |                   |         
|                                                                                  | Equity in investee losses                               |                   |         
|                                                                                  | Stock compensation                                      |                   |         
|                                                                                  | Loss (gain) on asset disposal                           |                   |         
|Changes in operating assets and liabilities:                                      |                                                         |                   |         
|                                                                                  | Accounts receivable                                     |                   |         
|                                                                                  | Inventories                                             |                   |         
|                                                                                  | Other current assets                                    |                   |         
|                                                                                  | Accounts payable                                        |                   |         
|                                                                                  | Accrued expenses                                        |                   |         
|                                                                                  | Product sales allowances and reserves                   |                   |         
|                                                                                  | Other liabilities                                       |                   |         
|                                                                                  |                                                         |                   |         
|Net cash provided by operating activities                                         |                                                         |                   | 182,317 
|                                                                                  |                                                         |                   |         
|Cash flows from investing activities:                                             |                                                         |                   |         
|                                                                                  | Purchases of short and long-term investments            |                   |         
|                                                                                  | Sales and maturities of short and long-term investments |                   |         
|                                                                                  | Additions to property and equipment                     |                   |         
|                                                                                  | Proceeds from sales of equipment                        |                   |         
|                                                                                  | Investment in non-affiliate                             |                   |         
|                                                                                  |                                                         |                   |         
|Net cash provided by (used in) investing activities                               |                                                         |                   | 197,791 
|                                                                                  |                                                         |                   |         
|Cash flows from financing activities:                                             |                                                         |                   |         
|                                                                                  | Net proceeds from issuance of common stock              |                   |         
|                                                                                  | Repayments of long-term debt and capital leases         |                   |         
|                                                                                  |                                                         |                   |         
|Net cash provided by (used in) financing activities                               |                                                         |                   | (408,677
|                                                                                  |                                                         |                   |         
|Effect of exchange rate changes on cash and cash equivalents                      |                                                         |                   | 399     
|                                                                                  |                                                         |                   |         
|Net decrease in cash and cash equivalents                                         |                                                         |                   | (28,170 
|Cash and cash equivalents at beginning of period                                  |                                                         |                   | 415,411 
|                                                                                  |                                                         |                   |         
|Cash and cash equivalents at end of period                                        |                                                         | $                 | 387,241 
|                                                                                  |                                                         |                   |         
|Supplemental schedule of cash flow information:                                   |                                                         |                   |         
|                                                                                  | Cash paid during the period for interest                |                   | $       
|                                                                                  | Cash paid during the period for income taxes            |                   | $       
|Non cash activities:                                                              |                                                         |                   |         
|                                                                                  | Additions to capital leases                             |                   | $       

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

3

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS        (Restated and Unaudited)

We restated our condensed consolidated interim financial statements for the periods ended September 30, 2007 and 2006 to reduce the amount of product
revenue earned during such periods due to matters related to government pricing discussed in Note 12 "Restatement of Financial Statements Based on Review of Government Pricing."

1.    Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited
financial statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The consolidated interim financial statements,
in the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended September 30,
2007 and 2006.

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

The
consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed
consolidated interim financial statements should be read in conjunction with the restated audited financial statements for the year ended December 31, 2006, which are contained in our annual
report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission, or SEC.

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

2.    Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, which allows entities the option to measure
eligible financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of
SFAS 159 to have a material impact on our consolidated financial statements.

In
September 2006, FASB issued SFAS No. 157,Fair Value Measurements, or SFAS 157, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial statements.

3.    Basic and Diluted Earnings Per Common Share

Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average potential common shares during the period. Potential
common shares result from the assumed

4

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

3.    Basic and Diluted Earnings Per Common Share (Continued)

conversion
of convertible subordinated debt and the assumed exercise of outstanding stock options, the proceeds of which are then assumed to have been used to repurchase outstanding stock options
using the treasury stock method. Potential common shares are not included in the per share calculation when the effect of their inclusion would be anti-dilutive.

For
the three and nine months ended September 30, 2007 and 2006, the following securities were excluded from the computation of diluted EPS because they would have had an
anti-dilutive effect:



Three Months
Ended
September 30, 2007

Three Months
Ended
September 30, 2006

Nine Months
Ended
September 30, 2007

Nine Months
Ended
September 30, 2006(in thousands, except price per share data)Number of options

3,569

4,175

4,459

3,779Price range per share

$22.71 to $87.50

$48.52 to $87.50

$38.26 to $87.50

$52.08 to $87.50




September 30,
2007

September 30,
2006(in thousands)5% convertible subordinated debentures due 2007



4,763Total



4,763


We
have issued 0% convertible subordinated notes due 2024, which were not convertible into equity as of September 30, 2007 or 2006 or at any time during the nine months ended
September 30, 2007 or 2006. Once these notes become convertible into equity, shares of common stock will be reserved under the conversion formula for issuance upon conversion if and when our
common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to such occurrence, the notes are only convertible into cash.

4.    Inventories

Inventories consist of the following:

September 30,
2007

December 31,
2006(in thousands)Raw materials

$
24,238

$
21,611Finished goods


25,221


15,476Total

$
49,459

$
37,087


5

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

5.    Deferred Financing and Patents Costs

The following schedule details the carrying value of our patents and deferred financing costs:

September 30,
2007

December 31,
2006(in thousands)Deferred financing costs, gross

$
20,407

$
34,440Accumulated amortization


(12,377
)

(23,215
)Deferred financing costs, net

$
8,030

$
11,225Patents, gross

$
2,259

$
2,259Accumulated amortization


(1,723
)

(1,603
)Patents, net

$
536

$
656


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

Three Months Ended

Nine Months EndedSeptember 30,
2007

September 30,
2006

September 30,
2007

September 30,
2006(in thousands)Amortization of deferred financing costs

$
959

$
1,435

$
3,195

$
4,305Amortization of patents


35


60


120


186Total

$
994

$
1,495

$
3,315

$
4,491


6.    Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

|                                                                    |  | September 30,
2007 |         | December 31,
2006
|------------------------------------------------------------------- |  | ------------------ | ------- | -----------------
|
|5% convertible subordinated debentures due February 2007            |  | $                  |        |                  
|0% Series A convertible senior subordinated notes due December 2008 |  |                    | 72,800  |                  
|0% Series B convertible senior subordinated notes due December 2010 |  |                    | 148,020 |                  
|0% convertible senior subordinated notes due October 2024           |  |                    | 500,000 |                  
|                                                                    |  |                    |         |                  
|Total                                                               |  | $                  | 720,820 |                  
|                                                                    |  |                    |         |                  

6

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

7.    Comprehensive Income

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

Three Months Ended

Nine Months EndedSeptember 30,
2007

September 30,
2006

September 30,
2007

September 30,
2006(in thousands)(as restated)

(as restated)Comprehensive income:Net income

$
39,708

$
61,965

$
63,334

$
76,002Net foreign currency translation adjustment


1,294


93


3,138


774Net unrealized gain (loss) on available-for-sale securities


2,491


(8
)

11,357


(3,872
)Total comprehensive income

$
43,493

$
62,050

$
77,829

$
72,904


8.    Legal Proceedings

Tecastemizole Class Action Complaints

In June 2007, we filed in the United States District Court for the District of Massachusetts, or the Court, a Stipulation of Settlement regarding two securities
class action lawsuits, or class actions, pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. As previously disclosed, the class actions,
which were filed on behalf of certain
purchasers of our equity and debt securities, or the plaintiffs, alleged that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing,
safety and likelihood of approval of tecastemizole by the United States Food and Drug Administration, or FDA.

The
Stipulation of Settlement contains no admission of wrongdoing. Sepracor and the other defendants have always maintained and continue to believe that we did not engage in any
wrongdoing or otherwise commit any violation of Federal or state securities laws or other laws. However, given the potential cost and burden of continued litigation, we believe the settlement is in
our best interests and the best interests of our stockholders.

Under
the terms of the Stipulation of Settlement, in June 2007, we paid into escrow $52.5 million in settlement of the class actions and, in July 2007, received an
$18.5 million reimbursement from our insurance carriers. We recorded the litigation settlement expense of $34.0 million, relating to this matter, during the quarter ended
March 31, 2007.

On
September 6, 2007, the Court granted final approval of the Stipulation of Settlement and entered a final judgment consistent with the Stipulation of Settlement. The settlement
is now final and the total settlement amount has been released from escrow. Pursuant to the final judgment entered by the Court, the Court dismissed the class actions with prejudice and the plaintiffs
are deemed to have released all related claims against us.

7

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

8.    Legal Proceedings (Continued)

Litigation Related to Generic Competition and Patent Infringement



In September 2005, we received notification that the FDA had received an Abbreviated New Drug Application, or ANDA, from Breath Limited, or Breath, seeking
approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX® (levalbuterol hydrochloride) Inhalation Solution. Breath's submission includes a
Paragraph IV certification alleging that our patents listed in the FDA publication entitledApproved Drug Products With Therapeutic
Equivalence Evaluations, commonly referred to as the "Orange Book," for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the
generic version for which Breath is seeking approval. In October 2005, we filed a civil action against Breath for patent infringement and a non-jury trial is scheduled to begin on
July 14, 2008 in the United States District Court for the District of Massachusetts, No. CV:06-10043.

In
January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3
mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In February 2006, we filed a civil action against
Dey, L.P. for patent infringement and the case is pending in the United States District Court for the District of Delaware, C.A. No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX Inhalation Solution
concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate
are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In September 2006, we filed a civil action against Dey, L.P. for patent
infringement in the United States District Court for the District of Delaware, C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were
consolidated into a single suit. No trial date has been set.

In
May 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3
mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Barr is seeking approval. In July 2007, we filed a civil action against Barr for patent infringement
and the case is pending in the United States District Court for the District of Delaware, C.A. No. 07-438. No trial date has been set.

The
filing of an action for patent infringement under the Hatch-Waxman Act invokes an automatic 30-month stay of the FDA's authority to grant final marketing approval to
those companies that file an ANDA containing a Paragraph IV certification against one or more of our XOPENEX Inhalation Solution patents. The first filer of an ANDA with a Paragraph IV
certification is potentially entitled to a 180-day period of semi-exclusivity during which the FDA cannot approve subsequently filed ANDAs. The 180-day
semi-exclusivity period would begin to run only upon first commercial marketing by the

8

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

8.    Legal Proceedings (Continued)

first
filer. There are, however, also certain events that could cause the first filer to forfeit the 180-day semi-exclusivity period, which we refer to as a forfeiture event.

For
our 1.25 mg/3 mL, 0.63/3 mL, and 0.31/3 mL XOPENEX Inhalation Solution, we believe that Breath is the first filer and potentially entitled to
180-days of semi-exclusivity against subsequent ANDA filers for those three dosages. The 30-month stay against Breath's ANDA is scheduled to expire on or about
March 7, 2008. Upon expiration of that 30-month stay, the FDA could grant final approval and Breath could then commence an "at risk" distribution of its generic levalbuterol product
for those dosages notwithstanding our patents and notwithstanding that the court's decision as to the merits of the litigation will not have been rendered, unless we were able to obtain an injunction
prohibiting such distribution. However, if a forfeiture event occurs and the FDA determines that Breath has forfeited the 180-day semi-exclusivity period for those three
dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the 30-month stay. For those three dosages, the
30-month stays against Dey L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey L.P. is the first filer and potentially entitled to 180-days of
semi-exclusivity for that concentration. The 30 month stay against Dey L.P.'s ANDA for that concentration expires on or about February 14, 2009.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringe a valid and enforceable claim in our patents, whether we are
ultimately entitled to such damages would be determined by the court in connection with our ongoing legal proceedings with each party desiring to launch generic levalbuterol hydrochloride products. If
any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution product prior to the resolution of these ongoing legal proceedings, or there is a court
determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our business,
financial condition and results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we would have to revise such
guidance.



In June 2007, we received notification that the FDA had received an ANDA from Glenmark Pharmaceuticals, Ltd. and Glenmark Pharmaceuticals, Inc.,
USA, which we refer to collectively as Glenmark, seeking approval of a generic version of Schering-Plough Corporation, or Schering-Plough's, 5 mg tablets of CLARINEX® (desloratadine).
Glenmark's submission includes a Paragraph IV certification alleging that our patents that Schering-Plough (as licensee of such patents) listed in the Orange Book for its CLARINEX are invalid,
unenforceable or not infringed by the generic version for which Glenmark is seeking approval. In July 2007, we and the University of Massachusetts, co-owners of certain patents listed in
the Orange Book, filed a civil action in the United States District Court for the District of New Jersey against Glenmark for patent infringement, C.A. No. 07-3385.

In
July 2007, we received notification that the FDA had received an ANDA from Sun Pharmaceutical Industries, Ltd., or Sun, seeking approval of a generic version of
Schering-Plough's 5 mg tablets of CLARINEX. Sun's submission includes a Paragraph IV certification alleging that our patents listed by Schering-Plough (as licensee of such patents) in the
Orange Book for CLARINEX are invalid, unenforceable, or are not infringed by the generic version for which Sun is seeking approval. In

9

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

8.    Legal Proceedings (Continued)

September
2007, we and the University of Massachusetts filed a civil action in the United States District Court for the District of New Jersey against Sun for patent infringement,
C.A. No. 07-4213.

In
August 2007, we received notification that the FDA had received an ANDA from Orchid Chemicals & Pharmaceuticals Ltd., or Orchid, seeking approval of a generic version of
Schering-Plough's 5 mg tablets, and 2.5 and 5 mg orally disintegrating tablets of CLARINEX. Orchid's submission includes a Paragraph IV certification alleging that our patents listed by
Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by the generic version for which Orchid is seeking approval. In October 2007,
we and the University of Massachusetts filed a civil action in the United States District Court for the District of New Jersey against Orchid for patent infringement,
C.A. No. 07-4623.

In
September 2007, we received notification that the FDA had received ANDAs from Mylan Pharmaceuticals, Inc., or Mylan, Lupin Limited, or Lupin, and Perrigo R & D Company,
or Perrigo, seeking approval of a generic version of Schering-Plough's 5 mg tablets of CLARINEX, and from Dr. Reddy's Laboratories, or Dr. Reddy's, seeking approval of a generic version
of Schering-Plough's 2.5/120 mg tablets of CLARINEX-D 12 hour desloratadine and pseudoephedrine extended release tablets. The submissions by these parties include
Paragraph IV certifications alleging that certain patents listed by Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by
the generic versions for which these parties are seeking approval. In October 2007, we and the University of Massachusetts filed civil actions in the United States District Court for the District of
New Jersey against Mylan, Lupin, Perrigo and Dr. Reddy's for patent infringement, C.A. No. 3:07-cv-05017,
C.A. No. 3:07-cv-05265, C.A. No. 3:07-cv-05136 and C.A. No. 3:07-cv-05001,
respectively.

In
October 2007, we received notification that the FDA had received an ANDA from Anchen Pharmaceuticals, Inc., or Anchen, seeking approval of a generic version of
Schering-Plough's 2.5/120 mg tablets of CLARINEX-D 12 hour desloratadine and pseudoephedrine extended release tablets. Anchen's submission includes a Paragraph IV
certification alleging that our patents listed by Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by the generic version for
which Anchen is seeking approval. We are currently contemplating filing a civil action against Anchen for patent infringement.

We
believe that all of these ANDAs are subject to a statutory stay of approval until June 21, 2009 based on previous litigation commenced by Schering-Plough against these parties
in separate civil actions involving another patent.



In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York,
C.A. No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., referred to collectively as Dey, alleging that manufacture and sale of BROVANA®
(arformoterol tartrate) Inhalation Solution infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer
and Counterclaim to this Complaint seeking to invalidate the originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent.
Under the current trial scheduling order, trial will begin no earlier than December 12, 2008. It is too early to make a reasonable assessment as to the likely

10

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

8.    Legal Proceedings (Continued)

outcome
or impact of this litigation. We are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain resolution.

Patent
litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties
from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions of our drugs and the drugs of our licensees will not be
excluded, for the full term of the respective patents, from marketing their generic versions of our products or third party products for which we have licensed rights to our patents. Introduction of
generic copies of any of our products or third party products for which we have licensed rights to our patents before the expiration of our patents would have a material adverse effect on our
business, financial condition and results of operations.

Stock Option Inquiry and Derivative Stockholder Complaints

We announced in June 2006 that the SEC is conducting an informal inquiry into our stock option grants and stock option granting practices. A special committee of
our outside directors, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to June 2006
under our various stock option plans in effect during this period. Our finance department also reviewed the stock option grants and stock option practices from 1996 to June 2006. Their review resulted
in the restatement of our financial
statements for the quarters ended March 31, June 30 and September 30, 2005, the quarter ended March 31, 2006 and the years ended December 31, 2005, 2004 and 2003.
The special committee has concluded that there is no evidence of fraud, illegal activity or an intent to mislead or deceive with respect to our stock option granting practices or the specific grants
that have resulted in the restatement of our financial statements. The special committee also determined that the board of directors and/or compensation committee generally intended to award the
options on the date specified in the grants, although they were not aware of the accounting consequences. Representatives from the U.S. Attorneys Office attended some of the earlier meetings that our
outside counsel had with the SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot be certain that it will not. The SEC and/or any other governmental agency that may
initiate a formal investigation may reach different conclusions and, if so, we could be subject to monetary damages, fines and penalties, and our officers and/or directors could be prohibited from
serving as officers and directors of any public company and could be subject to criminal penalties and/or disgorgement.

From
June to October 2006, six stockholder derivative complaints were commenced against us (as a nominal defendant) and certain of our current and former officers and directors. Three of
these complaints were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts (later transferred to the Business Litigation Session of the Superior Court, Suffolk County,
Commonwealth of Massachusetts) and three were filed in the United States District Court for the District of Massachusetts. All state court complaints were later consolidated into one state court
action, and all Federal court complaints were consolidated into one Federal court action. It was alleged in both actions that the individual defendants breached their fiduciary duties and were
unjustly enriched in connection with certain stock option grants; violations of Federal securities laws were alleged in the Federal action as well. The complaints sought monetary damages in
unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the court. On November 20, 2006, we
moved to dismiss the state court action, and on

11

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

8.    Legal Proceedings (Continued)

March 20,
2007 a hearing was held on the motion. No decision on the motion has been rendered at this time. The Federal court action has been stayed pending resolution of the state court motion
to dismiss.

In
October 2007, the parties to both the state and Federal action reached a settlement that provides for the dismissal of both actions, subject to the approval of the court. The
settlement resolves all claims and includes no finding of wrongdoing on the part of any of the defendants and no cash payment other than attorneys' fees. As part of the settlement, we have agreed to
adopt and implement stock option grant and other procedures that reflect developing best practices. A preliminary hearing on the fairness of the settlement and the adequacy of the stockholder notice
was held on November 6, 2007 by the state court, with a final fairness hearing likely to be held in January 2008. The settlement will not be final and effective until final approval by the
state court and entry of dismissal with prejudice by the Federal court.

LUNESTA Trademark Claim

In September 2006, Tharos Laboratories, Inc., or Tharos, filed suit against us in the United States District Court, District of Utah, Central Division,
2:06-cv-00757, alleging trademark infringement, dilution, unfair competition, false advertising and false designation of origin arising out of our use of our silk luna moth
design in connection with LUNESTA® (eszopiclone). Tharos seeks unspecified monetary damages and to enjoin our use of the silk luna moth design. In October 2006, we filed a Motion to
Dismiss Tharos' claims. On February 9, 2007, the court granted our motion in respect of the state unfair competition claims and denied it in respect of Tharos' other claims. On March 6,
2007, we filed an Answer to Tharos' Complaint. In addition, we filed counterclaims against Tharos for cancellation of Tharos' alleged trademark and for false advertising. We continue to defend our
trademark in this litigation but we are unable at this stage to predict its ultimate resolution. In October 2007, we reached a preliminary agreement in principle with Tharos to settle this litigation,
and final settlement is subject to the parties entering into a written settlement agreement.

Other Legal Proceedings

From time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a
material adverse effect on our business, financial condition or results of operations.

9.    Commitments and Contingencies

We announced in June 2006 that the SEC is conducting an informal inquiry into our stock option grants and stock option granting practices. A special committee of
our outside directors, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to June 2006
under our various stock option plans in effect during this period. Our finance department also reviewed the stock option grants and stock option practices from 1996 to June 2006. Their review resulted
in the restatement of our financial statements for the quarters ended March 31, June 30 and September 30, 2005, the quarter ended March 31, 2006 and the years ended
December 31, 2005, 2004 and 2003. The special committee has concluded that there is no evidence of fraud, illegal activity or an intent to mislead or deceive with respect to our stock option
granting practices or the specific grants that have resulted in the

12

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

9.    Commitments and Contingencies (Continued)

restatement
of our financial statements. The special committee also determined that the board of directors and/or compensation committee generally intended to award the options on the date specified
in the grants, although they were not aware of the accounting consequences. Representatives from the U.S. Attorneys Office attended some of the earlier meetings that our outside counsel had with the
SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot be certain that it will not. The SEC and/or any other governmental agency that may initiate a formal
investigation may reach different conclusions and, if so, we could be subject to monetary damages, fines and penalties, and our officers and/or directors could be prohibited from serving as officers
and directors of any public company and could be subject to criminal penalties and/or disgorgement.

10.  Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between
the financial statement amounts of assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is established if, based on management's review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be
realized. Given our limited history of profitability, and the possible adverse impact to our XOPENEX Inhalation Solution sales if an "at risk" generic launch were to occur or we are unable to
successfully defend our patents rights, management continues to conclude a valuation allowance is required for the full amount of the deferred tax asset. If in the future, we determine based on our
future profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income
tax benefit in the period of decrease and material income tax provisions in future periods.

We
adopted the FASB Interpretation, or FIN, No. 48,Accounting for Uncertainty in Income Taxes, or FIN 48 in January 2007.
The implementation of FIN 48 did not have a material impact on our consolidated financial statements or results of operations. We are currently in the process of conducting a study of our
research and development credit carryforwards. This study may result in an adjustment to our research and development credit carryforwards. However, until the study is completed and any adjustment is
known, no amounts are being presented as an uncertain tax position under FIN 48. We reasonably estimate that our unrecognized tax benefits position will not change significantly within the next
twelve months.

We
file tax returns in the U.S. Federal jurisdiction and in various state, local and foreign jurisdictions. During the fourth quarter of 2006, the Internal Revenue Service, or IRS,
commenced an audit of our 2005 and 2004 U.S. Federal income tax returns, which was formally concluded during the third quarter of 2007. We are no longer subject to IRS examination for years prior to
2004, although carryforward attributes that were generated prior to 2004 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. We receive
inquiries from various states during the year, some of those inquiries include an audit of state returns previously filed. With limited exceptions, we are no longer subject to state or local
examinations for years prior to 2003, however, carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by state or local tax authorities if they either have
been or will be used in a future period.

13

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

10.  Income Taxes (Continued)

The
foreign jurisdictions where we currently file income tax returns are Canada and the Netherlands Antilles. We are currently under examination by Canada Revenue Agency, or CRA, for our
Scientific Research and Experimental Development claims for the years ended December 31, 2005, 2004 and 2003. There are currently no examinations being conducted by the tax authorities in the
Netherlands Antilles. With limited exceptions, we are no longer subject to examination in Canada and the Netherlands Antilles for years prior to 2003 and 1999, respectively, although carryforward
attributes that were generated prior to these respective periods may still be adjusted upon examination if they either have been or will be used in a future period.

We
recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48.
For the quarter ended September 30, 2007, we did not recognize any accrued interest and penalties in our consolidated statement of operations or our consolidated balance sheet.

11.  Subsequent Events

In October 2007, we announced that we had decided to reduce our sales force by approximately 300 positions. The decision was based on our recently completed
evaluation of the structure, sizing and allocation of our direct sales force and is intended to result in cost savings in fiscal year 2008. We communicated our decision to our employees, including our
sales force, on October 30, 2007. A final decision regarding which employees will be affected has not been made, however we expect to complete the sales force reduction prior to
December 31, 2007.

As
a result of this sales force reduction, we expect to record charges of between $10 and $12 million in the fourth quarter of 2007. We currently expect these charges to consist
of approximately $7.5 to $ 9.0 million relating to employee severance benefits and approximately $2.5 to $3.0 million relating to other charges, including employee relocation expenses
and automobile lease termination fees.

12.  Restatement of Financial Statements Based on Review of Government Pricing

Subsequent to the filing of our Quarterly Report on Form 10-Q for the period ended September 30, 2007, we concluded that based on our
review of our government price reporting, we would need to restate our interim financial statements for the three and nine months ended September 30, 2007 and 2006.

Revenue
is recognized for amounts that are fixed or determinable assuming all other applicable criteria are met. We recently determined that Public Health Service, or PHS, discounts were
provided to non-PHS covered entities. This circumstance creates uncertainty as to whether a new best price was set in prior periods. If a new best price was set, additional Medicaid
rebates will be required to be paid. A portion of the revenue we previously recognized is therefore contingent on the outcome of this matter. Revenue has been reduced and rebate liabilities increased
to adjust for the amounts previously invoiced and received that are contingent and do not qualify for revenue recognition. The restatement for such contingent amounts reflects our best estimate of the
net revenue that should have been recognized in the respective periods.

Under
the Medicaid rebate program, we are obligated to pay a rebate to each participating State Medicaid program for each unit of product reimbursed by Medicaid. The amount of the rebate
is set

14

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

12.  Restatement of Financial Statements Based on Review of Government Pricing (Continued)

by
law as the greater of (a) 15.1% of the average manufacturer price, which is referred to as AMP, or (b) the difference between AMP and the Medicaid best price, which is the lowest
price available from us to any customer not excluded by law from that determination. The determination of whether a new best price was set is uncertain and is a matter of judgment that will be subject
to disclosure to Centers for Medicare and Medicaid Services, or CMS. In January 2008, we notified CMS of the possible errors in our Medicaid best price. A determination of the actual amount of
payments required may change as a result of future interactions with CMS and we cannot be certain that we will not be subject to fines, penalties and interest.

The
aggregate amount by which we have reduced revenue for contingent rebates in periods through December 31, 2006 is approximately $52.0 million. The amount by which we
have reduced revenues for the three and nine months ended September 30, 2007 and 2006 is $3.2 million and $8.3 million and $2.5 million and $9.5 million,
respectively.

The
following tables set forth the effects of the restatement on certain line items within our unaudited, condensed consolidated statements of operations for the three and nine months
ended September 30, 2007 and 2006, and consolidated balance sheets as of September 30, 2007 and December 31, 2006.

|                                              |                                     | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|--------------------------------------------- | ----------------------------------- | -------------------------------- |  | -------------------------------
|
|
|
|Consolidated Statement of Operations changes: |                                     |                                  |  |                                
|                                              | Product sales                       |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              
|                                              | Income (loss) from operations       |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              
|                                              | Income before income taxes          |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              
|                                              | Net income                          |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              
|                                              | Basic net income per common share   |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              
|                                              | Diluted net income per common share |                                  |  |                                
|                                              |                                     | As previously reported           |  | $                              
|                                              |                                     | As restated                      |  | $                              

15

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(Restated and Unaudited)

12.  Restatement of Financial Statements Based on Review of Government Pricing (Continued)

|
|

As of September 30,
2007

As of December 31,
2006(in thousands)

(in thousands)Consolidated Balance Sheet changes:Product sales allowances and reservesAs previously reported

$
137,106

$
115,647As restated

$
197,347

$
167,631Stockholders' EquityAs previously reported

$
238,380

$
92,168As restated

$
178,139

$
40,184


The
amounts by which have reduced revenues were based on management's best estimates and assumptions made prior to any concurrence by CMS. These amounts may change as a result of future
communications with CMS, and we cannot be certain that we have not overestimated the amount of additional rebates we may be required to pay, that the amount of any additional rebate payments or other
payments we may owe will not exceed our current estimates or that we will not be subject to fines, penalties or interest. In addition, both the federal government and state governments have initiated
investigations and lawsuits concerning the Medicaid price reporting practices of many pharmaceutical companies to ensure compliance with the Medicaid rebate program. As a result of the possible errors
that we identified in our calculation of Medicaid rebate reserve amounts, we may face an increased risk of a government investigation or lawsuits concerning our Medicaid or other price reporting. If
any such investigation or lawsuit is initiated we may be subject to fines and other penalties.

We
have amended Note 7 appearing herein to reflect the effects of the matters discussed in this Note 12.

16

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

Restatement of Financial Statements Based on Review of Government Pricing

In January 2008, we concluded that our previously filed unaudited, condensed interim financial statements as of and for the three and nine months ended
September 30, 2007 and 2006 should no longer be relied upon due to matters relating to our government pricing.

Revenue
is recognized for amounts that are fixed or determinable assuming all other applicable criteria are met. We recently determined that Public Health Service, or PHS, discounts were
provided to non-PHS covered entities. This circumstance creates uncertainty as to whether a new best price was set in prior periods. If a new best price was set, additional Medicaid
rebates will be required to be paid. A portion of the revenue we previously recognized is therefore contingent on the outcome of this matter. Revenue has been reduced and rebate liabilities increased
to adjust for the amounts previously invoiced and received that are contingent and do not qualify for revenue recognition. The restatement for such contingent amounts reflects our best estimate of the
net revenue that should have been recognized in the respective periods.

Under
the Medicaid rebate program, we are obligated to pay a rebate to each participating State Medicaid program for each unit of product reimbursed by Medicaid. The amount of the rebate
is set by law as the greater of (a) 15.1% of the average manufacturer price, which is referred to as AMP, or (b) the difference between AMP and the Medicaid best price, which is the
lowest price available from us to any customer not excluded by law from that determination. The determination of whether a new best price was set is uncertain and is a matter of judgment that will be
subject to disclosure to the Centers for Medicare and Medicaid Services, or CMS. In January 2008, we notified CMS of the possible errors in our Medicaid best price. A determination of the actual
amount of payments required may change as a result of future interactions with CMS and we cannot be certain that we will not be subject to fines, penalties and interest.

The
amounts by which we have reduced revenues for contingent rebates were based on management's best estimates and assumptions made prior to any concurrence by CMS. These amounts may
change as a result of future interactions with CMS and we cannot be certain that we have not overestimated the amount of additional rebates we may be required to pay, that the amount of any additional
rebate payments or other payments we may owe will not exceed our current estimates, or that we will not be subject to fines, penalties or interest. The restatement and its impact on the three and nine
months ended September 30, 2007 and 2006, and on the fiscal year ended December 31, 2006 is discussed in more detail in Note 12 to our unaudited, condensed consolidated interim
financial statements, which are included herein.

The
discussion and analysis set forth in this Item 2 has been amended to reflect the restatement as described in the Explanatory Note at the beginning of this Quarterly Report on
Form 10-Q/A and in Note 12 to our unaudited, condensed consolidated interim financial statements The amount by which we have reduced revenues for the three months ended
September 30, 2007 and 2006 is $3.2 million and $2.5 million, respectively.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q/A contains, in addition to historical information, forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. These forward-looking statements involve risks and uncertainties and are not guarantees of
future performance. Words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and variations of these words and similar expressions are intended to identify forward-looking
statements. Our actual results could differ significantly from

17

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the
results we discuss in these forward-looking statements. These forward-looking statements 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 obligation to do so. See the section entitled "Risk Factors" 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 focused on discovering, developing and commercializing differentiated products that address large and growing
markets and unmet medical needs and can be marketed to primary care physicians and certain specialists through our sales force.

We
currently manufacture and sell four products:



We
market and sell XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA directly through our sales force. We have entered into out-licensing arrangements with
respect to the sale of eszopiclone outside of the United States, Canada and Mexico and with respect to several other compounds. We expect to commercialize any additional products that we may
successfully develop or acquire through our sales force, co-promotion agreements and/or out-licensing partnerships.

Critical
near-term success factors for us include our ability to:



Our
long-term success depends in large part on our ability to successfully develop, acquire and commercialize new product candidates.

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We
expect that sales of LUNESTA and XOPENEX Inhalation Solution will represent the majority of our total revenues in 2007. We do not have long-term sales contracts with our
customers, and we rely primarily on purchase orders for sales of our products. Reductions, delays or cancellations of orders for LUNESTA, XOPENEX Inhalation Solution, XOPENEX HFA or BROVANA could
adversely affect our operating results. If sales of LUNESTA, XOPENEX Inhalation Solution, XOPENEX HFA and/or BROVANA do not meet our expectations, we may not have sufficient revenues to achieve our
business plan and our business will not be successful.

In
2007, we expect to be profitable for the year on an operating and net income basis. We expect sales and marketing expenses to continue to increase as compared to 2006 as we incur
increasing sales and marketing costs, related to anticipated product revenue growth, as well as expenses related to the restructuring of our sales force. We expect research and development expenses to
continue to increase as compared to 2006 as we continue to invest in research and development activities relating to additional studies for LUNESTA and BROVANA, and continued development of our
Phase I and Phase II drug candidates, as well as increased drug discovery efforts. As part of our business strategy for the remainder of 2007 and the future, we expect to consider and,
as appropriate, consummate acquisitions and/or licensing of other technologies, product candidates, approved products and/or businesses.

Significant 2007 Developments

In November 2007, we announced that the Centers for Medicare and Medicaid Services, or CMS, established a product-specific billing code for BROVANA under the
Medicare Part B benefit, which becomes effective on January 1, 2008. In April 2007, we announced the commercial availability of BROVANA for the treatment of COPD.

In
October 2007, we announced that we had decided to reduce our sales force by approximately 300 positions. The decision was based on our recently completed evaluation of the structure,
sizing and allocation of our direct sales force and is intended to result in cost savings in fiscal year 2008. We expect to complete the sales force reduction prior to December 31, 2007.

In
October 2007, the parties to both the state and Federal derivative actions brought against us (as a nominal defendant) and certain of our current and former officers and directors
related to certain stock option grants and alleged violations of Federal securities laws, reached a settlement that provides for the dismissal of both actions, subject to the approval of the court.
The settlement resolves all claims and includes no finding of wrongdoing on the part of any of the defendants and no cash payment other than attorneys' fees. As part of the settlement, we have agreed
to adopt and implement stock option grant and other procedures that reflect developing best practices. A preliminary hearing on the fairness of the settlement and the adequacy of the stockholder
notice was held on November 6, 2007 by the state court, with a final fairness hearing likely to be held in January 2008. The settlement will not be final and effective until final approval by
the state court and entry of dismissal with prejudice by the Federal court.

In
October 2007, we announced that Mark Iwicki was elected to the newly created position of Executive Vice President, Chief Commercial Officer.

In
September 2007, we entered into an agreement with Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline, for the commercialization of our eszopiclone product, which we market
as LUNESTA in the United States, for all markets worldwide excluding the United States, Canada, Mexico and Japan. Our eszopiclone product will be marketed by GSK in its territory primarily as
LUNIVIA® brand eszopiclone for the treatment of insomnia. Under this agreement, we received an initial payment of $20 million and are entitled to receive additional payments upon
accomplishment of various milestones. If all milestones are met, GSK will be obligated to pay us $155 million in aggregate license and milestone payments. We are also entitled to receive
double-digit royalties that escalate upon

19

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increased
product sales, and compensation for supplying the product to GSK pursuant to a supply agreement that is expected to be entered into by the parties.

In
July 2007, we announced that we had submitted a Marketing Authorization Application, or MAA, to the European regulatory authorities for LUNIVIA for the treatment of insomnia. Approval
of the MAA, which is the European Union equivalent of a New Drug Application, or NDA, in the United States, would allow authorization to market LUNIVIA in the European Union. Pursuant to our agreement
with GSK, we are responsible for supporting the MAA until final approval, or such earlier date mutually agreed upon by the parties, and GSK is responsible for supporting the MAA thereafter.

In
July 2007, we also announced that we had entered into an agreement with Eisai Co. Ltd., or Eisai, for the development and commercialization of our eszopiclone product,
marketed as LUNESTA in the United States. Under this agreement, Eisai will be responsible for completing remaining clinical trials necessary for attaining marketing approval from the Japanese
regulatory authorities and, contingent on obtaining regulatory approval, commercialization of the product in Japan. We received an initial milestone payment and will be entitled to receive subsequent
payments upon accomplishment of various development, regulatory and pricing milestones, as well as royalties on product sales. We will also be responsible for, and will receive compensation in
connection with, the manufacture and supply of bulk tablets and/or active ingredient.

In
June 2007, we announced that CMS determined that, based on its interpretation of the statutory language of the Medicare Prescription Drug Improvement and Modernization Act of 2003, or
MMA, it was required to discontinue the unique reimbursement codes for XOPENEX Inhalation Solution and generic albuterol, which had been in place since January 2005, and bundled these products
together in a newly created reimbursement code. As a result of this coding change, reimbursement for XOPENEX Inhalation Solution and generic albuterol is now based on the blended weighted average
selling price for the two products, resulting in reimbursement for XOPENEX Inhalation Solution that is considerably lower than the published selling price for the product distribution channel. The new
reimbursement rate became effective on July 1, 2007 and is subject to change quarterly based upon the respective contribution of commercial sales of XOPENEX Inhalation Solution and generic
albuterol to the quarterly blended weighted average selling price calculation for the newly created reimbursement code. This quarterly average selling price calculation is mandated by the MMA.
Revenues from the sale of XOPENEX Inhalation Solution have been, and we expect will continue to be, adversely affected on a comparable basis as a result of this change.

In
June 2007, we filed in the United States District Court for the District of Massachusetts, or the Court, a Stipulation of Settlement regarding two securities class action lawsuits, or
class actions, pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. As previously disclosed, the class actions, which were filed on
behalf of certain purchasers of our equity and debt securities, or the plaintiffs, allege that the defendants violated the Federal securities laws by making false and misleading statements relating to
the testing, safety and likelihood of approval of tecastemizole by the FDA. The Stipulation of Settlement contains no admission of wrongdoing. Sepracor and the other defendants have always maintained
and continue to believe that we did not engage in any wrongdoing or otherwise commit any violation of Federal or state securities laws or other laws. However, given the potential cost and burden of
continued litigation, we believe the settlement is in our best interests and the best interests of our stockholders. Under the terms of the Stipulation of Settlement, in June 2007 we paid into escrow
$52.5 million in settlement of the class actions and, in July 2007, received an $18.5 million reimbursement from our insurance carriers. We recorded the litigation settlement expense of
$34.0 million, relating to this matter, during the quarter ended March 31, 2007. In September 2007, the Court granted final approval of the Stipulation of Settlement and entered a final
judgment consistent with the Stipulation of Settlement. The settlement is now final and the total settlement amount has been released from escrow. Pursuant

20

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to
the final judgment entered by the Court, the Court dismissed the class actions with prejudice and the plaintiffs are deemed to have released all claims against us.

In
May 2007, we announced that Adrian Adams, President and Chief Operating Officer of Sepracor, was elected to the role of President and Chief Executive Officer. Mr. Adams assumed
the Chief Executive Officer role from Timothy J. Barberich, who was simultaneously elected Executive Chairman of the Board of Directors.

In
April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York,
C.A. No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., referred to collectively as Dey, alleging that the manufacture and sale of BROVANA infringes or
will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim to this Complaint seeking to invalidate the
originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent Under the current trial scheduling order, trial will begin no earlier
than December 12, 2008. It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss or
liability related to this lawsuit due to its uncertain resolution.

In
March 2007, we announced that W. James O'Shea had resigned as our President and Chief Operating Officer and was elected Vice Chairman. Mr. O'Shea ceased acting in this
capacity on August 31, 2007. In addition, we announced that, effective March 1, 2007, our board had elected Adrian Adams to the positions of President and Chief Operating Officer and
Andrew I. Koven to the positions of Executive Vice President, General Counsel and Secretary. The board, upon the recommendation of the nominating and corporate governance committee, also elected
Mr. Adams to the Board of Directors, as a Class II director. Douglas E. Reedich, Senior Vice President, Legal Affairs, plans to leave Sepracor but
will remain in this position for a transition period to ensure an orderly transition in the handling of our legal matters.

In
February 2007, we paid in full $440.0 million in aggregate principal amount of outstanding 5% convertible subordinated debentures, which matured on February 15,
2007, plus approximately $11.0 million in accrued interest.

Three Month Periods ended September 30, 2007 and 2006 (Restated)

Revenues

Product sales were $271.8 million and $277.6 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of
approximately 2%.

Sales
of XOPENEX Inhalation Solution were $91.6 million and $123.4 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of
approximately 26%. The decrease was primarily due to a decrease in the number of units sold of approximately 15%, and a 13% decrease in the net selling price as a result of a
higher rate of sales discounts and allowances during the three months ended September 30, 2007, primarily related to an increase in Medicare Part B government rebates as a result of the
CMS bundling decision, which created a new reimbursement code for XOPENEX Inhalation Solution. The decrease in net selling price was partially offset by (i) a gross price increase that occurred
in July 2007, and, (ii) a decrease in wholesaler fee-for-service charges resulting from credits earned due to the gross price increase. In the three months ended
September 30, 2006, we reversed a $4.1 million reserve related to TRICARE Pharmacy Benefits Program government rebate, which was based on a U.S. Federal Court of Appeals ruling in
September 2006 that pharmaceutical manufacturers are not required to reimburse on drugs purchased through the TRICARE Program. Adjustments recorded to gross sales are further disclosed below under the
heading "Analysis of gross sales to net sales."

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Sales
of XOPENEX HFA were $17.1 million and $13.1 million for the three months ended September 30, 2007 and 2006, respectively, an increase of approximately 31%. The
increase is due in part to a
44% increase in the net selling price, which is primarily related to fewer units sold in the three months ended September 30, 2007 under a government contract with the Department of
Veterans Affairs, or VA, as compared to the same period in 2006. This increase in net selling price was partially offset by a decrease in the number of units sold of approximately 10% and an
increase in Medicaid government rebates, as well as an increase in product coupons distributed. Adjustments recorded to gross sales are further disclosed below under the heading "Analysis of gross
sales to net sales."

Sales
of BROVANA were $2.4 million and $0 for the three months ended September 30, 2007 and 2006, respectively. We introduced BROVANA commercially in April 2007.
Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of LUNESTA were $160.7 million and $141.1 million for the three months ended September 30, 2007 and 2006, respectively, an increase of
approximately 14%. The increase is primarily the result of a 19% increase in the gross selling price, which yielded an increase of approximately 10% in the net selling price due
to a higher rate of sales discounts and allowances, particularly with respect to Medicare Part D government rebates and managed care commercial discounts. The increase was also the result of an
increase in the number of units sold of approximately 3%. In the three months ended September 30, 2006, we reversed a $4.1 million reserve related to TRICARE Pharmacy Benefits Program
government rebate, which was based on a U.S. Federal Court of Appeals ruling in September 2006 that pharmaceutical manufacturers are not required to reimburse on drugs purchased through the
TRICARE Program. Adjustments recorded to gross sales are further disclosed below under the heading "Analysis of gross sales to net sales."

Analysis of gross sales to net salesWe record product sales net of the following significant categories of product sales
allowances: payment term discounts, wholesaler fee-for service, government and commercial rebates and discounts, returns and other discounts. We recompute these amounts each quarter and,
with the exception of the best price matters described in more detail in the "Explanatory Note" to this report on Form 10-Q/A and notes to the unaudited, condensed consolidated
interim financial statements included herein, historically our estimates have not materially differed from actual results. Calculating each of these items involves significant estimates and judgments
and requires us to

22

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use
information from external sources. The following table presents the adjustments deducted from gross sales to arrive at net sales:

|                            |                                                 | For the Three Months Ended September 30, |        
|--------------------------- | ----------------------------------------------- | ---------------------------------------- | -------
|
|
|Gross sales                 |                                                 | $                                        | 372,412
|Adjustments to gross sales: |                                                 |                                          |        
|                            | Payment term discounts                          |                                          |        
|                            | Wholesaler fee-for-service                      |                                          |        
|                            | Government and commercial rebates and discounts |                                          |        
|                            | Returns                                         |                                          |        
|                            | Other (includes product introduction discounts) |                                          |        
|                            |                                                 |                                          |        
|Sub-total adjustments       |                                                 |                                          | 100,575
|                            |                                                 |                                          |        
|Net sales                   |                                                 | $                                        | 271,837
|                            |                                                 |                                          |        

---

The
increase in adjustments to gross sales as a percentage of gross sales for the three months ended September 30, 2007 as compared to the three months ended September 30,
2006 primarily reflects an overall increase in government and commercial rebates and discounts as a result of (i) an increase in discounts given through the Medicare Part B program that
we offered on the sales of XOPENEX Inhalation Solution, (ii) an increase in Medicaid discounts that we offered on the sales of LUNESTA, XOPENEX Inhalation Solution and XOPENEX HFA,
(iii) an increase in discounts given through the Medicare Part D program that we offered on the sales of LUNESTA. In the three months ended September 30, 2006, we reversed
$8.3 million of reserves related to TRICARE Pharmacy Benefits
Program government rebate, of which $4.2 million related to XOPENEX franchise sales and $4.1 million related to LUNESTA sales. The reversal was based on a U.S. Federal Court of Appeals
ruling in September 2006 that pharmaceutical manufacturers are not required to reimburse on drugs purchased through the TRICARE Program. In addition, adjustments to gross sales increased as a result
of higher amounts reserved for LUNESTA and XOPENEX Inhalation Solution product returns based on higher actual returns, and an increase in discounts we offered through voucher and coupon programs on
the sales of XOPENEX HFA. Partially offsetting these increases in adjustments to gross sales as a percentage of gross sales was a decrease in government discounts as a result of fewer XOPENEX HFA
units sold in the three months ended September 30, 2007 under a government contract with the VA as compared to the same period in 2006. Wholesaler fee-for-service
charges also decreased primarily related to credits earned due to a XOPENEX Inhalation Solution gross price increase in July 2007.

Royalties
and license fees were $8.9 million and $9.2 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of
approximately 3%.

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Royalties earned on the sales of ALLEGRA® (fexofenadine HCl), under our agreement with sanofi-aventis, increased to $3.7 million for the three months ended
September 30, 2007 compared to $3.0 million for the same period in 2006 due to increased sales in Japan.

Royalties
earned on sales of CLARINEX® (desloratadine), under our agreement with Schering-Plough Corporation, or Schering-Plough, were $2.5 million for the three
months ended September 30, 2007 compared to $4.1 million for the same period in 2006. Royalties for the three months ended September 30, 2006 included a true-up of the
second-quarter 2006 estimate of approximately $900,000.

Royalties
earned on sales of XYZAL®/XUSAL (levocetirizine) under our agreement with UCB Pharma SA, Belgium, or UCB, increased slightly to
$2.5 million for the three months ended September 30, 2007 as compared to $2.1 million for the same period in 2006.

License
fees recognized on our GSK and Eisai agreements for the commercialization of our eszopiclone product were $206,000 and $0 for the three months ended September 30, 2007 and
2006, respectively.

A
number of the patents we own and license to third parties for which we receive these royalties are the subject of patent infringement, invalidation or revocation claims. We can provide
no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties from whom we receive royalties, are not successful in enforcing our respective patents, the
companies seeking to market generic versions of our drugs and the drugs of our licensees will not be excluded from marketing their generic versions of these products. Introduction of generic copies of
any of these products before the expiration of our patents or the patents of our licensees could have a material adverse effect on our business, financial condition and/or results of operations.

Costs of Revenues

Cost of products sold was $26.2 million and $24.6 million for the three months ended September 30, 2007 and 2006, respectively, an increase
of approximately 7%.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 7% for both the three months ended September 30, 2007
and 2006. The cost of XOPENEX Inhalation Solution sold was slightly higher in the three months ended September 30, 2007 compared to the same period in 2006 when taking into consideration the
July 2007 gross price increase.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 14% for both the three months ended September 30, 2007 and 2006. Included in the costs
of XOPENEX HFA sold is a royalty paid on net sales of XOPENEX HFA to 3M Company, or 3M, our third-party finished goods manufacturer of the product.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 14% for the three months ended September 30, 2007. We introduced BROVANA commercially in
April 2007.

Cost
of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 6% and 5% for the three months ended September 30, 2007 and 2006, respectively, with
the largest portion being the royalty paid on net sales of LUNESTA to a third party. The increase is primarily due to a higher cost per unit of units sold in the three months ended
September 30, 2007 compared to the same period in 2006, as the cost of LUNESTA units sold was not impacted by certain capitalized product manufacturing costs, until the end of 2006.

Cost
of royalties earned was $194,000 and $327,000 for the three months ended September 30, 2007 and 2006, respectively, a decrease of approximately 41%. The cost of
royalties in both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough based on

24

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its
sales of CLARINEX. This decrease in third-party obligations is due to the decrease in royalties earned during the three months ended September 30, 2007 as compared with the same period in
2006.

Research and Development

Research and development expenses were $49.0 million and $35.5 million for the three months ended September 30, 2007 and 2006, respectively,
an increase of approximately 38%. The increase is primarily due to greater spending on our BROVANA Phase IV program, our drug discovery efforts, further research and development expenses for
our Phase I and Phase II programs and an increase in non-project-specific personnel-related expenses.

Drug
development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an investigational new drug
application, or IND, which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study:
Phase I, II and III. The most significant costs in clinical development are in Phase III clinical trials, as they tend to be the longest and largest studies in the drug development
process. Following successful completion of Phase III clinical trials, an NDA must be submitted to, and accepted by, the FDA, and the FDA must approve the NDA, prior to commercialization of the
drug. We may elect either on our own, or at the request of the FDA, to conduct further studies that are referred to as Phase IIIB and IV studies, which if conducted, could cause us to incur
substantial costs. Phase IIIB studies are initiated and either completed or substantially completed while the NDA is under FDA review. These studies are conducted under an IND. Phase IV
studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the FDA has approved a product for marketing. Phase IV studies may be
requested by the FDA either before or after the FDA has approved an NDA. These studies may also be independently initiated by the company for which an NDA has been approved. The FDA and the companies
conducting post-marketing studies use them to gather additional information about a product's safety, efficacy or optimal use.

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

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

Below
is a summary of development of our products and product candidates that represent approximately 10% or more of our direct project research and development spending for the three
months ended September 30, 2007. The "Estimate of Completion of Phase" column contains forward-looking statements regarding expected timing of completion of product development phases.
Completion of product development, if successful, culminates in the submission of an NDA to the FDA; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The
actual timing of completion of phases could differ materially from the estimates provided in the table. In the table below, the three commercial products and the two product candidates listed
accounted for approximately 76% of our direct project research and development spending for the

25

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three
months ended September 30, 2007. No other product candidate accounted for more than 8% of our direct research and development spending in this period.

|Product or Product Candidate        |  | Indication         |  | Phase of
Development |  | Estimate of
Completion
of Phase
|----------------------------------- |  | ------------------ |  | -------------------- |  | -------------------------------
|LUNESTA (eszopiclone)               |  | Insomnia           |  | *                    |  | *                              
|XOPENEX HFA (levalbuterol tartrate) |  | RespiratoryAsthma |  | **                   |  | **                             
|BROVANA (arformoterol tartrate)     |  | RespiratoryCOPD   |  | ***                  |  | ***                            
|SEP-225289                          |  | Depression         |  | Phase II             |  | 2008                           
|SEP-227162                          |  | Depression         |  | Phase I              |  | 2007                           

---

Below
is a summary of expenditure information related to our products and product candidates representing approximately 10% or more of our direct project research and development
spending during the three months ended September 30, 2007 or 2006, 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, stock compensation or other costs that benefit multiple projects. As a result, fully-loaded research and development cost summaries by project are not
presented.

|                                    |  | Project Costs
for the
Three Months Ended
September 30, 2007 |       | Project Costs
to Date Through
September 30, 2007 |   | Project Costs
for the
Three Months Ended
September 30, 2006 |  | Project Costs
to Date Through
September 30, 2006
|----------------------------------- |  | ----------------------------------------------------------- | ----- | ------------------------------------------------ | - | ----------------------------------------------------------- |  | ------------------------------------------------
|
|LUNESTA (eszopiclone)               |  | $                                                           | 4,890 |                                                  | $ | 236,439                                                     |  | $                                               
|XOPENEX HFA (levalbuterol tartrate) |  | $                                                           | 1,870 |                                                  | $ | 174,089                                                     |  | $                                               
|BROVANA (arformoterol tartrate)     |  | $                                                           | 3,605 |                                                  | $ | 184,948                                                     |  | $                                               
|SEP-225289                          |  | $                                                           | 3,278 |                                                  | $ | 20,843                                                      |  | $                                               
|SEP-227162                          |  | $                                                           | 4,344 |                                                  | $ | 16,495                                                      |  | $                                               

Due
to the length of time necessary to develop a product, uncertainties related to the ability to obtain governmental approval for commercialization, and difficulty in estimating costs
of projects, it is difficult to make accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA-approved status. We do not believe it is possible to
estimate, with any degree of accuracy, the costs of product candidates that are in stages earlier than Phase III. Accordingly, because all of our product candidates are in Phase I or
Phase II development, we have not provided any such estimates.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $154.6 million and $151.2 million for the three months ended September 30, 2007 and 2006,
respectively, an increase of approximately 2%. This increase is primarily the result of an increase in salary and other compensation related expenses, offset by an overall decrease in marketing,
advertising and promotional expenses. The decrease in marketing, advertising and promotional expenses consisted of a reduction in costs to support LUNESTA, which

26

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was
partially offset by an increase in costs to support BROVANA, which was commercially introduced in April 2007.

General and Administrative

General and administrative costs were $20.5 million and $19.3 million for the three months ended September 30, 2007 and 2006, respectively,
an increase of approximately 6%. The increase is primarily the result of an increase in personnel-related expenses.

Other Income (Expense)

Interest income was $11.2 million and $12.3 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of
approximately 9%. The decrease is primarily due to lower average balances of cash and short- and long-term investments in the third quarter of 2007. For the three months ended
September 30, 2007 and 2006, the average annualized interest rate that we earned on our investments was 5.10% and 5.09%, respectively.

Interest
expense was $88,000 and $5.5 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of approximately 98%. The expense in the
three months ended September 30, 2006 is primarily related to the interest we paid on our 5% convertible subordinated debentures, which we repaid in full upon their maturity on
February 15, 2007.

Equity
in investee losses were $37,000 and $212,000 for the three months ended September 30, 2007 and 2006, respectively, a decrease of approximately 83%. The loss represents our
portion of BioSphere losses.

Income Taxes

Income tax expense was $907,000 and $585,000 for the three months ended September 30, 2007 and 2006, respectively. The increase in income tax expense for
the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 is primarily due to foreign income taxes, as well as U.S. Federal and state alternative
minimum tax, or AMT. Although we had Federal and state tax net operating loss carryforwards as of December 31, 2006, the utilization of these loss carryforwards is limited in the calculation of
AMT. For the three months ended September 30, 2007 and 2006, income tax expense includes Federal, state and foreign income tax expense. Given our limited history of profitability, and the
possible adverse impact to our XOPENEX Inhalation Solution sales if an "at risk" generic launch were to occur or we are unable to successfully defend our patents rights, management continues to
conclude a valuation allowance is required for the full amount of our deferred tax asset. If in the future, we determine based on our future profitability, that these deferred tax assets are more
likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax
provisions in future periods.

Nine Month Periods ended September 30, 2007 and 2006 (Restated)

Revenues

Product sales were $853.7 million and $804.5 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of
approximately 6%.

Sales
of XOPENEX Inhalation Solution were $344.7 million for the nine months ended September 30, 2007 as compared to $366.7 million for the same period in 2006, a
decrease of approximately 6%. The decrease is primarily due to a 1% decrease in number of units sold and a 5% decrease in the net selling price as a result of a higher rate of sales discounts and
allowances during the nine months ended September 30, 2007, primarily related to an increase in Medicare Part B

27

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government
rebates as a result of the CMS bundling decision, which created a new reimbursement code for XOPENEX Inhalation Solution, and an increase in Medicaid government rebates. The decrease in net
selling price was partially offset by (i) a gross price increase that occurred in July 2007, and (ii) a decrease in wholesaler fee-for-service charges resulting
from credits earned due to the gross price increase. In the nine months ended September 30, 2006, we reversed a $3.1 million reserve related to TRICARE Pharmacy Benefits Program
government rebate, which was based on a U.S. Federal Court of Appeals ruling in September 2006 that pharmaceutical manufacturers are not required to reimburse on drugs purchased through the TRICARE
Program. Adjustments recorded to gross sales are further disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $50.0 million for the nine months ended September 30, 2007 as compared to $20.0 million for the same period in 2006, an increase of
approximately 149%. The increase is due to a 75% increase in the number of units sold, and a 43% increase in the net selling price, which is primarily related to fewer units sold in the nine months
ended September 30, 2007 under a government contract with the VA as compared to the same period in 2006. This increase in net selling price was adversely affected by an increase in Medicaid
government rebates, as well as an increase in managed care commercial discounts. Adjustments recorded to gross sales are further disclosed below under the heading "Analysis of gross sales to net
sales."

Sales
of BROVANA were $7.9 million for the nine months ended September 30, 2007, as compared to $0 for the same period in 2006. We introduced BROVANA commercially in April
2007. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of LUNESTA were $451.1 million and $417.8 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of approximately 8%. The
increase is primarily the result of a 13% increase in the gross selling price, which yielded an increase of approximately 7% in the net selling price due to a higher rate of sales discounts and
allowances, particularly with respect to
Medicare Part D government rebates and managed care commercial discounts. Partially offsetting these increases in sales discounts and allowances was a decrease in wholesaler
fee-for-service charges primarily related to credits earned due to the gross price increase in June 2007. In the nine months ended September 30, 2006, we reversed a
$2.6 million reserve related to TRICARE Pharmacy Benefits Program government rebate, which was based on a U.S. Federal Court of Appeals ruling in September 2006 that pharmaceutical
manufacturers are not required to reimburse on drugs purchased through the TRICARE Program. Adjustments recorded to gross sales are further disclosed below under the heading "Analysis of gross sales
to net sales."

28

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Analysis of gross sales to net salesThe following table presents the adjustments deducted from gross sales to arrive at net
sales:

|                            |                                                 | For the Nine Months Ended September 30, |          
|--------------------------- | ----------------------------------------------- | --------------------------------------- | ---------
|
|
|Gross sales                 |                                                 | $                                       | 1,121,158
|Adjustments to gross sales: |                                                 |                                         |          
|                            | Payment term discounts                          |                                         |          
|                            | Wholesaler fee for service                      |                                         |          
|                            | Government and commercial rebates and discounts |                                         |          
|                            | Returns                                         |                                         |          
|                            | Other (includes product introduction discounts) |                                         |          
|                            |                                                 |                                         |          
|Sub-total adjustments       |                                                 |                                         | 267,432  
|                            |                                                 |                                         |          
|Net sales                   |                                                 | $                                       | 853,726  
|                            |                                                 |                                         |          

---

The
increase in adjustments to gross sales as a percentage of gross sales for the nine months ended September 30, 2007 as compared to the nine months ended September 30,
2006 primarily reflects an overall increase in government and commercial rebates and discounts as a result of (i) an increase in Medicaid discounts that we offered on the sales of
XOPENEX HFA, XOPENEX Inhalation Solution and LUNESTA, (ii) an increase in discounts given through Medicare Part B program that we offered on the sales of XOPENEX Inhalation
Solution as a result of the CMS bundling decision, which created a new reimbursement code for XOPENEX Inhalation Solution, (iii) an increase in discounts given through Medicare Part D
program that we offered on the sales of LUNESTA, (iv) an increase in managed care commercial discounts we offered on the sales of LUNESTA and XOPENEX HFA, and (v) a decrease in
XOPENEX HFA units sold under a government contract with the VA in the nine months ended September 30, 2007 as compared to the same period in 2006. Partially offsetting these increases in
adjustments to gross sales as a percentage of gross sales was a decrease in wholesaler fee-for-service charges primarily related to credits earned due to LUNESTA and XOPENEX
Inhalation Solution gross price increases during 2007.

Royalties
and license fees were $31.5 million and $25.4 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of approximately
24%.

Royalties
earned on the sales of ALLEGRA (fexofenadine HCl), under our agreement with sanofi-aventis, increased to $15.8 million for the nine months ended September 30,
2007 compared to $11.7 million for the same period in 2006, resulting primarily from increased sales in Japan.

Royalties
earned on sales of CLARINEX (desloratadine), under our agreement with Schering-Plough were $10.6 million for the nine months ended September 30, 2007 compared to
$9.6 million for the same period in 2006.

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Royalties
earned on sales of XYZAL/XUSAL (levocetirizine) under our agreement with UCB, increased to $4.9 million for the nine months ended September 30, 2007 as compared
to $4.1 million for the same period in 2006.

Licenses
fees recognized on our GSK and Eisai agreements for the commercialization of our eszopiclone product was $206,000 and $0 for the three months ended September 30, 2007 and
2006, respectively.

A
number of the patents we own and license to third parties for which we receive these royalties are the subject of patent infringement, invalidation or revocation claims. We can provide
no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties from whom we receive royalties, are not successful in enforcing our respective patents, the
companies seeking to market generic versions of our drugs and the drugs of our licensees will not be excluded from marketing their generic versions of these products. Introduction of generic copies of
any of these products before the expiration of our patents or the patents of our licensees could have a material adverse effect on our business, financial condition and/or results of operations.

Costs of Revenues

Cost of products sold was $82.7 million and $70.8 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of
approximately 17%.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 7% and 8% for the nine months ended September 30, 2007 and
2006, respectively. The decrease in the cost as a percentage of gross sales is primarily due to lower manufacturing costs during the nine months ended September 30, 2007 as compared to the same
period in 2006.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 15% and 14% for the nine months ended September 30, 2007 and 2006,
respectively. Included in the costs of XOPENEX HFA sold is a royalty paid on net sales of XOPENEX HFA to 3M, our third-party finished goods manufacturer of the product. The increase in
the cost as a percentage of gross sales is primarily due to lower manufacturing volumes resulting in a higher per unit cost on the units sold in the nine months ended September 30, 2007 as
compare to the same period in 2006.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 18% for the nine months ended September 30, 2007. We introduced BROVANA commercially in April 2007.

Cost
of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 6% for both the nine months ended September 30, 2007 and 2006, with the largest portion being the
royalty paid on net sales of LUNESTA to a third party.

Cost
of royalties earned was $849,000 and $769,000 for the nine months ended September 30, 2007 and 2006, respectively, an increase of approximately 10%. The cost of royalties in
both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough based upon its sales of CLARINEX. This increase in third-party obligations is due to the
increase in royalties earned during the nine months ended September 30, 2007 as compared with the same period in 2006.

Research and Development

Research and development expenses were $135.2 million and $121.1 million for the nine months ended September 30, 2007 and 2006, respectively,
an increase of approximately 12%. The increase is primarily due to greater spending on our BROVANA Phase IV program, further research and development expenses for our Phase I and
Phase II programs, as well as an increase in non-project-

30

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specific
personnel-related expenses. These increases were offset by a decrease in spending on our XOPENEX HFA MDI formulation.

Below
is a summary of development of our products and product candidates that represent approximately 10% or more of our direct project research and development spending for the nine
months ended September 30, 2007. The "Estimate of Completion of Phase" column contains forward-looking statements regarding expected timing of completion of product development phases.
Completion of product development, if successful, culminates in the submission of an NDA to the FDA; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The
actual timing of completion of phases could differ materially from the estimates provided in the table. In the table below, the three commercial products and the two product candidates listed
accounted for approximately 82% of our direct project research and development spending for the nine months ended September 30, 2007. No other product candidate accounted for more than 6% of
our direct research and development spending in this period.

|Product or Product Candidate        |  | Indication         |  | Phase of
Development |  | Estimate of
Completion
of Phase
|----------------------------------- |  | ------------------ |  | -------------------- |  | -------------------------------
|LUNESTA (eszopiclone)               |  | Insomnia           |  | *                    |  | *                              
|XOPENEX HFA (levalbuterol tartrate) |  | RespiratoryAsthma |  | **                   |  | **                             
|BROVANA (arformoterol tartrate)     |  | RespiratoryCOPD   |  | ***                  |  | ***                            
|SEP-225289                          |  | Depression         |  | Phase II             |  | 2008                           
|SEP-227162                          |  | Depression         |  | Phase I              |  | 2007                           

---

Below
is a summary of expenditure information related to our products and product candidates representing approximately 10% or more of our direct project research and development
spending during the nine months ended September 30, 2007 or 2006, 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, stock compensation or other costs that benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not
presented.

|                                    |  | Project Costs
for the Nine Months Ended
September 30, 2007 |        | Project Costs
to Date Through
September 30, 2007 |   | Project Costs
for the Nine Months Ended
September 30, 2006 |  | Project Costs
to Date Through
September 30, 2006
|----------------------------------- |  | ---------------------------------------------------------- | ------ | ------------------------------------------------ | - | ---------------------------------------------------------- |  | ------------------------------------------------
|
|LUNESTA (eszopiclone)               |  | $                                                          | 16,416 |                                                  | $ | 236,439                                                    |  | $                                               
|XOPENEX HFA (levalbuterol tartrate) |  | $                                                          | 4,791  |                                                  | $ | 174,089                                                    |  | $                                               
|BROVANA (arformoterol tartrate)     |  | $                                                          | 11,017 |                                                  | $ | 184,948                                                    |  | $                                               
|SEP-225289                          |  | $                                                          | 7,733  |                                                  | $ | 20,843                                                     |  | $                                               
|SEP-227162                          |  | $                                                          | 8,354  |                                                  | $ | 16,495                                                     |  | $                                               

Due
to the length of time necessary to develop a product, uncertainties related to the ability to obtain governmental approval for commercialization, and difficulty in estimating costs
of projects, it is difficult to make accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA approved status. We do not believe it is possible to estimate, with
any degree of

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accuracy,
the costs of product candidates that are in stages earlier than Phase III. Accordingly, because all of our product candidates are in Phase I or Phase II development, we
have not provided any such estimates.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $538.3 million and $523.8 million for the nine months ended September 30, 2007 and 2006,
respectively, an increase of approximately 3%. The increase is primarily attributable to an increase in salary and other compensation related expense as a result of hiring additional sales
representatives and management in the second quarter of 2006 to support our marketed products, in addition to increased costs associated with our April 2007 commercialization of BROVANA. These
increases were offset by a decrease in marketing, advertising and promotional expenses primarily related to costs to support LUNESTA.

General and Administrative

General and administrative costs were $58.7 million and $51.9 million for the nine months ended September 30, 2007 and 2006, respectively, an
increase of approximately 13%. The increase is primarily the result of increased legal fees largely related to patent litigation, as well as expenses associated with our XOPENEX Inhalation Solution
Medicare Part B reimbursement matter.

Litigation Settlement

Litigation settlement expense was $34.0 million and $0 for the nine months ended September 30, 2007 and 2006, respectively. In June 2007, we filed
in the Court a Stipulation of Settlement regarding two class actions pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. As previously
disclosed, the class actions alleged that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing, safety and likelihood of approval of
tecastemizole by the FDA. Under the terms of the Stipulation of Settlement, in June 2007, we paid into escrow $52.5 million in settlement of the class actions and, in July 2007, received an
$18.5 million reimbursement from our insurance carriers. The settlement is now final and the total settlement amount has been released from escrow. We recorded the litigation settlement expense
of $34.0 million relating to this matter during the quarter ended March 31, 2007.

Other Income (Expense)

Interest income was $34.9 million and $33.1 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of
approximately 5%. The increase is primarily due to higher interest rates earned on investments in 2007. Our monthly average cash and investment balance was approximately $894.5 million and
$948.1 million for the nine months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the average annualized interest rate
that we earned on our investments was 5.20% and 4.66%, respectively.

Interest
expense was $3.0 million and $16.6 million for the nine months ended September 30, 2007 and 2006, respectively, a decrease of approximately 82%. The expense
in both periods is primarily related to the interest we paid on our 5% convertible subordinated debentures, which we repaid in full upon their maturity on February 15, 2007.

Equity
in investee losses were $441,000 and $565,000 for the nine months ended September 30, 2007 and 2006, respectively, a decrease of approximately 22%. The loss represents our
portion of BioSphere losses.

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Income Taxes

Income tax expense was $2.8 million and $1.1 million for the nine months ended September 30, 2007 and 2006, respectively. The increase in
income tax expense for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 is primarily due to U.S. Federal and state AMT and foreign taxes
as a result of an increase in net income. Although we had Federal and state tax net operating loss carryforwards as of December 31, 2006, the utilization of these loss carryforwards is limited
in the calculation of AMT. For the nine months ended September 30, 2007 and 2006, income tax expense includes Federal, state and foreign income tax expense. Given our limited history of
profitability, and the possible adverse impact to our XOPENEX Inhalation Solution sales if an "at risk" generic launch were to occur or we are unable to successfully defend our patents rights,
management continues to conclude a valuation allowance is required for the full amount of our deferred tax asset. If in the future, we determine based on our future profitability, that these deferred
tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and
material income tax provisions in future periods.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses, capital expenditures, working capital,
debt service and general corporate expenses. Historically, we have funded these requirements and the growth of our business primarily through convertible subordinated debt offerings, the issuance of
common stock, including the exercise of stock options, sales of our products and license agreements for our drug compounds. We now expect to fund our liquidity requirements primarily with revenue
generated from product sales. We also believe we have the ability to meet our short-term liquidity needs through the use of our cash and short-term investments on hand at
September 30, 2007.

Cash,
cash equivalents and short- and long-term investments totaled $932.3 million, or 74% of total assets, at September 30, 2007, compared to
$1.2 billion, or 78% of total assets, at December 31, 2006.

Net
cash provided by operating activities for the nine months ended September 30, 2007 was $182.3 million, which includes net income of $63.3 million. Our net income
includes non-cash charges of $43.7 million, consisting primarily of stock compensation and depreciation and amortization expense. Accounts receivable decreased by
$20.6 million primarily due to timing of product sales. Inventory on hand increased by $11.1 million as a result of efforts to increase the number of days inventory on hand of XOPENEX
HFA. Other current assets increased by $5.8 million, which is primarily attributable to an increase in prepaid expenses off set by a decline in interest receivable. Accounts payable increased
by $6.4 million primarily due to timing of vendor payments. Accrued expenses increased by $10.7 million primarily due to (i) the timing of personnel-related expenses,
(ii) increased legal and research and development expenses, (iii) increased expenses
relating to the expansion of commercial production lines primarily associated with BROVANA, and (iv) a decline in accrued interest as a result of the February 2007 payment in full of our 5%
convertible subordinated debentures. Product sales allowances and reserves increased $29.7 million primarily due to product revenue rebates related to LUNESTA and XOPENEX Inhalation Solutions
product sales. Other current liabilities increased by $24.7 million primarily due to an increase in deferred revenues.

Net
cash provided by investing activities for the nine months ended September 30, 2007 was $197.8 million, which is primarily attributable to cash provided by net sales of
short- and long-term investments of $217.5 million offset by purchases of property and equipment of $19.7 million.

Net
cash used in financing activities for the nine months ended September 30, 2007 was $408.7 million. We received proceeds of $32.2 million from issuing common
stock upon the exercise of

33

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stock
options issued under our stock option plans and we used $440.9 million to repay long-term debt and capital lease obligations.

We
believe our existing cash and the cash flow that we anticipate from operations and current strategic alliances will be sufficient to support existing operations through at least 2008.
In the longer term, we expect to continue to fund our operations with revenue generated from product sales. Our actual future cash requirements and our ability to generate revenue, however, will
depend on many factors, including:



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 otherwise borrowing money. 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; however, we
may choose to do so. If we are not able to successfully continue to grow our revenue and properly manage our expenses, if sales of LUNESTA do not increase, if sales of XOPENEX Inhalation Solution in
other markets do not offset the reduction in revenues resulting from the change in Medicare Part B reimbursement for the product, or if we do not prevail against those manufacturers seeking to
market a generic version of our XOPENEX Inhalation Solution product, it is likely that our business would be materially and adversely affected and that we would be required to raise additional funds
in order to repay our outstanding convertible debt. We cannot assure that, if required, we would be able to raise the additional funds on favorable terms, if at all.

In
addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, product candidates and technologies, which may affect our
liquidity requirements or cause us to raise additional funds which we may not be able to do on favorable terms, if at all.

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Critical Accounting Policies and Estimates

We identified critical accounting policies and estimates in our annual report on Form 10-K for the year ended December 31, 2006. 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,
income taxes, induced conversion of debt, inventory write-downs and stock-based compensation. These policies require us to make estimates in the preparation of our financial statements as of a given
date. Because of the uncertainty inherent in these matters, our actual results could differ from the estimates we use in applying the critical accounting policies.

A
summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2006 in the "Critical Accounting Policies and Estimates" section. Other than as described below, our critical accounting policies
and estimates are as set forth in the Form 10-K.

Revenue Recognition, Multiple Element ArrangementsWe have entered into collaborative agreements with other pharmaceutical
companies for the development and commercialization of our eszopiclone product outside of the United States, Canada and Mexico. These agreements are in the form of license agreements that call for
nonrefundable upfront payments, milestone payments on achieving significant milestones, and royalty payments on sales if and when the compound receives marketing approval.

Our
revenue recognition policy for all multiple revenue-generating arrangements are in accordance with the guidance provided in the SEC's Staff Accounting Bulletin, or SAB,
No. 101,Revenue Recognition in Financial Statements, as amended by SAB No. 104,Revenue
Recognition, and Emerging Issues Task Force, or EITF, Issue No. 00-21,Revenue Arrangements with Multiple
Deliverables.

Product sales allowances and reservesThe following table summarizes activity in each of our product sales allowances and
reserve categories for the nine months ended September 30, 2007:

|                                            |              | Payment
Terms
Discount |        | Wholesaler
Fee
for Service |   | Government
and
Commercial
Rebates and
Discounts |         | Returns |          | Other
Discounts |   | Total   |        
|------------------------------------------- | ------------ | ---------------------- | ------ | -------------------------- | - | ----------------------------------------------- | ------- | ------- | -------- | --------------- | - | ------- | -------
|
|Balance at December 31, 2006 (as restated)  |              | $                      | (4,351 | )                          | $ | (16,669                                         | )       | $       | (126,233 | )               | $ | (23,218 | )      
|Current provision:                          |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|                                            | Current year |                        |        | (22,440                    | ) |                                                 | (21,331 | )       |          | (193,884        | ) |         | (17,181
|                                            | Prior year   |                        |        |                           |   |                                                 | 457     |         |          | (637            | ) |         |       
|                                            |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|                                            | Total        |                        |        | (22,440                    | ) |                                                 | (20,874 | )       |          | (194,521        | ) |         | (17,181
|                                            |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|Actual:                                     |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|                                            | Current year |                        |        | 19,209                     |   |                                                 | 15,504  |         |          | 97,620          |   |         | 517    
|                                            | Prior year   |                        |        | 4,378                      |   |                                                 | 14,123  |         |          | 56,813          |   |         | 20,552 
|                                            |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|                                            | Total        |                        |        | 23,587                     |   |                                                 | 29,627  |         |          | 154,433         |   |         | 21,069 
|                                            |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        
|Balance at September 30, 2007 (as restated) |              | $                      | (3,204 | )                          | $ | (7,916                                          | )       | $       | (166,321 | )               | $ | (19,330 | )      
|                                            |              |                        |        |                            |   |                                                 |         |         |          |                 |   |         |        

Calculating
each of these product sales allowances and reserves involves significant estimates and judgments and requires us to use information from external sources. Based on known
market events and trends, internal and external historical trends, third-party data, customer buying patterns and up-to-date knowledge of contractual and statutory
requirements, we have been able to make reasonable estimates of sales discounts. With the exception of the best price matters described in more detail in the "Explanatory Note" to this report on
Form 10-Q/A and notes to the unaudited, condensed

35

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consolidated
interim financial statements included herein, historically our estimates have not materially differed from our actual results.

Provision for Income TaxesDeferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on management's review of both positive and
negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Given our limited history of profitability, and the possible adverse impact to our
XOPENEX Inhalation Solution sales if an "at risk" generic launch were to occur or we are unable to successfully defend our patents rights, management continues to conclude a valuation allowance is
required for the full amount of the deferred tax asset. If in the future, we determine based on our future profitability, that these deferred tax assets are more likely than not to be realized, a
release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods.

We
adopted the Financial Accounting Standards Board Interpretation, or FIN, No. 48,Accounting for Uncertainty in Income Taxes, or
FIN 48, in January 2007. The implementation of FIN 48 did not have a material impact on our consolidated financial statements or results of operations. We are currently in the
process of conducting a study of our research and development credit carryforwards. This study may result in an adjustment to our research and development credit carryforwards. However, until the
study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN 48. We reasonably estimate that our unrecognized tax benefits position will
not change significantly within the next twelve months.

We
file tax returns in the U.S. Federal jurisdiction and in various state, local and foreign jurisdictions. During the fourth quarter of 2006, the Internal Revenue Service, or
IRS, commenced an audit of our 2005 and 2004 U.S. Federal income tax returns, which was formally concluded during the third quarter of 2007. We are no longer subject to IRS examination for years prior
to 2004, although carryforward attributes that were generated prior to 2004 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. We receive
inquiries from various states during the year, some of those inquiries include an audit of state returns previously filed. With limited exceptions, we are no longer subject to state or local
examinations for years prior to 2003, however, carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by state or local tax authorities if they either have
been or will be used in a future period.

The
foreign jurisdictions where we currently file income tax returns are Canada and the Netherlands Antilles. We are currently under examination by Canada Revenue Agency, or CRA, for our
Scientific Research and Experimental Development claims for the years ended December 31, 2005, 2004 and 2003. There are currently no examinations being conducted by the tax authorities in the
Netherlands Antilles. With limited exceptions, we are no longer subject to examination in Canada and the Netherlands Antilles for years prior to 2003 and 1999, respectively, although carryforward
attributes that were generated prior to these respective periods may still be adjusted upon examination if they either have been or will be used in a future period.

We
recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48.
For the quarter ended September 30, 2007, we did not recognize any accrued interest and penalties in our consolidated statement of operations or our consolidated balance sheet.

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Contractual Obligations

As of September 30, 2007, our contractual obligations disclosure in our annual report on Form 10-K for the year ended
December 31, 2006 has not materially changed with the exception of the February 2007 payment in full of our 5% convertible subordinated debentures.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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, 2006. As of November 8, 2007, 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, 2006. 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

Evaluation of Disclosure Controls and Procedures

Our management has re-evaluated, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer, and
Executive Vice President, Corporate Finance, Administration and Technical Operations, the effectiveness of the design and operation of our disclosure controls and procedures as of September 30,
2007. The term "disclosure controls and procedures," as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the re-evaluation and the identification of the material weakness in internal control over financial
reporting described below, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President, Corporate Finance, Administration and Technical Operations, have concluded that,
as of September 30, 2007, our disclosure controls and procedures were not effective.

Our
management has identified the following material weakness in our internal control over financial reporting:

We
did not establish and/or maintain effective controls over the process to identify transactions with the potential to establish a new Medicaid best price which affected the accuracy of
the net revenue and product sales allowances and reserve accounts. Specifically, our controls over the calculation of Medicaid rebates were not designed to effectively monitor whether certain entities
were appropriately exempt from the Medicaid best price calculation. This control deficiency resulted in the restatement of our consolidated financial statements for the years ended December 31,
2006 and 2005 and each quarter in 2006 and the first three quarters of 2007. Additionally, this control deficiency, if not addressed, could result in misstatements of Medicaid rebate liability and
corresponding revenues

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that
would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

In
light of the material weakness referred to above, we performed additional analyses and procedures in order to conclude that its consolidated financial statements included in this
amended Quarterly Report on Form 10-Q/A are fairly presented, in all material respects, in accordance with generally accepted accounting principles in the United States of America.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our quarter ended September 30, 2007 that have materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Remediation Plan

The material weakness noted above was identified by year end 2007. During the first quarter of 2008, we have engaged in substantial efforts to address this
material weakness and will continue to do so throughout 2008. All of these efforts will be commenced in the first or second quarter of 2008 and concluded thereafter in a timely fashion as early in
2008 as is reasonably possible. Our on-going improvements to the internal controls designed to address this material weakness will include the following, which will be undertaken with the
assistance of qualified outside legal counsel:

I)     Measures
are and will continue to be taken to identify the cause of the material weakness in internal controls over financial reporting, through the following procedures:



II)   The
following remediation efforts will be implemented by management to remediate the material weakness of internal control over financial reporting:



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We
anticipate that these remediation actions represent ongoing improvement measures and we expect that they will be fully implemented by year end 2008. Although we have devoted, and
intend to continue to devote, significant resources to remediating the material weakness, the effectiveness of our remediation efforts will not be known until management next performs its test of
internal controls.

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PART II    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Tecastemizole Class Action Complaints

In June 2007, we filed in the Court, a Stipulation of Settlement regarding two class actions, pending in the Court naming Sepracor and certain of our current and
former officers and one director as defendants. As previously disclosed, the class actions, which were filed on behalf of the plaintiffs, alleged that the defendants violated the Federal securities
laws by making false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the FDA.

The
Stipulation of Settlement contains no admission of wrongdoing. Sepracor and the other defendants have always maintained and continue to believe that we did not engage in any
wrongdoing or otherwise commit any violation of Federal or state securities laws or other laws. However, given the potential cost and burden of continued litigation, we believe the settlement is in
our best interests and the best interests of our stockholders.

Under
the terms of the Stipulation of Settlement, in June 2007, we paid into escrow $52.5 million in settlement of the class actions and, in July 2007, received an
$18.5 million reimbursement from our
insurance carriers. We recorded the litigation settlement expense of $34.0 million, relating to this matter, during the quarter ended March 31, 2007.

On
September 6, 2007, the Court granted final approval of the Stipulation of Settlement and entered a final judgment consistent with the Stipulation of Settlement. The settlement
is now final and the total settlement amount has been released from escrow. Pursuant to the final judgment entered by the Court, the Court dismissed the class actions with prejudice and the plaintiffs
are deemed to have released all related claims against us.

Litigation Related to Generic Competition and Patent Infringement



In September 2005, we received notification that the FDA had received an ANDA, from Breath Limited, or Breath, seeking approval of a generic version of our
1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX® (levalbuterol hydrochloride) Inhalation Solution. Breath's submission includes a Paragraph IV certification
alleging that our patents listed in the FDA publication entitledApproved Drug Products With Therapeutic Equivalence Evaluations, commonly referred to
as the "Orange Book," for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Breath is seeking approval. In
October 2005, we filed a civil action against Breath for patent infringement and a non-jury trial is scheduled to begin on July 14, 2008 in the United States District Court
for the District of Massachusetts, No. CV:06-10043.

In
January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of a generic version of our 1.25 mg/3 mL,
0.63 mg/3 mL, and 0.31 mg/3 mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in
the Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In
February 2006, we filed a civil action against Dey, L.P. for patent infringement and the case is pending in the United States District Court for the District of Delaware,
C.A. No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX
Inhalation Solution concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed

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in
the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking
approval. In September 2006, we filed a civil action against Dey, L.P. for patent infringement in the United States District Court for the District of Delaware,
C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were consolidated into a single suit. No trial date has been set.

In
May 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval of a generic version of our
1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our
patents listed in the Orange Book for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Barr is seeking approval. In
July 2007, we filed a civil action against Barr for patent infringement and the case is pending in the United States District Court for the District of Delaware,
C.A. No. 07-438. No trial date has been set.

The
filing of an action for patent infringement under the Hatch-Waxman Act invokes an automatic 30-month stay of the FDA's authority to grant final marketing approval
to those companies that file an ANDA containing a Paragraph IV certification against one or more of our XOPENEX Inhalation Solution patents. The first filer of an ANDA with a
Paragraph IV certification is potentially entitled to a 180-day period of semi-exclusivity during which the FDA cannot approve subsequently filed ANDAs. The
180-day semi-exclusivity period would begin to run only upon first commercial marketing by the first filer. There are, however, also certain events that could cause the first
filer to forfeit the 180-day semi-exclusivity period, which we refer to as a forfeiture event.

For
our 1.25 mg/3 mL, 0.63/3 mL, and 0.31/3 mL XOPENEX Inhalation Solution, we believe that Breath is the first filer and potentially entitled to
180-days of semi-exclusivity against subsequent ANDA filers for those three dosages. The 30-month stay against Breath's ANDA is scheduled to expire on or about
March 7, 2008. Upon expiration of that 30-month stay, the FDA could grant final approval and Breath could then commence an "at risk" distribution of its generic levalbuterol product
for those dosages notwithstanding our patents and notwithstanding that the court's decision as to the merits of the litigation will not have been rendered, unless we were able to obtain an injunction
prohibiting such distribution. However, if a forfeiture event occurs and the FDA determines that Breath has forfeited the 180-day semi-exclusivity period for those three
dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the 30-month stay. For those three dosages, the
30-month stays against Dey L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey L.P. is the first filer and potentially entitled to 180-days of
semi-exclusivity for that concentration. The 30 month stay against Dey L.P.'s ANDA for that concentration expires on or about February 14, 2009.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringe a valid and enforceable claim in our patents, whether we are
ultimately entitled to such damages would be determined by the court in connection with our ongoing legal proceedings with each party desiring to launch generic levalbuterol hydrochloride products. If
any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution product prior to the resolution of these ongoing legal proceedings, or there is a court
determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our business,
financial condition and results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we would have to revise such
guidance.

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In June 2007, we received notification that the FDA had received an ANDA from Glenmark Pharmaceuticals, Ltd. and Glenmark Pharmaceuticals, Inc.,
USA, which we refer to collectively as Glenmark, seeking approval of a generic version of Schering-Plough's 5 mg tablets of CLARINEX. Glenmark's submission includes a Paragraph IV
certification alleging that our patents that Schering-Plough (as licensee of such patents) listed in the Orange Book for its CLARINEX are invalid, unenforceable or not infringed by the generic version
for which Glenmark is seeking approval. In July 2007, we and the University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed a civil action in the
United States District Court for the District of New Jersey against Glenmark for patent infringement, C.A. No. 07-3385.

In
July 2007, we received notification that the FDA had received an ANDA from Sun Pharmaceutical Industries, Ltd., or Sun, seeking approval of a generic version of
Schering-Plough's 5 mg tablets of CLARINEX. Sun's submission includes a Paragraph IV certification alleging that our patents listed by Schering-Plough (as licensee of such patents) in
the Orange Book for CLARINEX are invalid, unenforceable, or are not infringed by the generic version for which Sun is seeking approval. In September 2007, we and the University of Massachusetts
filed a civil action in the United States District Court for the District of New Jersey against Sun for patent infringement, C.A. No. 07-4213.

In
August 2007, we received notification that the FDA had received an ANDA from Orchid Chemicals & Pharmaceuticals Ltd., or Orchid, seeking approval of a generic version of
Schering-Plough's 5 mg tablets, and 2.5 and 5 mg orally disintegrating tablets of CLARINEX. Orchid's submission includes a Paragraph IV certification alleging that our patents
listed by Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by the generic version for which Orchid is seeking approval. In
October 2007, we and the University of Massachusetts filed a civil action in the United States District Court for the District of New Jersey against Orchid for patent infringement,
C.A. No. 07-4623.

In
September 2007, we received notification that the FDA had received ANDAs from Mylan Pharmaceuticals, Inc., or Mylan, Lupin Limited, or Lupin, and Perrigo R & D Company,
or Perrigo, seeking approval of a generic version of Schering-Plough's 5 mg tablets of CLARINEX, and from Dr. Reddy's Laboratories, or Dr. Reddy's, seeking approval of a generic
version of Schering-Plough's 2.5/120 mg tablets of CLARINEX-D 12 hour desloratadine and pseudoephedrine extended release tablets. The submissions by these parties include
Paragraph IV certifications alleging that certain patents listed by Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by
the generic versions for which these parties are seeking approval. In October 2007, we and the University of Massachusetts filed civil actions in the United States District Court for the
District of New Jersey against Mylan, Lupin, Perrigo and Dr. Reddy's for patent infringement, C.A. No. 3:07-cv-05017, C.A.
No. 3:07-cv-05265, C.A. No. 3:07-cv-05136 and C.A. No. 3:07-cv-05001, respectively.

In
October 2007, we received notification that the FDA had received an ANDA from Anchen Pharmaceuticals, Inc., or Anchen, seeking approval of a generic version of
Schering-Plough's 2.5/120 mg tablets of CLARINEX-D 12 hour desloratadine and pseudoephedrine extended release tablets. Anchen's submission includes a Paragraph IV
certification alleging that our patents listed by Schering-Plough (as licensee of such patents) in the Orange Book for CLARINEX are invalid, unenforceable or not infringed by the generic version for
which Anchen is seeking approval. We are currently contemplating filing a civil action against Anchen for patent infringement.

We
believe that all of these ANDAs are subject to a statutory stay of approval until June 21, 2009 based on previous litigation commenced by Schering-Plough against these parties
in separate civil actions involving another patent.

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In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey, alleging that manufacture and sale of BROVANA® (arformoterol tartrate) Inhalation Solution infringes or will induce infringement of
a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim to this Complaint seeking to invalidate the originally asserted patent and a
second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. Under the current trial scheduling order, trial will begin no earlier than December 12, 2008.
It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss or liability related to this
lawsuit due to its uncertain resolution.

Patent
litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties
from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions of our drugs and the drugs of our licensees will not be
excluded, for the full term of the respective patents, from marketing their generic versions of our products or third party products for which we have licensed rights to our patents. Introduction of
generic copies of any of our products or third party products for which we have licensed rights to our patents before the expiration of our patents would have a material adverse effect on our
business, financial condition and results of operations.

Stock Option Inquiry and Derivative Stockholder Complaints

We announced in June 2006 that the SEC is conducting an informal inquiry into our stock option grants and stock option granting practices. A special committee of
our outside directors, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to
June 2006 under our various stock option plans in effect during this period. Our finance department also reviewed the stock option grants and stock option practices from 1996 to
June 2006. Their review resulted in the restatement of our financial statements for the quarters ended March 31, June 30 and September 30, 2005, the quarter ended
March 31, 2006 and the years ended December 31, 2005, 2004 and 2003. The special committee has concluded that there is no evidence of fraud, illegal activity or an intent to mislead or
deceive with respect to our stock option granting practices or the specific grants that have resulted in the restatement of our financial statements. The special committee also determined that the
board of directors and/or compensation committee generally intended to award the options on the date specified in the grants, although they were not aware of the accounting consequences.
Representatives from the U.S. Attorneys Office attended some of the earlier meetings that our outside counsel had with the SEC. While the U.S. Attorneys Office has not initiated an
investigation, we cannot be certain that it will not. The SEC and/or any other governmental agency that may initiate a formal investigation may reach different conclusions and, if so, we could be
subject to monetary damages, fines and penalties, and our
officers and/or directors could be prohibited from serving as officers and directors of any public company and could be subject to criminal penalties and/or disgorgement.

From
June to October 2006, six stockholder derivative complaints were commenced against us (as a nominal defendant) and certain of our current and former officers and directors. Three of
these complaints were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts (later transferred to the Business Litigation Session of the Superior Court, Suffolk County,
Commonwealth of Massachusetts) and three were filed in the United States District Court for the District of Massachusetts. All state court complaints were later consolidated into one state court
action, and all Federal court complaints were consolidated into one Federal court action. It was alleged in both actions that the individual defendants breached their fiduciary duties and were
unjustly enriched in

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connection
with certain stock option grants; violations of Federal securities laws were alleged in the Federal action as well. The complaints sought monetary damages in unspecified amounts, equitable
and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the court. On November 20, 2006, we moved to dismiss the state court
action, and on March 20, 2007 a hearing was held on the motion. No decision on the motion has been rendered at this time. The Federal court action has been stayed pending resolution of the
state court motion to dismiss.

In
October 2007, the parties to both the state and Federal action reached a settlement that provides for the dismissal of both actions, subject to the approval of the court. The
settlement resolves all claims and includes no finding of wrongdoing on the part of any of the defendants and no cash payment other than attorneys' fees. As part of the settlement, we have agreed to
adopt and implement stock option grant and other procedures that reflect developing best practices. A preliminary hearing on the fairness of the settlement and the adequacy of the stockholder notice
was held on November 6, 2007 by the state court, with a final fairness hearing likely to be held in January 2008. The settlement will not be final and effective until final approval by
the state court and entry of dismissal with prejudice by the Federal court.

LUNESTA Trademark Claim

In September 2006, Tharos Laboratories, Inc., or Tharos, filed suit against us in the United States District Court, District of Utah, Central Division,
2:06-cv-00757, alleging trademark infringement, dilution, unfair competition, false advertising and false designation of origin arising out of our use of our silk luna moth
design in connection with LUNESTA. Tharos seeks unspecified monetary damages and to enjoin our use of the silk luna moth design. In October 2006, we filed a Motion to Dismiss Tharos' claims. On
February 9, 2007, the court granted our motion in respect of the state unfair competition claims and denied it in respect of Tharos' other claims. On March 6, 2007, we filed an Answer to
Tharos' Complaint. In addition, we filed counterclaims against Tharos for cancellation of Tharos' alleged trademark and for false advertising. We continue to defend our trademark in this litigation
but we are unable at this stage to predict its ultimate resolution. In October
2007, we reached a preliminary agreement in principle with Tharos to settle this litigation, and final settlement is subject to the parties entering into a written settlement agreement.

Other Legal Proceedings

From time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a
material adverse effect on our business, financial condition or results of operations.

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ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below in addition to the other information contained in this report, before making an investment decision. Our
business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not currently
known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations, financial condition or results from operations.

Risks Related to Our Financial Results and Our Common Stock

We have a history of net losses and we may not be able to generate revenues sufficient to achieve and maintain profitability on a quarterly and annual
basis.

Until the year ended December 31, 2006, we had incurred net losses each year since our inception. It is possible we will not be able to achieve
profitability again or maintain profitability on a quarterly or annual basis. We expect to continue to incur significant operating expenditures to further develop and commercialize our products and
product candidates and in order to allow us to otherwise expand our product portfolio through drug discovery and business development efforts. As a result, we will need to generate significant
revenues in future periods to achieve and maintain profitability. We cannot provide assurance that we will be able to maintain profitability for any substantial period of time. If revenues grow more
slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and
adversely affected. In addition, if we are unable to achieve or maintain profitability on a quarterly or annual basis, the market price of our common stock may decline.

Almost all of our revenues are derived from sales of LUNESTA and XOPENEX Inhalation Solution and our future success depends on the continued commercial
success of these products as well as XOPENEX HFA and BROVANA.

Approximately 90% of our total revenues for the nine months ended September 30, 2007 resulted from sales of LUNESTA and XOPENEX Inhalation Solution, and we
expect that sales from these two products will continue to represent a significant majority of our revenues for the coming year. In April 2005, we commercially introduced LUNESTA as a new product in a
highly and increasingly competitive market, and we cannot be certain that it will achieve continued commercial success. In addition, we do not have long-term sales contracts with our
customers, and we rely primarily on purchase orders for sales of LUNESTA and XOPENEX Inhalation Solution. Reductions, delays or cancellations of orders for LUNESTA or XOPENEX Inhalation Solution could
adversely affect our operating results. Additionally, revenues from the sale of XOPENEX Inhalation Solution have been, and we expect will continue to be, adversely affected on a comparable basis as a
result of a change in the Medicare Part B reimbursement rate. If sales of LUNESTA do not increase and if sales of XOPENEX Inhalation Solution in other markets do not offset the reduction in
revenues resulting from the change in Medicare Part B reimbursement for the product, or if we do not prevail against those manufactures seeking to market a generic version of our XOPENEX
Inhalation Solution product, we may not have sufficient revenues to achieve our business plan or repay our outstanding debt, and our business will not be successful.

In
December 2005, we commercially introduced XOPENEX HFA and in April 2007, we commercially introduced BROVANA. We cannot be certain that either XOPENEX HFA or BROVANA will
achieve commercial success.

With
respect to XOPENEX Inhalation Solution, Breath, Dey, L.P., Barr and Watson Laboratories, Inc., or Watson, have filed ANDAs including Paragraph IV certifications
with the FDA seeking to market a generic version of levalbuterol hydrochloride inhalation solution before our patents

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expire.
We have commenced patent infringement litigation against Breath, Dey, L.P., and Barr, but we have decided not to commence litigation against Watson at this time as its
Paragraph IV certification is limited to a patent that expires in 2021. The filing of a lawsuit for patent infringement under the Hatch-Waxman Act results in an automatic 30-month
stay of the FDA's authority to grant marketing approval to these companies. The 30-month stay against Breath's ANDA is scheduled to expire for our 1.25 mg/3 mL,
0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution on or about March 7, 2008. Upon expiration of that 30-month stay, the FDA could grant final approval
and Breath could then commence an "at risk" distribution of its generic levalbuterol product for those dosages notwithstanding our patents and notwithstanding that the court's decision as to the
merits of the litigation will not have been rendered, unless we were able to obtain an injunction prohibiting such distribution. However, if a forfeiture event occurs and the FDA determines that
Breath has forfeited the 180-day semi-exclusivity period for those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk"
launch upon expiration of the 30-month stay. For those three dosages, the 30-month stays against Dey L.P. and Barr expire on or about July 9, 2008 and
November 30, 2009, respectively. If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution product prior to the resolution of these ongoing legal
proceedings, or there is a court determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material
adverse effect on our business, financial condition and/or results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we
would have to revise such guidance.

With
respect to BROVANA, in April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey alleging that the manufacture and sale of BROVANA infringes or will induce infringement of a single U.S. patent for which Dey owns all rights,
title and interest. In April 2007, we filed an Answer and Counterclaim to this Complaint seeking to invalidate the originally asserted patent and a second related patent. In May 2007, Dey filed a
reply asserting infringement of the second patent. Under the current trial scheduling order, trial will begin no earlier than December 12, 2008. It is too early to make a reasonable assessment
as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain resolution.

We
cannot be certain that we will be able to continue to successfully commercialize LUNESTA and/or XOPENEX Inhalation Solution or that any of our products will continue to be accepted in
their markets. Specifically, the following factors, among others, could affect the level of success and market acceptance of XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and/or LUNESTA:



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Any
adverse developments with respect to the sale of LUNESTA or XOPENEX Inhalation Solution could significantly reduce revenues and have a material adverse effect on our ability to
maintain profitability and achieve our business plan.

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

Since January 2005 and through June 2007, Medicare reimbursed XOPENEX Inhalation Solution pursuant to a unique reimbursement code. In March 2006, the Durable
Medical Equipment Program Safeguard Contractors, or DME-PSCs, the entities responsible for overseeing the Medicare Part B prescription drug benefit for respiratory products,
announced their intention to implement a Least Costly Alternative, or LCA, reimbursement action for XOPENEX Inhalation Solution that, if it had been implemented, would have reduced the reimbursement
paid for XOPENEX Inhalation Solution to that of generic racemic albuterol. In December 2006, CMS commenced a National Coverage Analysis, or NCA, to determine when use of nebulized levalbuterol in
treating COPD in the Medicare population is reasonable and necessary. While the NCA for XOPENEX Inhalation Solution was pending, the DME-PSCs announced that the proposed LCA would be
stayed. On June 20, 2007, CMS announced its preliminary coverage determination, stating that, based on its review of the available data and comments submitted, it was unable to determine the
criteria for when XOPENEX Inhalation Solution would be appropriate to use by the Medicare population and would instead defer this determination to the DME-PSCs. As part of its coverage
determination, CMS affirmed that the use of nebulized beta-adrenergic agonists (such as XOPENEX Inhalation Solution and BROVANA) in the treatment of lung disease in the home is medically
necessary; such a determination is needed before CMS or the DME-PSCs can establish the coverage criteria for a given prescription drug under the Medicare Part B benefit. The final
coverage determination was made in September 2007 and was identical to the preliminary coverage determination. Should the DME-PSCs establish overly restrictive coverage criteria for either
XOPENEX Inhalation Solution or BROVANA, or again seek to impose an LCA on XOPENEX Inhalation Solution, we may no longer be able to sell these products profitably in the Medicare Part B market
and revenues for these products may be materially adversely affected.

In
May 2007, CMS announced that, based on its interpretation of the statutory language of the MMA, it was required to discontinue the unique reimbursement codes for XOPENEX Inhalation
Solution and generic albuterol, which had been in place since January 2005, and bundled these products together in a newly created reimbursement code. As a result of this coding change, reimbursement
for XOPENEX Inhalation Solution and generic albuterol is now based on the blended weighted average selling price for the two products, resulting in reimbursement for XOPENEX Inhalation Solution that
is considerably lower than the product's published selling price for the product distribution channel. The
new reimbursement rate became effective on July 1, 2007 and is subject to change quarterly based upon the respective contribution of commercial sales of XOPENEX Inhalation Solution and generic
albuterol to the quarterly blended weighted average selling price calculation for the newly created reimbursement code. This quarterly average selling price calculation is mandated by the MMA.
Revenues from the sale of XOPENEX Inhalation Solution have been, and we expect will continue to be, adversely affected on a comparable basis as a result of this change.

The
bundling action also resulted in an unintended increase in Medicare Part B reimbursement for generic albuterol, significantly higher than the product's average selling price
(as publicly reported by

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the
Medicare Part B program), creating the potential for inappropriate reimbursement incentives to influence the dispensing decisions of providers. In July 2007, the U.S. House of
Representatives released draft legislation as part of the State Children's Health Insurance Program, or SCHIP, reauthorization that includes language addressing the Medicare Part B
reimbursement scenario that may potentially impact physician prescribing decisions based upon financial incentives. The draft legislation provides that XOPENEX Inhalation Solution and generic
albuterol will be paid at the lower of their respective stand-alone average selling prices or the blended XOPENEX Inhalation Solution/generic albuterol average selling price. The draft legislation was
not part of the SCHIP reauthorization bill passed by Congress and vetoed by President Bush in September 2007. The language remains part of the Medicare Physician Fee Schedule corrections legislation
currently pending in the House of Representatives and we are working to include comparable language in sister legislation being developed by the Senate. For generic albuterol, this will lower the
reimbursement Medicare pays for the product to its stand-alone average selling price. For XOPENEX Inhalation Solution, reimbursement will continue to be paid at the blended XOPENEX Inhalation
Solution/generic albuterol average selling price. Medicare Part B reimbursement rates are updated quarterly. The effective date of the legislation, if passed, is expected to be
January 1, 2008, but could be later if the law is not passed and signed by President Bush prior to the end of 2008. The impact of this potential legislative action on XOPENEX Inhalation
Solution revenues in the Medicare market in 2008 is not yet known.

We
estimate that as much as 25% of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B. We have been actively contracting with home
health care and retail pharmacy providers in an effort to ensure the continued availability of XOPENEX Inhalation Solution to Medicare Part B beneficiaries with reversible obstructive airway
disease. If the contracting strategy for XOPENEX Inhalation Solution is not successful in maintaining as much of the current unit sales levels for the product in Medicare as commercially feasible, if
the reimbursement scenario that may potentially impact physician prescribing decisions for generic albuterol is not changed and/or if the DME-PSCs impose restrictive coverage policies on
XOPENEX Inhalation Solution, revenue from sales of XOPENEX Inhalation Solution will be adversely affected and our financial condition and results from operations will be impaired.

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

As of September 30, 2007, our total debt was approximately $721 million. None of our 0% Series A notes due December 2008, our 0%
Series B notes due December 2010 nor our 0% notes due October 2024 restricts us or our subsidiaries' ability to incur additional indebtedness, including debt that ranks senior to the notes. The
0% notes due 2024 are senior to the Series A notes due 2008 and Series B notes due 2010. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity
with this debt. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The conversion prices for the 0%
Series A notes due 2008 and 0% Series B notes due 2010 are $31.89 and $29.84, respectively. On October 31, 2007, the closing sale price of our common stock was $27.54. If the
market price for our common stock does not exceed the conversion price, the holders of our outstanding convertible debt may decide not to convert their securities into common stock. For example, the
holders of our 5% debentures did not convert such debentures into common stock, and on February 15, 2007, the maturity date for the 5% debentures, we repaid in cash the entire principal amount
of $440.0 million, plus $11.0 million of accrued interest. Our 0% notes due 2024 are convertible into cash and, if applicable, shares of our common stock at a conversion price of
approximately $67.20, at the option of the holders in October 2009, 2014, 2019 and 2024, as well as under certain circumstances. We may not be able to make the required cash payments upon conversion
of the 0% notes due 2024.

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Historically,
we have had negative cash flow from operations, and in 2006, we experienced our first full year of positive cash flow from operating activities. Unless we have sufficient
cash or are able to generate sufficient operating cash flow to pay off the principal of our outstanding debt, we will be required to raise additional funds or default on our obligations under the
debentures and notes. If revenue generated from sales of LUNESTA and XOPENEX Inhalation Solution do not meet expected levels, it is unlikely that we would have sufficient cash flow to repay our
outstanding convertible debt and/or make cash payments upon conversion of the 0% notes due 2024. There can be no assurance that, if required, we would be able to raise the additional funds on
favorable terms, if at all.

If we exchange debt for shares of common stock, there will be additional dilution to holders of our common stock.

As of September 30, 2007, we had approximately $721 million of outstanding debt that could be converted into common stock. In order to reduce future
payments due at maturity, we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of our common stock,
warrants, preferred stock, debt or other consideration; or a combination of any of the foregoing. If we exchange shares of our capital stock, or securities convertible into or exercisable for our
capital stock, for outstanding convertible debt or use proceeds
from the issuance of convertible debt to fund redemption of outstanding convertible debt with a higher conversion ratio, the number of shares that we might issue as a result of such exchanges would
significantly exceed the number of shares originally issuable upon conversion of such debt and, accordingly, such exchanges would result in material dilution to holders of our common stock. We cannot
assure you that we will repurchase or exchange any additional outstanding convertible debt.

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

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, net revenues and expenses, the amounts of charges accrued by us and related
disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot
assure you, however, that our estimates, or the assumptions underlying them, will not be materially different from actual results. For example, our royalty revenue is recognized based upon our
estimates of our collaboration partners' sales during the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income would be reduced. In
addition, we estimate product sales allowances, including payment term discounts, government and commercial rebates and returns and other discounts. If actual amounts differ from these estimates, net
income could be adversely affected. Each, in turn, could adversely affect our financial condition, results from operations and stock price.

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

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit of regulatory approvals,
license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied our funding needs through collaboration arrangements with
corporate partners, sales of products, and equity and debt financings. These funding sources may not be available to us when needed in the future, and, if available, they may not be on terms
acceptable to us. Insufficient funds could require us to delay, scale back, eliminate or alter certain of our research and product development programs and/or commercialization efforts or to enter
into license agreements with third parties to commercialize

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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:



Our stock option granting practices are the subject of an informal inquiry by the SEC.

As we announced on June 2, 2006, the SEC is conducting an informal inquiry into our stock option grants and stock option practices and a special committee
of our outside directors oversaw a review of
our stock option granting practices and the documentation relating to such grants. Representatives from the U.S. Attorneys office attended some of the earlier meetings that our outside legal
counsel had with the SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot be certain that it will not. As a result of the SEC inquiry and/or other governmental
proceedings that could be initiated in the future, we could be subject to monetary damages, fines and penalties and our officers and/or directors could be prohibited from serving as officers and
directors of any public company and could be subject to criminal penalties and disgorgement.

Based
on the results of the special committee's review, we have restated our financial statements for the quarters ended March 31, June 30, and September 30, 2005,
the quarter ended March 31, 2006 and the fiscal years ended December 31, 2005, 2004 and 2003, and revised the financial information contained in our earnings release for the period ended
June 30, 2006. If the SEC disagrees with the conclusions we and our special committee have made, including with regard to measurement dates for certain stock option grants, the amount of
additional stock-based compensation expense we incurred and/or the adjustments we have recorded to non-cash charges to reflect the additional stock-based compensation, we may be required
to further restate our historical financial statements.

We have civil litigation pending that relates to our stock option granting practices, and we cannot predict the ultimate outcome of this litigation.

We and certain of our current and former directors and officers are defendants in a state and a Federal derivative action relating to our stock option granting
practices. The complaints allege purported breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints
sought monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the court. In
October 2007, we reached a settlement with the parties to the derivative actions, subject to the approval of the court. The settlement resolves all claims and includes no finding of wrongdoing on the
part of any of the defendants and no cash payment other than attorneys' fees. As part of the settlement, we have agreed to adopt and implement stock option grant and other procedures that reflect
developing best practices. However, the settlement will not be final and effective until final approval by the state court and entry

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of
dismissal with prejudice in the Federal court and, if it does not become final, we could be required to pay monetary damages and/or provide other relief.

Fluctuations in the demand for our products, the success and timing of clinical trials, regulatory approvals, product introductions, collaboration and
licensing arrangements, any termination of development efforts and other material events will cause fluctuations in our quarterly operating results, which could cause volatility in our stock price.

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



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

Various provisions of our certificate of incorporation and by-laws and of Delaware corporate law may discourage, delay or prevent a change 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 Sepracor to
consummate an acquisition transaction.

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, has been highly volatile. In
addition, the stock market has experienced extreme price and volume fluctuations. The volatility and market prices of securities of many pharmaceutical and biotechnology companies have been
significantly affected for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market
price of our common stock. Prices for our common stock are determined in the marketplace and may be influenced by many factors, including variations in our financial results and investors' perceptions
of us, and changes in recommendations by securities analysts as well as their perceptions of general economic, industry and market conditions.

Risks Related to Commercialization

We face intense competition and many of our competitors have greater resources and capabilities than we have.

We face intense competition in the sale of our current products, and expect to face intense competition in the sale of any future products we sell. If we are
unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may not achieve our product revenue objectives and because we may use
our financial resources to seek to differentiate ourselves from our competition. Large and small companies, academic institutions, governmental agencies and other public and private organizations
conduct research, seek patent protection, develop and acquire products, establish collaborative arrangements for product development and sell or license products in competition with us. Many of our
competitors and potential competitors have substantially greater resources, manufacturing and sales and marketing capabilities, research and development staff and production facilities than we have.
The fields in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more quickly to new or emerging technologies or to devote greater
resources to the development, manufacture and

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marketing
of new products and/or technologies than we can. As a result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred
in connection with their development.

In
the insomnia market, LUNESTA faces intense competition from established products such as AMBIEN® (zolpidem tartrate), SONATA® (zalepon), AMBIEN CR®
(zolpidem tartrate extended release) and ROZEREM (ramelteon). We expect that LUNESTA will face increasing competition from other potentially competitive therapies, such as a generic
version of AMBIEN, which was introduced in April 2007, a generic version of AMBIEN CR, which could be introduced as early as March 2009, and therapies in clinical development and under FDA
review for the treatment of insomnia. To continue to be successful in the market with LUNESTA, we must continue to demonstrate that LUNESTA's safety and efficacy features are superior to those of
competing branded and generic products, some of which may be less expensive than LUNESTA.

In
the asthma and COPD markets, XOPENEX Inhalation Solution, a short-acting beta-agonist, faces competition from generic albuterol and DUONEB® (ipratropium
bromide and albuterol sulfate). Albuterol has been available generically for many years, is well established and sells at prices substantially lower than XOPENEX Inhalation Solution. DUONEB offers
combination therapy of albuterol with ipratropium bromide. A generic version of DUONEB has recently been commercially introduced with additional generic entrants expected to follow. To be successful
in the marketing of XOPENEX Inhalation Solution, we must continue to demonstrate that the efficacy and safety features of the drug outweigh its higher price relative to generic albuterol and other
competing products. In addition, as a consequence of the ongoing commercialization of BROVANA, prescription levels for XOPENEX Inhalation Solution may be adversely affected to the extent that a
significant number of physicians prescribe BROVANA as a substitute product for their patients who are currently taking or would be prescribed XOPENEX Inhalation Solution. Such substitution could have
an adverse effect on sales of XOPENEX Inhalation Solution and/or the growth
of the combined revenue generated from the sale of XOPENEX Inhalation Solution and BROVANA. We may also face competition in the event of commercial introduction of a generic alternative to our XOPENEX
Inhalation Solution product.

Albuterol
MDIs have been on the market for many years and are well established. In the asthma market, XOPENEX HFA faces competition from chlorofluorocarbons, or
CFC-containing albuterol MDIs and branded HFA albuterol MDIs such as PROAIR® HFA (albuterol sulfate), VENTOLIN® HFA (albuterol sulfate HFA inhalation aerosol) and
PROVENTIL® HFA (albuterol sulfate) Inhalation Aerosol. With the phase-out of CFC albuterol MDI products required by the end of December 2008, we expect that competition from
branded HFA MDIs will increase substantially. There are currently no generic short-acting beta-agonist HFA MDIs available. To be successful in the marketing of
XOPENEX HFA, we must demonstrate that the efficacy and safety features of the drug outweigh its higher price as compared to generic CFC albuterol MDIs and that these attributes differentiate
the product from other HFA MDIs on the market.

BROVANA
competes in the COPD market, as it does not have an asthma indication. Competitive products include all nebulized products used in the treatment of COPD including albuterol,
XOPENEX Inhalation Solution, ATROVENT® (ipratropium bromide), DUONEB, generic albuterol/ipratropium bromide combination products, and nebulized Perforomist (formoterol
fumarate) Inhalation Solution, which was commercially introduced in October 2007. Even though BROVANA is a nebulized product, it also faces competition from long-acting
beta-agonists and anticholinergics delivered by MDI and dry-powder inhaler, including SEREVENT® DISKUS® (salmeterol xinafoate inhalation powder),
SPIRIVA® HandiHaler® (tiotropium bromide inhalation powder) and FORADIL® (formoterol fumarate inhalation powder). BROVANA also competes with combination therapy
products used for COPD including ADVAIR® (salmeterol and fluticasone) and recently commercialized SYMBICORT® (formoterol and budesonide). To be successful in the marketing of
BROVANA, we must demonstrate that patients with COPD who use a nebulizer will benefit by adding BROVANA as adjunctive therapy.

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For
all of our products, we need to demonstrate to physicians, patients and third-party payors that the cost of our product is reasonable and appropriate in light of its safety, efficacy
and health care benefits, each as compared to other competing products.

We may be unable to successfully commercialize products for which we receive approval from the FDA or similar foreign agencies.

Commercialization of a product for which we have received an approval letter from the FDA or similar foreign agency could be delayed for a number of reasons, some
of which are outside of our control, including delays in delivery of the product due to importation regulations and/or problems with our distribution channels or delays in the issuance of approvals
from, or the completion of, required procedures by agencies other than the FDA, such as the United States Drug Enforcement Administration. In addition, commercialization of approved products may be
delayed by our failure to timely finalize distribution arrangements, manufacturing processes and arrangements, produce sufficient inventory and/or properly prepare our sales force. If we are unable to
successfully commercialize a product promptly after receipt of an approval letter, our business and financial position may be materially adversely affected due to reduced revenue from product sales
during the period or periods that commercialization is delayed and the shortening of any lead time to market we may have had over our competitors. In addition, the exclusivity period, which is the
time during which the FDA or similar foreign agency will prevent generic pharmaceutical companies from introducing a generic copy of the product, begins to run upon approval and, therefore, to the
extent we are unable to successfully commercialize a product promptly after receipt of an approval letter, our long-term product sales and revenues could be adversely affected.

Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, if we fail to comply with the applicable regulatory requirements, we may be forced to suspend
and/or cease commercialization of the product due to suspension or withdrawal of regulatory approvals, product recalls, seizures of products and/or operating restrictions and may be subject to fines
and criminal prosecution. In any such event, our ability to successfully commercialize the product would be impaired and sales and revenues could be materially adversely affected.

We recently announced our intention to reduce the size of our direct sales force. This and any future reduction in sales force could prevent us from
achieving anticipated revenues and attracting and retaining qualified sales personnel and could negatively impact our financial condition and results of operations.

We sell our products, XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA, primarily through our direct sales force. On October 30, 2007,
we announced our intention to reduce our direct sales force by approximately 300 positions. Although we expect the sales force reduction to result in lower expenses, we may not realize the anticipated
cost-savings. This sales force reduction could result in temporary lack of focus and reduced productivity among our sales personnel and, if our sales organization does not devote the time
and resources necessary to attain sales projections, we may not be able to achieve anticipated revenues and our financial condition and operating results could be harmed. In addition, the sales force
reduction may make it more difficult for us to attract and retain the qualified sales people necessary to maintain current sales levels and/or to support potential sales growth and sales of any
additional products we may commercialize in the future.

We
have in the past, and may again in the future, incur significant expense to expand our sales force. This sales force expansion has, in some instances, been in anticipation of
receiving marketing approval for products under development and/or expected sales growth. If, in the future, we expand our sales force too rapidly or do not receive expected marketing approvals or
attain anticipated sales growth, we may be forced to again reduce our sales force, which could negatively impact our financial condition and results of operations.

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We sell our products primarily through a direct sales force, and if we are not successful in attracting and retaining qualified sales personnel, we may
not be successful in commercializing our products.

We have established a sales force to market XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA. Our ability to realize significant revenues from
direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel. Competition for these persons is intense and our recently announced sales force reduction
could harm our ability to attract and retain qualified sales personnel. If we are unable to attract and retain qualified sales personnel, we will not be able to successfully expand our marketing and
direct sales force on a timely or cost effective basis. We may also need to enter into additional co-promotion or other such arrangements with third parties, for example, where our own
direct sales force is not large enough or sufficiently well aligned to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion or other such
arrangements, and the terms of any co-promotion or other such arrangements may not be favorable to us.

If we or our third-party manufacturers do not comply with current Good Manufacturing Practices, or GMP, regulations, then the FDA could refuse to
approve marketing applications or force us to recall or withdraw our products.

The FDA and other regulatory authorities require that our products be manufactured according to their GMP regulations. The failure by us, our collaborative
development partners or our third-party manufacturers to comply with current GMP regulations could lead to delay in our development programs or refusal by the FDA or other regulatory authorities to
approve marketing applications. Following marketing approval of a product, failure in either respect could also impede commercial introduction or on-going distribution of the product
and/or be the basis for action by the FDA or other regulatory authorities to withdraw approvals previously granted, to recall products and for other regulatory action.

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

We may be subject to product liability claims that arise through testing, manufacturing, marketing, sale and use of pharmaceutical products. Product liability
claims could distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay significant damages, which could prevent or
interfere with our product commercialization efforts and could adversely affect our business. Claims of this nature could also subject us to product recalls or adversely affect our reputation, which
could damage our position in the market. Although we maintain product liability insurance coverage for 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.

Buying patterns of our wholesalers may vary from time to time, which could have a material impact on our financial condition, cash flows and results of
operations.

Sales of our products to wholesalers represent a substantial portion of our total sales. Buying patterns of our wholesalers may vary from time to time, in part as
a result of pricing or seasonality. Wholesalers, or direct customers of wholesalers, may accumulate inventory in one quarter and limit product purchases in subsequent quarters, which could have a
material impact on our financial condition, cash flows and results of operations.

We
have entered into wholesaler fee-for-service agreements, or FFSAs, with our three largest customers. We believe it is beneficial to enter into FFSAs to
establish specified levels of product inventory to be maintained by our wholesalers and to obtain more precise information as to the level of

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our
product inventory available throughout the product distribution channel. The FFSAs require that the wholesalers maintain certain minimum inventory levels that gradually decline over the next
several quarters. We record the cost associated with the FFSAs as revenue deductions. We cannot be certain that the FFSAs will be effective in limiting speculative purchasing activity, that there will
not be a future drawdown of inventory as a result of declining minimum inventory requirements, or otherwise, or that the inventory level data provided through our FFSAs are accurate. If speculative
purchasing does occur, if the wholesalers significantly decrease their inventory levels, or if inventory level data provided through FFSAs is inaccurate, our business, financial condition, cash flows
and results of operations may also be adversely affected.

Risks Related to the Regulatory Environment

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

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

If we fail to successfully develop and receive regulatory approval for product candidates, we will be unable to commercialize the product candidates and
future sales and earnings growth will be substantially hampered.

Our ability to maintain profitability will depend in large part on successful development and commercialization of additional products. All of our product
candidates are in the early stages of development. We cannot be assured that we will be able to develop or acquire and commercially introduce new products in a timely manner or that new products, if
developed or acquired, will be approved for the indications and/or with the labeling we expect, or that they will achieve market acceptance. Before we commercialize any other product candidate in the
United States, we will need to successfully develop the product candidate by completing successful clinical trials, submitting an NDA for the product candidate that is accepted for filing by the FDA
and receiving FDA approval to market the candidate. We must comply with similar requirements in foreign jurisdictions before commercializing any products in the jurisdiction. If we fail to
successfully develop a product candidate and/or the FDA or similar foreign agency delays or denies approval of any NDA, or foreign equivalent, that we have submitted or submit in the future, then
commercialization of our products under development may be delayed or terminated, which could have a material adverse effect on our business.

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



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In
addition, our growth is dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. We cannot be certain that the markets
we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance in these markets, that competitors
or regulators will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain profits in these markets.

If the FDA, or similar foreign agency, delays or denies approval of any NDA, or foreign equivalent, that we file, then commercialization of the product
subject to the filing will be delayed or terminated, which could have a material adverse effect on our business.

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



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

Our sales depend on payment and reimbursement from third-party payors, and a reduction in payment rate or reimbursement could result in decreased use or
sales of our products.

Sales of our products are dependent, in part, on the availability of reimbursement from third-party payors such as Federal and state government agencies under
programs such as Medicare and Medicaid, and private insurance plans. Third-party payors continually attempt to contain or reduce the cost of health care by challenging the prices charged for medical
products and services. We may not be able to sell our products profitably if reimbursement is unavailable or coverage is limited in scope or amount.

There
have been, there are, and we expect there will continue to be, state and Federal legislative and/or administrative proposals that could limit the amount that state or Federal
governments will pay to reimburse the cost of pharmaceutical products. Legislative or administrative acts that reduce reimbursement for our products could adversely affect our business. In addition,
private insurers, such as managed care organizations, may adopt their own coverage restrictions or demand price concessions in response to legislation or administrative action. Reduction in
reimbursement for our products could have a material adverse effect on our results of operations. Also, the increasing emphasis on managed care in the United States may put increasing pressure on the
price and usage of our products, which may adversely affect product sales. Further, when a new drug product is approved, governmental and/or private reimbursement for that product is uncertain, as is
the amount for which that product will be reimbursed and the extent of coverage for the product. We cannot predict availability or amount of reimbursement for our approved products or product
candidates and current reimbursement policies for marketed products may change at any time.

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The
MMA established a prescription drug benefit beginning in 2006 for all Medicare beneficiaries. We do not know the extent to which our products will continue to be included in the
Medicare prescription drug benefit, and we may be required to provide significant discounts or rebates to drug plans participating in the Medicare drug benefit. Moreover, Congress may enact
legislation that permits the Federal government to directly negotiate price and demand discounts on pharmaceutical products that may implicitly create price controls on prescription drugs. In
addition, Managed Care Organizations, or MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, health care institutions and other government agencies continue to
seek price discounts. MCOs, HMOs, PPOs and private health plans administer the Medicare drug benefit, leading to managed care and private health plans influencing prescription decisions for a larger
segment of the population. In addition, certain states have proposed, and certain other states have adopted, various programs to control prices for their seniors' and low-income drug
programs, including price or patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.

Since
January 2005 and through June 2007, Medicare reimbursed XOPENEX Inhalation Solution pursuant to a unique reimbursement code. In March 2006, the DME-PSCs, the entities
responsible for overseeing the Medicare Part B prescription drug benefit for respiratory products, announced their intention to implement an LCA, reimbursement action for XOPENEX Inhalation
Solution that, if it had been implemented, would have reduced the reimbursement paid for XOPENEX Inhalation Solution to that of generic racemic albuterol. In December 2006, CMS commenced an NCA, to
determine when use of nebulized levalbuterol in treating COPD in the Medicare population is reasonable and necessary. While the NCA for XOPENEX Inhalation Solution was pending, the
DME-PSCs announced that the proposed LCA would be stayed. On June 20, 2007, CMS announced its preliminary coverage determination, stating that, based on its review of the available
data and comments submitted, it was unable to determine the criteria for when XOPENEX Inhalation Solution would be appropriate to use by the Medicare population and would instead defer this
determination to the DME-PSCs. As part of its coverage determination, CMS affirmed that the use of nebulized beta-adrenergic agonists (such as XOPENEX Inhalation Solution and
BROVANA) in the treatment of lung disease in the home is medically necessary; such a determination is needed before CMS or the DME-PSCs can establish the coverage criteria for a given
prescription drug under the Medicare Part B benefit. The final coverage determination was made in September 2007 and was identical to the preliminary coverage determination. Should the
DME-PSCs establish overly restrictive coverage criteria for either XOPENEX Inhalation Solution or BROVANA, or again seek to impose an LCA on XOPENEX Inhalation Solution, we may no longer
be able to sell these products profitably in the Medicare Part B market and revenues for these products may be materially adversely affected.

In
May 2007, CMS announced that, based on its interpretation of the statutory language of the MMA, it was required to discontinue the unique reimbursement codes for XOPENEX Inhalation
Solution and generic albuterol, which had been in place since January 2005, and bundled these products together in a newly created reimbursement code. As a result of this coding change, reimbursement
for XOPENEX Inhalation Solution and generic albuterol is now based on the blended weighted average selling price for the two products, resulting in reimbursement for XOPENEX Inhalation Solution that
is considerably lower than the product's published selling price for the product distribution channel. The new reimbursement rate became effective on July 1, 2007 and is subject to change
quarterly based upon the respective contribution of commercial sales of XOPENEX Inhalation Solution and generic albuterol to the quarterly blended weighted average selling price calculation for the
newly created reimbursement code. This quarterly average selling price calculation is mandated by the MMA. Revenues from the sale
of XOPENEX Inhalation Solution have been, and we expect will continue to be, adversely affected on a comparable basis as a result of this change.

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The
bundling action also resulted in an unintended increase in Medicare Part B reimbursement for generic albuterol, significantly higher than the product's average selling price
(as publicly reported by the Medicare Part B program), creating the potential for inappropriate reimbursement incentives to influence the dispensing decisions of providers. In July 2007, the
U.S. House of Representatives released draft legislation as part of the SCHIP reauthorization that includes language addressing the Medicare Part B reimbursement scenario that may potentially
impact physician prescribing decisions based upon financial incentives. The draft legislation provides that XOPENEX Inhalation Solution and generic albuterol will be paid at the lower of their
respective stand-alone average selling prices or the blended XOPENEX Inhalation Solution/generic albuterol average selling price. The draft legislation was not part of the SCHIP reauthorization bill
passed by Congress and vetoed by President Bush in September 2007. The language remains part of the Medicare Physician Fee Schedule corrections legislation currently pending in the House of
Representatives and we are working to include comparable language in sister legislation being developed by the Senate. For generic albuterol, this will lower the reimbursement Medicare pays for the
product to its stand-alone average selling price. For XOPENEX Inhalation Solution, reimbursement will continue to be paid at the blended XOPENEX/generic albuterol average selling price. Medicare
Part B reimbursement rates are updated quarterly. The effective date of the legislation, if passed, is expected to be January 1, 2008, but could be later if the law is not passed and
signed by President Bush prior to the end of 2008. The impact of this potential legislative action on XOPENEX Inhalation Solution revenues in the Medicare market in 2008 is not yet known.

We
estimate that as much as 25% of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B. We have been actively contracting with home
health care and retail pharmacy providers in an effort to ensure the continued availability of XOPENEX Inhalation Solution to Medicare Part B beneficiaries with reversible obstructive airway
disease. If the contracting strategy for XOPENEX Inhalation Solution is not successful in maintaining as much of the current unit sales levels for the product in Medicare as commercially feasible, if
the reimbursement scenario that may potentially impact physician prescribing decisions for generic albuterol is not corrected legislatively, and/or if the DME-PSCs impose restrictive
coverage policies on XOPENEX Inhalation Solution, revenue from sales of XOPENEX Inhalation Solution will be adversely affected and our financial condition and results from operations will be impaired.

In
April 2007, CMS informed us that the scope of the NCA includes BROVANA. As stated above, CMS announced that it was deferring its coverage determination, including any determination
for long-acting beta-agonists like BROVANA, to the DME-PSCs. On June 13, 2007, the DME-PSCs published an article detailing the coverage criteria
for BROVANA. Unless otherwise modified by the DME-PSCs, the coverage criteria established for BROVANA in the above-referenced article will remain in effect under the product-specific
billing code that was recently awarded for the
product. We have initiated a contracting strategy with retail and home health care pharmacy providers for BROVANA that is intended to ensure the availability of the product for Medicare patients. If
the contracting strategy for BROVANA is not successful or if the coverage policies established by the DME-PSCs for the product are viewed by physicians and providers as too restrictive,
revenue growth from sales of BROVANA in the Medicare market will be materially adversely affected.

As
we enter into agreements to license our products for commercialization outside of the United States, we may be subject to pricing decisions made by regulatory bodies and private
insurers around the world. Such pricing decisions may affect royalty rates and payments made to us under those agreements, or decisions whether or not to commercialize our products in the applicable
jurisdiction. Efforts to obtain pricing decisions are often the responsibility of the third party licensee and we cannot predict the success of any third party in obtaining desirable pricing, or how
the actions of such third party or any regulatory body or private insurer will affect the ultimate commercial benefits of those transactions.

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If
reimbursement for our marketed products changes adversely or if we fail to obtain adequate reimbursement for our other current or future products, health care providers may limit how
much or under what circumstances they will prescribe or administer them, which could reduce use of our products or cause us to reduce the price of our products.

We will spend considerable time and money complying with Federal, state and foreign laws and regulations and, if we are unable to fully comply with such
laws and regulations, we could face substantial penalties.

We are subject to extensive regulation by Federal and state governments. The laws that directly or indirectly affect our business include, but are not limited to,
the following:



If
our past or present operations are found to be in violation of any of the laws described above or other governmental regulations to which we or our customers are subject, we may be
subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare and Medicaid programs and curtailment or restructuring
of our operations. Similarly, if our customers are found non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. In addition,
if we are required to obtain

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permits
or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, exclusion
from Medicare and Medicaid programs or curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found
in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention
from operating our business and damage our reputation.

If our Medicaid rebate program practices are investigated, the costs 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. Under the Medicaid rebate program, we are
obligated to pay at least a minimum primary rebate of 15.1% of the average manufacturers price on all utilization of our products by Medicaid beneficiaries. In addition, this primary rebate may be
higher if we provide discounts to commercial customers that are greater than the statutorily mandated minimum. Also, several state Medicaid programs have implemented Preferred Drug Lists, or PDLs, and
more states may adopt this practice. Products placed on a state Medicaid program's PDL are not subject to restrictions on their utilization such as prior authorization before use. If our drugs are not
included on Medicaid PDLs, use of our drugs in the Medicaid program may be adversely affected. In some states that have adopted PDLs, we have been, and may continue to be, required to provide
substantial supplemental rebates to state Medicaid authorities in order for our drugs to be included on the PDL.

Both
the Federal government and state and local governments have initiated investigations and lawsuits concerning the rebate practices of many pharmaceutical companies to ensure
compliance with these rebate programs. We were recently named as a defendant, together with numerous other companies, in one such suit. The formulas for determining these rebates and discounts are set
by law, are based on a number of different factors, and can be complicated. We recompute these amounts each quarter based on our up-to-date knowledge of the statutory
requirements and believe our calculations are accurate and based on reasonable assumptions and judgments. However, as a result of an investigation or lawsuit we may be required to pay additional
rebates and/or discounts on sales made in prior periods or be subject to fines and other penalties. In addition, an investigation or lawsuit concerning our rebate practices could be costly, could
divert the attention of our management from our core business and could damage our reputation.

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

In May 2001, an advisory panel to the FDA recommended that the FDA allow certain popular allergy medications to be sold without a prescription. In November 2002,
the FDA approved CLARITIN®, an allergy medication, to be sold without a prescription. In the future, the FDA may also allow 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 CLARINEX, ALLEGRA, and XYZAL/XUSAL for which we receive royalties on sales, has been and may continue to be, adversely affected.

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Risks Related to Our Intellectual Property

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

Our success depends in large part on our ability 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 substantially
equivalent products. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products. It
is also possible that we could incur substantial costs if we are required to initiate litigation against others to protect or enforce our intellectual property rights.

We
have filed patent applications covering composition of, methods of making, and/or methods of using, our drugs and drug candidates. Our revenues under collaboration agreements with
pharmaceutical companies depend in part on the existence and scope of issued patents. We may not be issued patents based on patent applications already filed or that we file in the future and if
patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements. Generally, we do not receive royalty revenue from sales of products licensed
under collaboration agreements in countries where we do not have a patent for such products. The issuance of a patent in one country does not ensure the issuance of a patent in any other country.
Furthermore, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and has been and remains the subject of much litigation. Legal
standards relating to scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United
States Patent and Trademark Office may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent
applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business. In addition, if we are not successful in
enforcing our patents, we will not be able to prevent others from introducing generic versions of our products.

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

XOPENEX Inhalation Solution is currently the subject of patent infringement litigation. The FDA has received ANDAs from Breath, Dey, L.P., Watson and Barr
seeking marketing approval for generic versions of our XOPENEX Inhalation Solution products. These submissions include Paragraph IV certifications alleging that our patents listed in the Orange
Book for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the submitter's proposed product. We have commenced patent infringement litigation against Breath, Dey, L.P.,
and Barr, but we have decided not to commence litigation against Watson at this time as its Paragraph IV certification is limited to a patent that expires in 2021. The filing of a lawsuit for
patent infringement under the Hatch-Waxman Act results in an automatic 30-month stay of the FDA's authority to grant marketing approval to these companies. The 30-month stay
against Breath's ANDA is scheduled to expire for our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution on or about March 7, 2008.
Upon expiration of that 30-month stay, the FDA could grant final approval and Breath could then commence an "at risk" distribution of its generic levalbuterol product for those dosages
notwithstanding our patents and notwithstanding that the court's decision as to the merits of the litigation will not have been rendered, unless we were able to obtain an injunction prohibiting such
distribution. However, if a forfeiture event occurs and the FDA determines that Breath has forfeited the 180-day semi-exclusivity period for those three dosages, other ANDA
filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the 30-month stay. For those three dosages, the 30-month stays
against Dey L.P. and Barr expire on or about July 9, 2008 and November 30, 2009,

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respectively.
If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution product prior to the resolution of these ongoing legal proceedings, or there is
a court determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our
business, financial condition and results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we would have to revise
such guidance.

Certain
of Schering Plough's CLARINEX products for which we receive sales royalties are currently the subject of patent infringement litigation. In 2007, the FDA received ANDAs from
(i) Glenmark, Sun, Orchid, Mylan, Dr. Reddy's, Lupin and Perrigo seeking approval of a generic version of CLARINEX 5 mg tablets, (ii) Orchid seeking approval of a generic version
of CLARINEX 2.5 mg and 5 mg orally disintegrating tablets, and (iii) Dr. Reddy's and Anchen seeking approval of Schering Plough's 2.5/120 mg tablets of CLARINEX-D
12 hour desloratadine and pseudoephedrine extended release tablets. The submissions in 2007 include Paragraph IV certifications alleging that our patents, which Schering Plough (as
licensee of such patents) listed in the Orange Book for these products, are invalid, unenforceable or not infringed by the submitter's proposed product. We and the University of Massachusetts,
co-owners of certain patents listed in the Orange Book, filed civil actions against these parties, with the exception of Anchen, for patent infringement. We are currently contemplating
filing a civil action against Anchen for patent infringement. We believe that all of these ANDAs are subject to a statutory stay of approval until June 21, 2009 based on previous litigation
commenced by Schering-Plough against these parties in separate civil actions involving another patent.

In
June 2006, we were notified that Teva Pharmaceutical Industries Limited and Teva UK Limited, referred to collectively as Teva, filed a claim naming us as defendant in the United
Kingdom's High Court of Justice, Chancery Division, Patents Court. The claim alleged that our two patents relating to fexofenandine hydrocloride, which we have licensed to sanofi-aventis in connection
with its sale of ALLEGRA, were invalid and sought to have them invalidated. In October 2007, the court determined that certain claims of our patents are invalid and granted an order allowing the
invalid claims to be deleted and both patents to be maintained in amended form. No appeal was filed and the decision is final. We do not believe this decision will adversely affect royalties we
receive for ALLEGRA in the United Kingdom. If a similar action is brought and patent based exclusivity for ALLEGRA is lost in the United Kingdom or in any other jurisdiction, our rights to receive
royalty revenue in any such jurisdiction will terminate.

In
June 2007, we received notification that Teva filed an Action for Revocation of our European patent for levocetirizine in the High Chancery Court in the United Kingdom based on
alleged invalidity of our granted patent and their intent to market a generic levocetirizine product that would infringe our granted patent. In July 2007, we received notification that Teva
Pharmaceutical Industries Limited filed a Nullification Request for our European patent for levocetirizine in the German Federal Patent Court. Our levocetirizine patent is exclusively licensed to UCB
in connection with its sale of XYZAL/XUSAL. We have retained counsel for the Action for Revocation in the United Kingdom and we are in process of retaining counsel for the Nullification Action in
Germany.

Should
the courts uphold our foreign patents, companies seeking to market generic versions of our drugs and the drugs of our licensees will be deterred from market entry until the
expiration of the applicable patent(s).

Patent
litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of any patent related lawsuits. If we, or third parties
from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions of our drugs and the drugs of our licensees will not be
excluded, for the full term of our patents, from marketing their generic versions of our products or third party products for which we have licensed rights to our patents. Introduction of generic
copies of any of our

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products
or third party products for which we have licensed rights to our patents before the expiration of our patents would have a material adverse effect on our business.

Additionally,
the costs to us of these proceedings, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management
and other key personnel from our core business and our resources in general. Uncertainties resulting from the initiation and continuation of this and any other litigation proceedings could harm our
ability to compete in the marketplace.

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

Our success depends in part on our ability to operate without infringing upon proprietary rights of others, including patent and trademark rights. Third parties,
typically drug companies, hold patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for some of the drug candidates for which we have
patents or patent applications. Third parties also hold patents relating to drug delivery technology that may be necessary for development or commercialization of some of our drug candidates. In each
of these cases, unless we have or obtain a license agreement, we generally may not commercialize the drug candidates until these third-party patents expire or are declared invalid or unenforceable by
the courts. Licenses may not be available to us on acceptable terms, if at all.

Others
may file suit against us alleging that our products or product candidates infringe patents they hold. Even if resolved in our favor, any patent infringement litigation would be
costly, would require significant time and attention of our management, could prevent us from commercializing our products for a period of time and could require us to pay significant damages and
could have a material adverse effect on our business. If the matter is not resolved in our favor, we could be required to pay significant damages and/or be prevented from commercializing our product
and our business could be materially adversely affected. In April 2007, we were served with a Complaint filed by Dey, alleging that the manufacture and sale of BROVANA infringes or will induce
infringement of a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim to this Complaint seeking to invalidate the originally
asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent Under the current trial scheduling order, trial will begin no earlier than
December 12, 2008. It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss or
liability related to this lawsuit due to its uncertain resolution.

If
any of our trademarks, or our use of any of our trademarks on our products, is challenged, we may be forced to rename the affected product or product candidate, which could be costly
and time consuming, and would result in the loss of any brand equity associated with the product name. In September 2006, Tharos filed suit against us in the United States District Court, District of
Utah, Central Division, alleging trademark infringement, dilution, unfair competition, false advertising and false designation of origin arising out of our use of our silk luna moth design in
connection with LUNESTA. Tharos seeks unspecified monetary damages and to enjoin our use of the silk luna moth design. In October 2006, we filed a motion to dismiss Tharos' claims. On
February 9, 2007, the court granted our motion in respect of the state unfair competition claims and denied it in respect of Tharos' other claims. On March 6, 2007, we filed an Answer to
Tharos' Complaint. In addition, we filed counterclaims against Tharos for cancellation of Tharos' alleged trademark and for false advertising. In October 2007, we reached a preliminary agreement on
principle with Tharos to settle this litigation, and final settlement is subject to the parties entering into a written settlement agreement.

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Risks Related to Our Dependence on Third Parties

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

We have entered into a collaboration agreement with 3M for the manufacturing of XOPENEX HFA. Under this agreement, 3M is responsible for manufacturing an MDI
formulation of XOPENEX. We commercially introduced XOPENEX HFA in December 2005. We have also entered into agreements with Eisai and GSK for development and commercialization of our eszopiclone
product, marketed as LUNESTA in the U.S. Under the Eisai agreement, Eisai will be responsible for completing remaining clinical trials necessary for attaining marketing approval from the Japanese
regulatory authorities and, contingent on regulatory approval, commercialization of the product in Japan. Under the GSK agreement, GSK is responsible for the development and commercialization of the
product for all markets worldwide, excluding the United States, Canada, Mexico and Japan.

If
3M, Eisai, GSK or any future development or commercialization collaborator do not devote sufficient time and resources to its collaboration arrangement with us, breaches or terminates
its agreement with us, fails to perform its obligations to us in a timely manner 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 or commercialization of any product candidate under development by or in
collaboration with a partner is delayed or limited, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.

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

We have entered into licensing arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under these licensing arrangements
consist primarily of royalties on sales
of products. Payments and royalties under these arrangements depend in large part on the commercialization efforts of our licensing partners in countries where we hold patents, including sales efforts
and enforcement of patents, which we cannot control. If any of our licensing partners do not devote sufficient time and resources to its licensing arrangement with us or focuses its efforts in
countries where we do not hold patents, we may not realize the potential commercial benefits of the arrangement, our revenues under these arrangements may be less than anticipated and our results of
operations may be adversely affected. If any of our licensing partners was to breach or terminate its agreement with us or fail to perform its obligations to us in a timely manner, the royalties we
receive under the licensing agreement could decrease or cease. If we are unable or fail to perform, or breach in our performance of, our obligations under a licensing agreement, the royalties and
benefits to which we are otherwise entitled under the agreement could be reduced or eliminated. Any delay or termination of this type could have a material adverse effect on our financial condition
and results of operations because we may lose technology rights and milestone or royalty payments from licensing partners and/or revenues from product sales, if any, could be delayed, reduced or
terminated.

We rely on third-party manufacturers, and this reliance could adversely affect our ability to meet our customers' demands.

We currently operate a manufacturing plant that we believe can meet our commercial requirements of the active pharmaceutical ingredient for XOPENEX Inhalation
Solution and XOPENEX HFA, partially fulfill our commercial requirements of the active pharmaceutical ingredient for LUNESTA, and support production of our product candidates in amounts needed for our
clinical

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trials.
We do not, however, have the capability to manufacture at our manufacturing facility all of our requirements for the active ingredients of our currently approved products, and we have no
facilities for manufacturing pharmaceutical dosage forms or finished drug products. Developing and obtaining this capability would be time consuming and expensive. Unless and until we develop this
capability, we will rely substantially, and in some cases, entirely, on third-party manufacturers. Catalent Pharma Solutions, LLC, or Catalent, formerly Cardinal Health, Inc., and
Holopack International Corporation, or Holopack, are currently our only finished goods manufacturers of our XOPENEX Inhalation Solution. Catalent is currently the sole finished goods manufacturer of
BROVANA, Patheon Inc., or Patheon, is the sole manufacturer of LUNESTA, and 3M is the sole manufacturer and supplier of XOPENEX HFA. Certain components of XOPENEX HFA are available from only a
single source. If Catalent, Holopack, Patheon, 3M, or any of our sole-source component suppliers experiences delays or difficulties in producing, packaging or delivering XOPENEX Inhalation
Solution, XOPENEX HFA or its components, BROVANA or LUNESTA, as the case may be, we could be unable to meet our customers' demands for such products, which could lead to lost sales, customer
dissatisfaction and damage to our reputation. 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, including FDA guidelines. The delays associated with the verification of a new manufacturer for XOPENEX Inhalation
Solution, XOPENEX HFA or its components, BROVANA or LUNESTA could adversely affect our ability to produce such products in a timely manner or within budget.

We
license certain proprietary technology required to manufacture our XOPENEX HFA from 3M. If 3M is unable or unwilling to fulfill its obligations to us under our agreement, we
may be unable to manufacture XOPENEX HFA on terms that are acceptable to us, if at all. Our other current contract manufacturers, as well as any future contract manufacturers, may also independently
own technology related to manufacturing of our products. If so, we would be heavily dependent on such manufacturer and such manufacturer could require us to obtain a license in order to have another
party manufacture our products.

Risks Related to Growth of Our Business

If we fail to acquire and develop additional product candidates or approved products, our ability to grow will be impaired.

We are currently commercializing four products. However, all of our product candidates are in the early stages of development. In order to increase the likelihood
that we will be able to successfully develop and/or commercialize additional drugs, we intend to acquire and develop additional product candidates and/or approved products. The success of this growth
strategy depends upon our ability to correctly establish criteria for such acquisitions and successfully identify, select and acquire product candidates and/or products that meet such criteria. We
will be required to integrate any acquired product candidates into our research and development operations and any acquired products into our sales and marketing operations. Managing the development
and/or commercialization of a new product involves numerous other financial and operational risks, including difficulties allocating resources between existing and acquired assets and attracting and
retaining qualified employees to develop and/or sell the product.

Any
product candidate we acquire may require additional research and development efforts prior to commercial sale, including extensive preclinical and/or clinical testing and approval by
the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the
product candidate will not be safe and effective or approved by regulatory authorities.

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In
addition, we cannot be assured that any products that we develop or acquire will be:



Proposing,
negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial,
marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and
approved products on terms that we find acceptable, or at all.

We may undertake strategic acquisitions in the future and any difficulties from integrating such acquisitions could adversely affect our stock price,
business operations, financial condition or results from operations.

We may acquire additional businesses and products that complement or augment our existing business. We have limited acquisition experience and may not be able to
integrate any acquired business or product successfully or operate any acquired business profitably. Integrating any newly acquired business or product could be expensive and
time-consuming. Integration efforts often place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than we predict.
The diversion of our management's attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our
on-going business or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with customers, suppliers,
collaborators, employees and others with whom we have business dealings. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses or
products, which may result in dilution for stockholders or the incurrence of indebtedness.

As
part of our efforts to acquire businesses or product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal
of identifying and
evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the
intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we may consummate in the future, whether as a result of unidentified risks, integration
difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected. If we acquire product candidates, we will also need to make
certain assumptions about, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates. Our assumptions may prove to be incorrect,
which could cause us to fail to realize the anticipated benefits of these transactions.

In
addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. For transactions that are ultimately not
consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts. Even if our efforts are successful, we may
incur as part of a transaction substantial charges for closure costs associated with elimination of duplicate operations and facilities and acquired in-process research and development
charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

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

Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration agreements with
pharmaceutical companies to fund all or part of the costs of development and commercialization of these product candidates. We may not be able to enter into collaboration agreements and the terms of
the collaboration agreements, if any, may not be favorable to us. Inability to enter into collaboration agreements could delay or preclude development, manufacture and/or 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, or the HSR Act, for certain agreements containing
exclusive license grants and to delay the effectiveness of any such exclusive license until expiration or earlier termination of the notice and waiting period under the HSR Act. If expiration or
termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such
a license, development and commercialization could be delayed or precluded and our business could be adversely affected.

ITEMS 2-5.    NONE

ITEM 6.    EXHIBITS

|10.1 | *  | Amended and Restated Transition and Severance Agreement by and between the Registrant and W. James O'Shea dated September 7, 2007.                               
|---- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2 | *  | Employment Agreement by and between the Registrant and Mark Iwicki dated October 15, 2007.                                                                       
|10.3 | *  | Executive Retention Agreement by and between the Registrant and and Mark Iwicki dated October 15, 2007.                                                          
|10.4 | * | Development, License and Commercialization Agreement dated September 11, 2007 by and between Registrant and Glaxo Group Limited, an affiliate of GlaxoSmithKline.
|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 7, 2008 |  | By:          
|Date: May 7, 2008 |  | By:          

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Exhibit Index

|Exhibit No. |    | Description                                                                                                                                                          
|----------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        | *  | Amended and Restated Transition and Severance Agreement by and between the Registrant and W. James O'Shea dated September 7, 2007.                                   
|10.2        | *  | Employment Agreement by and between the Registrant and Mark Iwicki dated October 15, 2007.                                                                           
|10.3        | *  | Executive Retention Agreement by and between the Registrant and Mark Iwicki dated October 15, 2007.                                                                  
|10.4        | * | Development, License and Commercialization Agreement dated September 11, 2007 by and between the Registrant and Glaxo Group Limited, an affiliate of GlaxoSmithKline.
|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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