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Put Agreement - SEPRACOR INC /DE/ - 3-31-1998

VIEWS: 56 PAGES: 305

									Exhibit 10.32 PUT AGREEMENT THIS AGREEMENT, dated as of December 30, 1997, by and between SEPRACOR INC., a Delaware corporation ("Sepracor"), to FLEET NATIONAL BANK (the "Bank"). WHEREAS, Versicor, Inc., a Delaware corporation (the "Company"), and the Bank have entered into a Revolving Credit, Term Loan and Security Agreement dated as of December 31, 1996 as amended by the First Amendment Agreement dated as of the date hereof (as further amended, supplemented or restated from time to time, the "Credit Agreement") pursuant to which the Bank has agreed, subject to the terms and conditions set forth therein, to make a term loan to the Company (the "Term Loan"), such Term Loan to be evidenced by the Company's Term Notes, each payable to the order of the Bank (the "Notes"); and WHEREAS, Sepracor holds in excess of 19% of the outstanding capital stock of the Company on a fully diluted basis and the making of the Term Loan will therefore be beneficial to Sepracor; and WHEREAS, the Bank has agreed to accept this Agreement from Sepracor in substitution for the Guaranty Agreement (Sepracor/Versicor) dated as of December 31, 1996 previously delivered by Sepracor to the Bank; and WHEREAS, the obligation of the Bank to make the Term Loan is subject to the condition, among others, that Sepracor shall execute and deliver this Put Agreement; NOW, THEREFORE, in consideration of the willingness of the Bank to make the Term Loan to the Company, and for other good and valuable consideration, receipt of which is hereby acknowledged by Sepracor, Sepracor hereby agrees as follows: 1. Put Right. The Bank shall have the right at any time after an Event of Default (as each such term is defined in the Credit Agreement) has occurred to require Sepracor to purchase up to $2,000,000 in principal amount of the Term Loan (the "Put Right") on the terms and subject to the provisions of this Section; provided, that so long as no Event of Default has occurred, the Put Right shall terminate and Sepracor shall not be obligated to purchase any portion of the Term Loan (i) at such time as the outstanding amount of the Term Loan (including principal, accrued interest and premium, if any) shall no longer exceed $4,000,000 or (ii) upon the closing by the Company of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company's common stock for the account of the Company in which the aggregate net cash proceeds (after deduction of any underwriting discounts, commissions or expenses) received by the Company from such public offering shall exceed $25,000,000. The Put Right may be exercised by the Bank delivery of written notice (the "Put Notice") to Sepracor not less than ten (10) days prior to the proposed date of purchase and sale (the "Settlement Date"). The Put Notice shall state the proposed Settlement Date, the amount of the Term Loan to be transferred, and the Put Purchase Price (as defined below) as well as provide wire instructions for payment

of the Put Purchase Price. The purchase price (the "Put Purchase Price") shall be an amount equal to the sum of (i) the principal amount of the Term Loan proposed to be transferred in the Put Notice, (ii) the amount of any accrued interest and premium, if any, related to such principal amount and (iii) any reasonable costs of the Bank related to the exercise of the Put Right (including reasonable attorneys' fees and disbursements). On the Settlement Date, Sepracor will pay the Put Purchase Price to the Bank in immediately available funds and the Bank shall deliver a Term Note of the Company, in the original principal amount of $2,000,000, endorsed to Sepracor, without recourse. Upon the termination of the Amended and Restated Revolving Credit and Security Agreement dated as of December 31, 1996 between Sepracor and the Bank or any successor agreement, prior to the termination by the Bank of this Agreement, Sepracor shall provide the Bank with cash collateral or other collateral in the form of securities reasonably acceptable to the Bank in an amount not less than the amount of the Put Purchase Price on the date of the termination of such agreement. 2. Transfer of Security Interest. Upon consummation of the sale contemplated by the Put Right and provided that the Bank has received with respect to the Term Loan irrevocable and indefeasible payment in cash in full and all obligation under the Credit Agreement have been discharged in full, the Bank shall exercise reasonable efforts to cause the assignment to Sepracor of its security interest and all UCC-1 financing statements filed by the Bank against the Company; provided that the Bank shall not assign any security interest granted pursuant to the Control and Security Agreement. Sepracor expressly and knowingly acknowledges that the Bank has made no representations or warranties to Sepracor as to the filing or locations for filing of any financing statements or as to the perfection or enforceability of any security interest. The Bank shall be under no obligation to Sepracor as to the maintenance and enforceability of any security interest against the Company prior to any transfer of a security interest contemplated by this Section 2 and without the consent of Sepracor, may release any such security interest at its sole discretion. 3. Waiver of Demands, Notices, Diligence, etc. Sepracor hereby assents to all of the terms and conditions of the Term Loan and waives: (a) demand for the payment of the principal of the Term Loan or of any claim for interest or any part of any thereof (other than the Put Right provided for in Section 1 hereof); (b) notice of the occurrence of a default or an event of default under the Term Loan; (c) protest of the nonpayment of the principal of the Term Loan or of any claim for interest or any part thereof; (d) notice of presentment, demand and protest; (e) notice of acceptance of any guaranty herein provided for or of the terms and provisions thereof or hereof by the Bank; (f) notice of any indulgences or extensions granted to the Company or any successor to the Company or any person or party which shall have assumed the obligations of the Company; (g) any requirement of diligence or promptness on the part of the Bank in the enforcement of any of its rights under the provisions of the Term Loan or this Agreement; (h) any enforcement of the Term Loan; (i) any right which Sepracor might have to require the Bank to proceed against any guarantor of the Term Loan or to realize on any collateral security therefor; and (j) any and all notices of every kind and description which may be required to be given by any statute or rule of law in any jurisdiction. The waivers set forth in this Section 3 shall be effective notwithstanding the fact that the Company ceases to exist by reason of its liquidation, merger, consolidation or otherwise. Notwithstanding anything to the contrary contained herein, the Bank shall not without the prior written consent of Sepracor, release any -2-

collateral securing the Term Loan or any obligations of Versicor under the Term Notes. 4. Obligations of Sepracor Unconditional. The obligations of Sepracor under this Agreement shall be unconditional, irrespective of the validity, regularity or enforceability of the Term Loan, and shall not be affected by any action taken under the Term Loan in the exercise of any right or remedy therein conferred, or by any failure or omission on the part of the Bank to enforce any right given thereunder or hereunder or any remedy conferred thereby or hereby, or by any waiver of any term, covenant, agreement or condition of the Term Loan or this Agreement, or by any release of any security or any guaranty at any time existing for the benefit of the Term Loan, or by the merger or consolidation of the Company, or by sale, lease or transfer by the Company to any person of any or all of its properties, or by any action of the Bank granting indulgence or extension to, or waiving or acquiescing in any default by, the Company or any successor to the Company or any person or party which shall have assumed its obligations, or by reason of any disability or other defense of the Company or any successor to the Company, or by any modification, alteration, or by any circumstance whatsoever (with or without notice to or knowledge of Sepracor) which may or might in any manner or to any extent vary the risk of Sepracor hereunder, it being the purpose and intent of Sepracor that the obligations of Sepracor hereunder shall be absolute and unconditional under any and all circumstances and shall not be discharged except by payment or performance as herein provided, and then only to the extent of such payment or performance. Notwithstanding anything to the contrary contained herein, the Bank shall not without the prior written consent of Sepracor, release any collateral securing the Term Loan or any obligations of Versicor under the Term Notes. 5. Subordination of Claims of Sepracor. Any claims against the Company to which Sepracor may be or become entitled (including, without limitation, claims pursuant to any Term Note transferred hereunder pursuant to the Put Right, claims by subrogation or otherwise by reason of any payment or performance by Sepracor in satisfaction and discharge, in whole or in part, of its obligations under this Agreement) shall be and hereby are made subject and subordinate to the prior irrevocable and indefeasible payment or performance in full of the Term Loan (including principal, interest and premium, if any). 6. Reinstatement. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time any amount received by the Bank in respect of the Term Loan is rescinded or must otherwise be restored or returned by the Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company or Sepracor or upon the appointment of an intervenor or conservator of, or trustee or similar official for, the Company or Sepracor or any substantial part of any of their respective properties, or otherwise, all as though said payments had not been made. 7. Notices. Except as otherwise provided herein, all notices to Sepracor or the Bank shall be in writing and shall be deemed to have been sufficiently given or served for all purposes hereof if personally delivered or mailed by first class mail, postage prepaid, as follows: -3-

(a) if to Sepracor: Sepracor Inc. 111 Locke Drive Marlborough, Massachusetts 01752 Attention: Robert F. Scumaci Senior Vice President with a copy to: John D. Sigel, Esquire Hale & Dorr 60 State Street Boston, Massachusetts 02109 (b) if to the Bank: Fleet National Bank 75 State Street Boston, Massachusetts 02106 Attention: Kimberly A. Martone Vice President with a copy to: George Ticknor, Esquire Palmer & Dodge One Beacon Street Boston, Massachusetts 02108 or at such other address as the party to whom such notice or demand is directed may have designated in writing to the other party hereto. A notice shall be deemed to have been given upon the earlier to occur of (i) three (3) days after the date on which it is deposited in the U.S. mails or (ii) receipt by the party to whom such notice is directed. 8. Miscellaneous. This Agreement shall inure to the benefit of and be binding upon the Bank and Sepracor and their respective successors and assigns, and the term "Bank" shall be deemed to include any other holder or holders of any of the Term Loan. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Sepracor agrees, as principal obligor and not as guarantor, to pay to the Bank forthwith upon demand in funds immediately available to the Bank, all reasonable costs and expenses (including court costs and reasonable attorneys' fees and disbursements) incurred or expended by the Bank in connection with the enforcement of this Agreement. Terms used herein but not defined herein shall have the meanings assigned to them in the Credit Agreement. -4-

9. Governing Law; Jurisdiction; Waiver of Jury Trial. This Agreement, including the validity hereof and the rights and obligations of the parties hereunder, shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts. Sepracor, to the extent that it may lawfully do so, hereby consents to the jurisdiction of the courts of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, as well as to the jurisdiction of all courts to which an appeal may be taken from such courts, for the purpose of any suit, action or other proceeding arising out of any of its obligations hereunder or with respect to the transactions contemplated hereby, and expressly waives any and all objections it may have as to venue in any such courts. Sepracor further agrees that a summons and complaint commencing an action or proceeding in any of such courts shall be properly served and shall confer personal jurisdiction if served personally or by certified mail to it at its address provided in Section 7 of this Agreement or as otherwise provided under the laws of the Commonwealth of Massachusetts. SEPRACOR IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR OTHER PROCEEDING INSTITUTED BY OR AGAINST IT IN RESPECT OF ITS OBLIGATIONS HEREUNDER OR THE TRANSACTIONS CONTEMPLATED HEREBY. -5-

IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date first above written. SEPRACOR INC.
By /s/ Robert F. Scumaci ------------------------------------Name: Robert F. Scumaci Title: Senior Vice President

The foregoing Agreement is hereby accepted: FLEET NATIONAL BANK
By /s/ Kimberly A. Martone ------------------------------------Name: Kimberly A. Martone Title: Vice President

Exhibit 10.33 $165,000,000 SEPRACOR INC. 6 1/4% Convertible Subordinated Debentures Due 2005 PURCHASE AGREEMENT February 5, 1998

February 5, 1998 Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Smith Barney Inc. Vector Securities International, Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: Sepracor Inc., a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several purchasers named in Schedule I hereto (the "INITIAL PURCHASERS") $165,000,000 principal amount of its 6 1/4% Convertible Subordinated Debentures due 2005 (the "FIRM SECURITIES") to be issued pursuant to the provisions of an Indenture (the "INDENTURE") to be dated the Closing Date (as defined below) between the Company and The Chase Manhattan Bank, as Trustee (the "TRUSTEE"). The Company also proposes to issue and sell to the Initial Purchasers not more than an additional $24,475,000 principal amount of its 6 1/4% Convertible Subordinated Debentures due 2005 (the "ADDITIONAL SECURITIES") if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Initial Purchasers, the right to purchase such 6 1/4% Convertible Subordinated Debentures due 2005 granted to the Initial Purchasers in Section 2 hereof. The Firm Securities and the Additional Securities are hereinafter collectively referred to as the "SECURITIES". The Securities will be convertible into shares of Common Stock, $.10 par value per share ("Common Stock"), (the "UNDERLYING SECURITIES"). The Securities and the Underlying Securities will be offered without being registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), to qualified institutional buyers in compliance with the exemption from registration provided by Rule 144A under the Securities Act, and to institutional accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) that deliver a letter in the form annexed to the Final Memorandum (as defined below). The Initial Purchasers and their direct and indirect transferees will be entitled to the benefits of a Registration Rights Agreement dated the date hereof between the Company and the Initial Purchasers (the "REGISTRATION RIGHTS AGREEMENT"). In connection with the sale of the Securities, the Company has prepared a preliminary offering memorandum (the "PRELIMINARY MEMORANDUM") and will 2

prepare a final offering memorandum (the "FINAL MEMORANDUM" and, with the Preliminary Memorandum, each a "MEMORANDUM") including or incorporating by reference a description of the terms of the Securities and the Underlying Securities, the terms of the offering, a description of the Company and any material developments relating to the Company occurring after the date of the most recent financial statements included or incorporated into each Memorandum. As used herein, the term "Memorandum" shall include in each case the documents incorporated by reference therein. The terms "SUPPLEMENT", "AMENDMENT" and "AMEND" as used herein with respect to a Memorandum shall include all documents deemed to be incorporated by reference in the Preliminary Memorandum or Final Memorandum that are filed subsequent to the date of such Memorandum with the Securities and Exchange Commission (the "COMMISSION") pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). 1. Representations and Warranties. The Company represents and warrants to, and agrees with, you that: (a) (i) Each document, if any, filed or to be filed pursuant to the Exchange Act and incorporated by reference in either Memorandum complied or will comply when so filed in all material respects with the requirements of the Exchange Act and the applicable rules and regulations of the Commission thereunder and (ii) the Preliminary Memorandum does not contain and the Final Memorandum, in the form used by the Initial Purchasers to confirm sales and on the Closing Date (as defined in Section 4), will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in either Memorandum based upon information relating to any Initial Purchaser furnished to the Company in writing by such Initial Purchaser through you expressly for use therein. (b) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (c) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the 3

jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for shares of capital stock of BioSepra Inc., HemaSure Inc. and Versicor Inc. to the extent described in each Memorandum) are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims, except for a negative pledge under the Company's credit agreement and the rights of the holders of the Company's Series B Redeemable Exchangeable Preferred Stock to shares of Common Stock of BioSepra Inc. (d) This Agreement has been duly authorized, executed and delivered by the Company. (e) The authorized and outstanding capital stock of the Company as of September 30, 1997 is as set forth in each Memorandum under the caption "Capitalization" and the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Final Memorandum. The shares of capital stock of the Company outstanding prior to the issuance of the Securities have been duly authorized and are validly issued, fully paid and non-assessable and their issuance was not subject to any preemptive or similar rights. (f) The shares of the Company's capital stock outstanding on the date hereof have been duly authorized and are validly issued, fully paid and non-assessable. (g) The Securities have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, will be valid and binding obligations of the Company, enforceable in accordance with their terms, and will be entitled to the benefits of the Indenture and the Registration Rights Agreement, except as (i) the enforceability thereof may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally, (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles and (iii) the indemnification provisions of the Registration Rights Agreement may be unenforceable as a matter of public policy. 4

(h) The Underlying Securities reserved for issuance upon conversion of the Securities have been duly authorized and reserved and, when issued upon conversion of the Securities in accordance with the terms of the Securities, will be validly issued, fully paid and non-assessable, and the issuance of the Securities is not, and the issuance of the Underlying Securities will not be, subject to any preemptive or similar rights. (i) Each of the Indenture and Registration Rights Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification and contribution under the Registration Rights Agreement may be limited under applicable law, except as (i) the enforceability thereof may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles. (j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, the Indenture, the Registration Rights Agreement and the Securities will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary except to the extent such contravention would not singly or in the aggregate have material adverse effect on the Company and its subsidiaries, taken as a whole, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, the Indenture, the Registration Rights Agreement or the Securities, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities and by Federal and state securities laws with respect to the Company's obligations under the Registration Rights Agreement. (k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Final Memorandum. 5

(l) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject other than proceedings accurately described in all material respects in each Memorandum and proceedings that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under this Agreement, the Indenture, the Registration Rights Agreement or the Securities or to consummate the transactions contemplated by the Final Memorandum. (m) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (n) To the Company's knowledge, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (o) The Company is not, and after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Final Memorandum, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (p) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "AFFILIATE") of the Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the 6

sale of the Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Securities, (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (q) It is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers in the manner contemplated by this Agreement to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (r) The Securities satisfy the requirements set forth in Rule 144A(d)(3) under the Securities Act. (s) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except to the extent that the failure to so possess would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit, which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole. (t) The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (u) The accountants, Coopers & Lybrand L.L.P., who have certified certain of the financial statements included or incorporated by reference in each Memorandum (or any amendment or supplement thereto) are independent public accountants as required by the Securities Act. 7

(v) The financial statements, together with related schedules and notes, included or incorporated by reference in each Memorandum, present fairly the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries on the basis stated in each Memorandum at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included or incorporated by reference in either Memorandum are accurately presented and prepared, in the case of the financial information, on a basis consistent with such financial statements and the books and records of the Company and its subsidiaries. (w) The Company and each of its subsidiaries are conducting their business in compliance with all the laws, rules and regulations of the jurisdictions in which they are conducting business, including, without limitation, those of the United States Food and Drug Administration (the "FDA"), except where failure to be so in compliance, singly or in the aggregate, would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (x) Except as disclosed in each Memorandum, the Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights, manufacturing processes, formulae, trade secrets and know-how or other information (collectively, "Intellectual Property") described in either Memorandum as owned by or used by it in the conduct of its business as such business is described in each Memorandum or which, to the knowledge of the Company, is necessary for the sale of its products or proposed products described in either Memorandum, except as where the failure to own or possess such rights would not, singly or the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. To the knowledge of the Company, none of the material patent rights owned or licensed by the Company is unenforceable or invalid. Except as disclosed in each Memorandum, the Company is not aware of any patents issued to third parties, pending patent applications filed by third parties or proprietary rights of any third party which would be infringed by the sale of any of the Company's products or proposed products described in either Memorandum, except for such infringements which would not singly or in the aggregate have a material adverse effect on the Company and its subsidiaries, taken as a whole. The Company is not aware of any infringement of any of the Company's or its subsidiaries' Intellectual Property rights by any third party which could be reasonably expected to 8

have a material adverse effect on the Company and its subsidiaries, taken as a whole. (y) None of the statements in the Final Memorandum describing (i) the License Agreement dated June 1, 1993 between the Company and Marion Merrell Dow Inc., (ii) the Exclusive License Agreement dated as of December 5, 1997 between the Company and Schering-Plough Ltd. or (iii) the Norastemizole Collaboration and License Agreement dated on or about February 2, 1998 between the Company and Janssen Pharmaceutica N.V. contain any untrue statement of a material fact or omit to state a material fact necessary in order to make such statements and the descriptions of such agreements set forth in the Final Memorandum, in the light of the circumstances under which such statements and descriptions were made, not misleading. (z) The Underlying Securities have been approved for quotation on the Nasdaq National Market. 2. Agreements to Sell and Purchase. The Company hereby agrees to sell to the several Initial Purchasers, and each Initial Purchaser, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective principal amount of Firm Securities set forth in Schedule I hereto opposite its name at a purchase price of 97% of the principal amount thereof (the "PURCHASE PRICE") plus accrued interest, if any, to the Closing Date (as defined below). On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Initial Purchasers the Additional Securities, and the Initial Purchasers shall have a one-time right to purchase, severally and not jointly, up to $24,475,000 principal amount of Additional Securities at the Purchase Price plus accrued interest, if any, to the date of payment and delivery. If you, on behalf of the Initial Purchasers, elect to exercise such option, you shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the principal amount of Additional Securities to be purchased by the Initial Purchasers and the date on which such Additional Securities are to be purchased. Such date may be the same as the Closing Date but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Securities may be purchased as provided in Section 4 solely for the purpose of covering over-allotments made in connection with the offering of the Firm Securities. If any Additional Securities are to be purchased, each Initial Purchaser agrees, severally and not jointly, to purchase the principal amount of Additional Securities (subject to such adjustments to eliminate fractional Securities as you may determine) that bears the same proportion to the total principal amount of 9

Additional Securities to be purchased as the principal amount of Firm Securities set forth in Schedule I opposite the name of such Initial Purchaser bears to the total principal amount of Firm Securities. The Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Initial Purchasers, it will not, during the period ending 90 days after the date of the Final Memorandum, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the sale of the Securities under this Agreement or (B) the issuance of the Underlying Securities upon conversion of the Securities or (C) the issuance by the Company of any shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Initial Purchasers have been advised in writing or (D) the grant of options to employees, directors and consultants of the Company, provided such options are not exercisable in such 90 day period. The Company hereby agrees that it will cause each of its directors and executive officers to enter into separate "lock-up" agreements, each substantially in the form of Exhibit D hereto, relating to sales and certain dispositions of shares of Common Stock or any securities convertible into or exercisable or exchangeable for such Common Stock and the exercise of registration rights with respect thereto (the "Lock-Up Agreements"). 3. Terms of Offering. You have advised the Company that the Initial Purchasers will make an offering of the Securities purchased by the Initial Purchasers hereunder on the terms to be set forth in the Final Memorandum, as soon as practicable after this Agreement is entered into as in your judgment is advisable. 4. Payment and Delivery. Payment for the Firm Securities shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm Securities for the respective accounts of the several Initial Purchasers at 10:00 a.m., New York City time, on February 10, 1998, at a closing to be held at the offices of Hale and Dorr LLP in Boston, Massachusetts or at such other time and place on the same or such other date, not later than February 17, 1998, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." 10

Payment for any Additional Securities shall be made to the Company in Federal or other funds immediately available in New York City at a closing to be held at the offices of Hale and Dorr LLP in Boston, Massachusetts against delivery of such Additional Securities for the respective accounts of the several Initial Purchasers at 10:00 a.m., New York City time, on the date specified in the notice described in Section 2 or at such other time and place on the same or on such other date, in any event not later than March 17, 1998, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Firm Securities and Additional Securities shall be in definitive form or global form, as specified by you, and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Securities and Additional Securities shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Initial Purchasers, with any transfer taxes payable in connection with the transfer of the Securities to the Initial Purchasers duly paid, against payment of the Purchase Price therefor plus accrued interest, if any, to the date of payment and delivery. 5. Conditions to the Initial Purchasers' Obligations. The several obligations of the Initial Purchasers to purchase and pay for the Firm Securities on the Closing Date are subject to the following conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Final Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Final Memorandum. (b) The Initial Purchasers shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. 11

(c) The Initial Purchasers shall have received on the Closing Date an opinion of Hale and Dorr LLP, outside counsel for the Company, dated the Closing Date, to the effect set forth in Exhibit A. Such opinion shall be rendered to the Initial Purchasers at the request of the Company and shall so state therein. (d) You shall have received on the Closing Date an opinion of Stewart McKelvey Sterling Scales, Canadian counsel to the Company, dated the Closing Date and addressed to you, with respect to the matters set forth in clauses (B) and (I) of Exhibit A, and such other matters as you and your counsel may reasonably request, relating to Sepracor Canada Limited. (e) You shall have received on the Closing Date an opinion of Hyman, Phelps & McNamara, regulatory counsel for the Company, dated the Closing Date, to the effect that it has reviewed the information in each Memorandum under the captions "Risk Factors -- Risks Relating to Sepracor's Pharmaceutical Program -- Regulatory Approvals and Clinical Trials", and "Business -- Government Regulation", and to the extent that such information constitutes matters of law or summaries of matters of law, such information is complete and correct in all material respects. In addition, based upon such counsel's representation of the Company in regulatory matters relating to the FDA, such counsel shall state that it believes that such information does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Such opinion shall be rendered to the Initial Purchasers at the request of the Company and shall so state therein. (f) The Initial Purchasers shall have received on the Closing Date (i) an opinion of Pennie & Edmonds, patent counsel for the Company, dated the Closing Date to the effect set forth in Exhibit B-1, (ii) an opinion of Heslin & Rothenberg, a patent counsel to the Company, dated the closing date to the effect set forth in Exhibit B-2, and (iii) an opinion of Douglas Reedich, Esq. dated the Closing Date to the effect set forth in Exhibit B-3. Such opinions shall be rendered to the Initial Purchasers at the request of the Company and shall so state therein. (g) The Initial Purchasers shall have received on the Closing Date an opinion of Ropes & Gray, counsel for the Initial Purchasers, dated the Closing Date, to the effect set forth in Exhibit C. (h) The Initial Purchasers shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers, from Coopers & Lybrand LLP, independent public 12

accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in or incorporated by reference into each Memorandum; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (i) The "lock-up" agreements, each substantially in the form of Exhibit C hereto, between you and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of common stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (j) The Securities shall have been designated for trading on PORTAL. (k) The Underlying Securities shall have been approved for quotation on the Nasdaq National Market. (l) The Company shall have executed and delivered the Indenture and the Registration Rights Agreement and the Trustee shall have executed and delivered the Indenture. The several obligations of the Initial Purchasers to purchase Additional Securities hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Securities and other matters related to the issuance of the Additional Securities. 6. Covenants of the Company. In further consideration of the agreements of the Initial Purchasers contained in this Agreement, the Company covenants with each Initial Purchaser as follows: (a) To furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 6(c), as many copies of the Final Memorandum, any documents incorporated by reference therein and any supplements and amendments thereto as you may reasonably request. (b) Before amending or supplementing either Memorandum, to furnish to you a copy of each such proposed amendment or supplement and not to use any such proposed amendment or supplement to which you reasonably object. 13

(c) If, during such period after the date hereof and prior to the date on which all of the Securities shall have been sold by the Initial Purchasers, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Final Memorandum in order to make the statements therein, in the light of the circumstances when the Final Memorandum is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Initial Purchasers, it is necessary to amend or supplement the Final Memorandum to comply with applicable law, forthwith to prepare and furnish, at its own expense, to the Initial Purchasers, either amendments or supplements to the Final Memorandum so that the statements in the Final Memorandum as so amended or supplemented will not, in the light of the circumstances when the Final Memorandum is delivered to a purchaser, be misleading or so that the Final Memorandum, as amended or supplemented, will comply with applicable law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the issuance and sale of the Securities and all other fees or expenses in connection with the preparation of each Memorandum and all amendments and supplements thereto, including all printing costs associated therewith, and the delivering of copies thereof to the Initial Purchasers, in the quantities herein above specified, (ii) all costs and expenses related to the transfer and delivery of the Securities to the Initial Purchasers, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or legal investment memorandum in connection with the offer and sale of the Securities under state securities laws and all expenses in connection with the qualification of the Securities for offer and sale under state securities laws as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection with such qualification and in connection with the Blue Sky or legal investment memorandum, (iv) any fees charged by rating agencies for the rating of the Securities, (v) all document production charges and expenses of counsel to the Initial Purchasers (but not including their fees for professional services) in connection with the preparation of this Agreement, (vi) the fees and expenses, if any, incurred in connection with the admission of the Securities for trading in PORTAL or any appropriate market system, (vii) the costs and charges of the Trustee and any transfer agent, registrar or 14

depositary, (viii) the cost of the preparation, issuance and delivery of the Securities, (ix) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Securities, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (x) all other cost and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 8, and the last paragraph of Section 10, the Initial Purchasers will pay all of their costs and expenses, including fees and disbursements of their counsel, transfer taxes payable on resale of any of the Securities by them and any advertising expenses connected with any offers they may make. (f) Neither the Company nor any Affiliate will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities. (g) Neither the Company nor any Affiliate will solicit any offer to buy or offer or sell the Securities or the Underlying Securities by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (h) While any of the Securities or the Underlying Securities remain "restricted securities" within the meaning of the Securities Act, to make available, upon request, to any seller of such Securities the information specified in Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to Section 13 or 15(d) of the Exchange Act. (i) To use its best efforts to permit the Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the PORTAL Market. (j) None of the Company, its Affiliates or any person acting on its or their behalf (other than the Initial Purchasers) will engage in any directed selling efforts (as that term is defined in Regulation S) with respect to the Securities, and the Company and its Affiliates and each 15

person acting on its or their behalf (other than the Initial Purchasers) will comply with the offering restrictions requirement of Regulation S. (k) During the period of two years after the Closing Date or the Option Closing Date, if later, the Company will not resell any of the Securities or the Underlying Securities which constitute "restricted securities" under Rule 144A that have been reacquired by it. (l) To comply with all of the terms and conditions of the Registration Agreement, and all agreements set forth in the representation letters of the Company to DTC relating to the approval of the Securities by DTC for "book entry" transfer. (m) Prior to any registration of the Securities pursuant to the Registration Agreement, or at such earlier time as may be so required, to qualify the Indenture under the 1939 Act and to enter into any necessary supplemental indentures in connection therewith. 7. Offering of Securities; Restrictions on Transfer. (a) Each Initial Purchaser, severally and not jointly, represents and warrants that such Initial Purchaser is a qualified institutional buyer as defined in Rule 144A under the Securities Act (a "QIB"). Each Initial Purchaser, severally and not jointly, agrees with the Company that (i) it will not solicit offers for, or offer or sell, such Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act and (ii) it will solicit offers for such Securities only from, and will offer such Securities only to, persons that it reasonably believes to be (1) QIBs or (2) other institutional accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act ("INSTITUTIONAL ACCREDITED INVESTORS") that, prior to their purchase of the Securities, deliver to such Initial Purchaser a letter containing the representations and agreements set forth in Appendix A to the Memorandum. (b) Each Initial Purchaser, severally and not jointly, represents, warrants, and agrees with respect to offers and sales outside the United States that: (i) such Initial Purchaser understands that no action has been or will be taken in any jurisdiction by the Company that would permit a public offering of the Securities, or possession or distribution of either Memorandum or any other offering or publicity material relating to the Securities, in any country or jurisdiction where action for that purpose is required; 16

(ii) such Initial Purchaser will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Securities or has in its possession or distributes either Memorandum or any such other material, in all cases at its own expense; (iii) the Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Rule 144A or Regulation S under the Securities Act or pursuant to another exemption from the registration requirements of the Securities Act; (iv) such Initial Purchaser has offered the Securities and will offer and sell the Securities (A) as part of their distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering and the Closing Date (or Option Closing Date, if later), only in accordance with Rule 903 of Regulation S or as otherwise permitted in Section 7(a); accordingly, neither such Initial Purchaser, its Affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Securities, and any such Initial Purchaser, its Affiliates and any such persons have complied and will comply with the offering restrictions requirement of Regulation S; (v) such Initial Purchaser has (A) not offered or sold and, prior to the date six months after the Closing Date, will not offer or sell any Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (B) complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom, and (C) only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on; 17

(vi) such Initial Purchaser understands that the Securities have not been and will not be registered under the Securities and Exchange Law of Japan, and represents that it has not offered or sold, and agrees not to offer or sell, directly or indirectly, any Securities in Japan or for the account of any resident thereof except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law; and (vii) such Initial Purchaser agrees that, at or prior to confirmation of sales of the Securities, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Securities from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meaning given to them by Regulation S." Terms used in this Section 7(b) have the meanings given to them by Regulation S. 8. Indemnity and Contribution. (a) The Company agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls any Initial Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in either Memorandum (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Initial Purchaser furnished to the Company in writing by such Initial Purchaser through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to the Preliminary Memorandum shall not inure to the benefit of any Initial Purchaser from 18

whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Initial Purchaser, if a copy of the Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Initial Purchaser to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Memorandum (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 6(a) hereof. (b) Each Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Initial Purchaser, but only with reference to information relating to such Initial Purchaser furnished to the Company in writing by such Initial Purchaser through you expressly for use in either Memorandum or any amendments or supplements thereto. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan 19

Stanley & Co. Incorporated, in the case of parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) To the extent the indemnification provided for in Section 8(a) or 8(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand from the offering of the Securities or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Securities (before deducting expenses) received by the Company and the total discounts and commissions received by the Initial Purchasers, in each case as set forth in the Final Memorandum, bear to the aggregate offering price of the Securities. The relative fault of the Company on the one hand and of the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Initial Purchasers' respective obligations to contribute 20

pursuant to this Section 8 are several in proportion to the respective principal amount of Securities they have purchased hereunder, and not joint. (e) The Company and the Initial Purchasers agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 8(d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities resold by it in the initial placement of such Securities were offered to investors exceeds the amount of any damages that such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Initial Purchaser or any person controlling any Initial Purchaser or by or on behalf of the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Securities. 9. Termination. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in 21

New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Final Memorandum. 10. Effectiveness; Defaulting Initial Purchasers. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date, or the Option Closing Date, as the case may be, any one or more of the Initial Purchasers shall fail or refuse to purchase Securities that it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, the other Initial Purchasers shall be obligated severally in the proportions that the principal amount of Firm Securities set forth opposite their respective names in Schedule I bears to the aggregate principal amount of Securities set forth opposite the names of all such non-defaulting Initial Purchasers, or in such other proportions as you may specify, to purchase the Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase on such date; provided that in no event shall the principal amount of Securities that any Initial Purchaser has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of one-ninth of such principal amount of Securities without the written consent of such Initial Purchaser. If, on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Firm Securities which it or they have agreed to purchase hereunder on such date and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Firm Securities to be purchased on such date, and arrangements satisfactory to you and the Company for the purchase of such Firm Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser or of the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Final Memorandum or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Additional Securities and the aggregate principal amount of Additional Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Additional Securities to be purchased, the non-defaulting Initial Purchasers shall have the option to (a) terminate their obligation hereunder to purchase Additional Securities or (b) purchase not less than the principal amount of Additional Securities that such non-defaulting Initial Purchasers would have 22

been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. If this Agreement shall be terminated by the Initial Purchasers, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Initial Purchasers or such Initial Purchasers as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Initial Purchasers in connection with this Agreement or the offering contemplated hereunder. 11. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 12. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 13. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 23

Very truly yours, SEPRACOR INC.
By: /s/David P. Southwell ---------------------------------------Name: David P. Southwell Title: Executive Vice President and Chief Financial Officer

Accepted as of the date hereof Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Smith Barney Inc. Vector Securities International, Inc. Acting severally on behalf of themselves and the several Initial Purchasers named in Schedule I hereto. By: Morgan Stanley & Co. Incorporated
By: /s/ William H. Wright II --------------------------------Name: William H. Wright II Title: Managing Director

24

SCHEDULE I
PRINCIPAL AMOUNT OF FIRM SECURITIES TO BE PURCHASED $99,000,000 16,500,000 33,000,000 16,500,000 Total: $165,000,000

INITIAL PURCHASER ----------------Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Smith Barney Inc. Vector Securities International, Inc.

1

EXHIBIT A OPINION OF HALE AND DORR LLP The opinion of Hale and Dorr LLP, to be delivered pursuant to Section 5(c) of the Purchase Agreement shall be to the effect that: A. The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Final Memorandum and is duly qualified to transact business and is in good standing in Massachusetts. B. Each domestic subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Final Memorandum; all of the issued shares of capital stock of each domestic subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for BioSepra Inc.) are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims known to such counsel, except for the negative pledge under the Company's credit agreement and the right of the holders of the Company's Series B Redeemable Exchangeable Preferred Stock to shares of BioSepra Inc. C. The Purchase Agreement has been duly authorized, executed and delivered by the Company. D. The authorized and outstanding capital stock of the Company, as of September 30, 1997, is as set forth in the Final Memorandum under the caption "Capitalization". The authorized capital stock of the Company conforms as to legal matters in all material respects to the description thereof contained in the Final Memorandum under the caption "Description of Capital Stock". E. The shares of Common Stock outstanding on the Closing Date or Option Closing Date have been duly authorized and are validly issued, fully paid and non-assessable. F. The Securities have been duly authorized by the Company and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of the Purchase Agreement, will be valid and binding obligations 2

of the Company, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity, and will be entitled to the benefits of the Indenture and the Registration Rights Agreement pursuant to which such Securities are to be issued. G. The Underlying Securities reserved for issuance upon conversion of the Securities have been duly authorized and reserved and, when issued upon conversion of the Securities in accordance with the terms of the Securities, will be validly issued, fully paid and non-assessable and the issuance of the Underlying Securities will not be subject to any preemptive rights under Delaware law or the Company's Certificate of Incorporation. H. Each of the Indenture and Registration Rights Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity and except as rights to indemnification and contribution under the Registration Rights Agreement may be limited under applicable law. I. The execution and delivery by the Company of, and the performance by the Company of its obligations under the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Securities will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, any agreement or other instrument binding upon the Company or any of its subsidiaries that is an exhibit to any of the documents incorporated by reference into either Memorandum or, to the best of such counsel's knowledge, any judgment, order or decree of any United States or Massachusetts governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any United States or Massachusetts governmental body or agency is required for the performance by the Company of its obligations under the Purchase Agreement, the Indenture, the Registration Rights Agreement or the Securities, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities and by Federal and state securities laws with respect to the Company's obligations under the Registration Rights Agreement. J. Such counsel does not know of any legal or governmental proceedings (excluding proceedings relating to patent matters) pending which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject other than proceedings described 3

in the Final Memorandum and proceedings which such counsel believes are not likely to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under the Purchase Agreement, the Indenture, the Registration Rights Agreement or the Securities or to consummate the transactions contemplated by the Final Memorandum. K. The Company is not, and after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Final Memorandum, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. L. The statements in the Final Memorandum under the captions "Description of Debentures", "Description of Capital Stock," "Plan of Distribution", "Transfer Restrictions" in the Final Memorandum, insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly summarize the matters referred to therein. M. The statements in the Final Memorandum under the caption "Certain Federal Income Tax Considerations," insofar as such statements constitute a summary of the United States federal tax laws referred to therein, are accurate and fairly summarize in all material respects the United States federal tax laws referred to therein. N. Each document incorporated by reference in the Final Memorandum (except for financial statements and schedules and other financial and statistical data included therein as to which such counsel need not express any opinion), complied as to form when filed with the Commission in all material respects with the Exchange Act and the rules and regulations of the Commission thereunder. O. No facts have come to such counsel's attention which causes them to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Final Memorandum when issued contained, or as of the date such opinion is delivered contains, any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. P. Based upon and assuming the accuracy of the representations, warranties and agreements of the Company in Sections 1(p), 1(r), 6(f), 6(g) and 6(j) of the Purchase Agreement and of the Initial Purchasers in Section 7 of the Purchase Agreement and of each institutional accredited investor in the letter executed by such investor in the form of Appendix A to the Memorandum, it is 4

not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers under the Purchase Agreement or in connection with the initial resale of such Securities by the Initial Purchasers in accordance with Section 7 of the Purchase Agreement to register the Securities under the Securities Act of 1933 or to qualify the Indenture under the Trust Indenture Act of 1939, it being understood that no opinion is expressed as to any subsequent resale of any Security or Underlying Security. With respect to paragraph O above, counsel may state that its belief is based upon its participation in the preparation of the Final Memorandum (and any amendments or supplements thereto) and review and discussion of the contents thereof and review of the documents incorporated by reference therein, but are without independent check or verification except as specified. 5

EXHIBIT B-1 OPINION OF PENNIE & EDMONDS The opinion of Pennie & Edmonds LLP, patent counsel to the Company, shall be to the effect that: 1. With respect to issued patents resulting from patent applications prosecuted by such counsel, such counsel has disclosed, and with respect to patent applications being prosecuted by such counsel, such counsel has disclosed or intends to disclose, to the United States Patent and Trademark Office ("U.S. PTO") any references known by such counsel to be material to the patentability of the claimed inventions of the United States patents and patent applications of the Company and its subsidiaries prosecuted by such counsel in accordance with 37 C.F.R. Section 1.56. 2. With respect to patent applications of the Company being prosecuted by such counsel, such counsel is of the belief that none of such references disclosed, or such references that such counsel intends to disclose, to the U.S. PTO constitute a bar under 35 U.S.C. Section 102 to patentability of the claims pending in such applications. 3. To such counsel's knowledge, the Company (or its subsidiaries) is the sole assignee (or a joint assignee and exclusive licensee) of each of the United States patents and patent applications of the Company and its subsidiaries being prosecuted by such counsel) (see Attachment I which attachment lists all of the Company's and its subsidiaries' United States patents and patent applications being prosecuted by such counsel; except as set forth in the Final Memorandum, to such counsel's knowledge, no other entity or individual has any right or claim in any of such patents or patent applications (or any patent to be issued therefrom) by virtue of any contract, license or other agreement, known to such counsel, entered into between such entity or individual and the Company or a subsidiary of the Company. 4. Except as described in the Final Memorandum or in the documents incorporated by reference into the Final Memorandum, to such counsel's knowledge, neither the Company nor any subsidiary has received any notice of infringement of a patent of another as of February __, 1998. 5. Such counsel is not aware of any valid basis for a finding of unenforceability or invalidity under 35 U.S.C. Section 102 of any United States patents with respect to which such counsel is patent counsel. 6

6. Except as set forth in the Final Memorandum or in the documents incorporated by reference into the Final Memorandum, there are no judicial proceedings pending relating to patents or proprietary information to which the Company or a subsidiary is a party and, to the best of counsel's knowledge, no such judicial proceedings are threatened by any person; 7. The statements under the captions "Risk Factors - Risks Relating to Sepracor's Pharmaceutical Development Program - Patent Uncertainties", "Risk Factors - Patent Interference", "Business - Patents and Proprietary Technology" and "Business - Legal Proceedings" that relate to matters for which such counsel acts as patent counsel to the Company, insofar as such statements constitute matters of law or legal conclusions thereunder are accurate and correct in all material respects and fairly present such matters; 8. With respect to United States patent matters for which such counsel acts as patent counsel to the Company, nothing has come to such counsel's attention which would lead them to believe that the sections of the Final Memorandum entitled "Risk Factors- Risks Relating to Sepracor's Pharmaceutical Development Program Patent Uncertainties", "Risk Factors -- Patent Interference", "Business - Patents and Proprietary Technology" and "Business - Legal Proceedings", at the time the Final Memorandum was issued or as of the date of this opinion, contained any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, not misleading. 7

EXHIBIT B-2 OPINION OF HESLIN & ROTHENBERG The opinion of Heslin & Rothenberg, patent counsel to the Company, shall be to the effect that: 1. With respect to issued patents resulting from patent applications prosecuted by such counsel, such counsel has disclosed, and with respect to patent applications being prosecuted by such counsel, such counsel has disclosed or intends to disclose, to the United States Patent and Trademark Office ("U.S. PTO") any references known by such counsel to be material to the patentability of the claimed inventions of the United States patents and patent applications of the Company and its subsidiaries prosecuted by such counsel in accordance with 37 C.F.R. Section 1.56. 2. With respect to patent applications of the Company being prosecuted by such counsel, such counsel is of the belief that none of such references disclosed, or such references such counsel intends to disclose to the U.S. PTO constitute a bar under 35 U.S.C. Section. 102 to the patentability of the claims pending in such applications. 3. To such counsel's knowledge, except for the three patent applications identified on Attachment I, the Company (or its subsidiaries) is the sole assignee (or a joint assignee and exclusive licensee) of each of the United States patents and patent applications being prosecuted by such counsel (see Attachment I which attachment lists all of the Company's and its subsidiaries' United States patents and patent applications being prosecuted by such counsel); except as set forth in the Final Memorandum, to such counsel's knowledge, no other entity or individual has any right or claim in any of such patents or patent applications (or any patent to be issued therefrom) by virtue of any contract, license or other agreement, known to such counsel, entered into between such entity or individual and the Company and a subsidiary of the Company. 4. Except as described in the Final Memorandum or in the documents incorporated by reference into the Final Memorandum, to such counsel's knowledge, neither the Company nor any subsidiary has received any notice of infringement of a patent of another as of February __, 1998. 5. Such counsel is not aware of any information or any activity of the Company or of counsel that, in counsel's opinion, would provide a basis for a 8

finding of unenforceability or invalidity of any patents of the Company or its subsidiaries. 6. Except as set forth in the Final Memorandum or in the documents incorporated by reference into the Final Memorandum, there are no judicial proceedings pending relating to patents or proprietary information to which the Company or a subsidiary is a party and, to the best of counsel's knowledge, no such judicial proceedings are threatened by any person; 7. The statements under the captions "Risk Factors - Risks Relating to Sepracor's Pharmaceutical Development Program - Patent Uncertainties" "Risk Factors - Patent Interference", "Business - Patents and Proprietary Technology" and "Business - Legal Proceedings", insofar as such matters constitute matters of law or legal conclusions thereunder are accurate and correct in all material respects and fairly present such matters; 8. With respect to United States patent matters, nothing has come to such counsel's attention which would lead them to believe that the sections of the Final Memorandum entitled "Risk Factors- Risks Relating to Sepracor's Pharmaceutical Development Program - Patent Uncertainties", "Risk Factors - Patent Interference", "Business Patents and Proprietary Technology" and "Business - Legal Proceedings", at the time the Final Memorandum was issued or as of the date of this opinion, contained any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, not misleading. 9

EXHIBIT B-3 OPINION OF DOUGLAS REEDICH, ESQ. The opinion of Douglas Reedich, Esq., patent counsel to the Company, shall be to the effect that: 1. To such counsel's knowledge, based on such counsel's knowledge of the products and proposed products of the Company and the conduct of the business of the Company, the sale in the United States of the drug substances recited as Sepracor ICEs in the Final Memorandum for the associated indications recited in the Final Memorandum would not infringe any patent claiming (a) a drug substance mentioned in the Final Memorandum or (b) its use for the associated indication mentioned in the Final Memorandum of which such counsel is aware that is not either (i) described in the Final Memorandum, (ii) mentioned in this letter or (iii) owned by, controlled by, or licensed to Sepracor or its licensees. Furthermore, to the best of such counsel's knowledge, the information contained in the Final Memorandum concerning third party patents that may be relevant to the sale of the products and proposed products of the Company is correct. 2. Except as described in the Final Memorandum or in the documents incorporated by reference into the Final Memorandum, to such counsel's knowledge, neither the Company nor any subsidiary has received any notice of infringement of or conflict with rights of others with respect to any patent. 10

EXHIBIT C OPINION OF ROPES & GRAY The opinion of Ropes & Gray to be delivered pursuant to Section 5(d) of the Purchase Agreement shall be to the effect that: A. The Purchase Agreement has been duly authorized, executed and delivered by the Company. B. The Securities have been duly authorized by the Company and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of the Purchase Agreement, will be valid and binding obligations of the Company, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity, and will be entitled to the benefits of the Indenture and the Registration Rights Agreement pursuant to which such Securities are to be issued. The Securities have been duly authorized and, when issued and delivered in accordance with the terms of the Purchase Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Securities will not be subject to any preemptive or similar rights under Delaware law or the Company's Certificate of Incorporation. C. The Underlying Securities reserved for issuance upon conversion of the Securities have been duly authorized and reserved and, when issued upon conversion of the Securities in accordance with the terms of the Securities, will be validly issued, fully paid and non-assessable, and the issuance of the Underlying Securities will not be subject to any preemptive or similar rights under Delaware law or the Company's Certificate of Incorporation. D. Each of the Indenture and Registration Rights Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity and except as rights to indemnification and contribution under the Registration Rights Agreement may be limited under applicable law. E. The statements in the Final Memorandum under the captions "Description of Securities", "Description of Capital Stock" "Plan of Distribution" and "Transfer Restrictions", insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, accurately summarizes in all material respects the matters referred to therein. 1

G. Nothing has caused such counsel to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Final Memorandum when issued contained, or as of the date such opinion is delivered contains, any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. H. Based upon and assuming the accuracy of the representations, warranties and agreements of the Company in Sections 1(p), 1(r), 6(f), 6(g) and 6(j) of the Purchase Agreement and of the Initial Purchasers in Section 7 of the Purchase Agreement and of each institutional accredited investor in the letter executed by such investor in the form of Appendix A to the Memorandum, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers under the Purchase Agreement or in connection with the initial resale of such Securities by the Initial Purchasers in accordance with Section 7 of the Purchase Agreement to register the Securities under the Securities Act of 1933 or to qualify the Indenture under the Trust Indenture Act of 1939, it being understood that no opinion is expressed as to any subsequent resale of any Security or Underlying Security. With respect to paragraph G above, Ropes & Gray may state that their belief is based upon their participation in the preparation of the Final Memorandum (and any amendments or supplements thereto) and review and discussion of the contents thereof (including the review of, but not participation in the preparation of, the incorporated documents), but are without independent check or verification except as specified. 2

EXHIBIT D FORM OF LOCK-UP LETTER _____________, 1998 Morgan Stanley & Co. Incorporated Lehman Brothers, Inc. Smith Barney Inc. Vector Securities International, Inc.
c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036

Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") proposes to enter into a Purchase Agreement (the "PURCHASE AGREEMENT") with Sepracor Inc., a Delaware corporation (the "COMPANY"), providing for the offering (the "OFFERING") by the several Initial Purchasers, including Morgan Stanley (the "INITIAL PURCHASERS"), of $_____________ principal amount of the Company's __% Convertible Subordinated Debentures Due 2005 (the "SECURITIES"). The Securities will be convertible into shares of Common Stock, $.10 par value, of the Company (the "COMMON STOCK"). To induce the Initial Purchasers that may participate in the Offering to continue their efforts in connection with the Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Initial Purchasers, it will not, during the period commencing on the date hereof and ending 90 days after the date of the final offering memorandum relating to the Offering (the "FINAL MEMORANDUM"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to securities of the Company transferred by gift when the 1

donee agrees in writing to be bound hereby or transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Offering. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Initial Purchasers, it will not, during the period commencing on the date hereof and ending 90 days after the date of the Final Memorandum, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will be made only pursuant to a Purchase Agreement, the terms of which are subject to negotiation between the Company and the Initial Purchasers. Very truly yours, (Name) (Address) 2

Exhibit 10.34 EXECUTION COPY SEPRACOR INC. TO THE CHASE MANHATTAN BANK TRUSTEE INDENTURE DATED AS OF FEBRUARY 10, 1998 6 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2005

TABLE OF CONTENTS
ARTICLE I DEFINITIONS SECTION 1.1. ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF DEBENTURES SECTION 2.1. DESIGNATION AMOUNT AND ISSUE OF DEBENTURES........................... SECTION 2.2. FORM OF DEBENTURES................................................... SECTION 2.3. DATE AND DENOMINATION OF DEBENTURES; PAYMENTS OF INTEREST............ SECTION 2.4. EXECUTION OF DEBENTURES.............................................. SECTION 2.5. EXCHANGE AND REGISTRATION OF TRANSFER OF DEBENTURES; RESTRICTIONS ON TRANSFER; DEPOSITARY.............................................. SECTION 2.6. MUTILATED, DESTROYED, LOST OR STOLEN DEBENTURES. ................... SECTION 2.7. TEMPORARY DEBENTURES................................................. SECTION 2.8. CANCELLATION OF DEBENTURES PAID, ETC. .............................. SECTION 2.9. CUSIP NUMBERS........................................................ ARTICLE III REDEMPTION OF DEBENTURES SECTION 3.1. SECTION 3.2. SECTION 3.3. SECTION 3.4. SECTION 3.5. ARTICLE IV SUBORDINATION OF SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION ARTICLE V PARTICULAR COVENANTS OF THE COMPANY SECTION 5.1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST........................... DEBENTURES 4.1. AGREEMENT OF SUBORDINATION........................................... 4.2. PAYMENTS TO DEBENTUREHOLDERS......................................... 4.3. SUBROGATION OF DEBENTURES............................................ 4.4. AUTHORIZATION TO EFFECT SUBORDINATION................................ 4.5. NOTICE TO TRUSTEE.................................................... 4.6. TRUSTEE'S RELATION TO SENIOR OBLIGATIONS............................. 4.7. NO IMPAIRMENT OF SUBORDINATION....................................... 4.8. CERTAIN CONVERSIONS NOT DEEMED PAYMENT............................... 4.9. ARTICLE APPLICABLE TO PAYING AGENTS.................................. 4.10. SENIOR OBLIGATIONS ENTITLED TO RELY.................................. 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.......

DEFINITIONS..........................................................

REDEMPTION PRICES.................................................... NOTICE OF REDEMPTION; SELECTION OF DEBENTURES........................ PAYMENT OF DEBENTURES CALLED FOR REDEMPTION.......................... CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION........................ REDEMPTION AT OPTION OF HOLDERS......................................

-2-

SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION ARTICLE VI

5.2. 5.3. 5.5. 5.6. 5.7. 5.8. 5.9. 5.10.

MAINTENANCE OF OFFICE OR AGENCY...................................... APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE................... EXISTENCE............................................................ MAINTENANCE OF PROPERTIES............................................ PAYMENT OF TAXES AND OTHER CLAIMS.................................... RULE 144A INFORMATION REQUIREMENT.................................... STAY, EXTENSION AND USURY LAWS....................................... COMPLIANCE CERTIFICATE...............................................

DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.1. DEBENTUREHOLDERS' LISTS.............................................. SECTION 6.2. PRESERVATION AND DISCLOSURE OF LISTS................................. SECTION 6.3. REPORTS BY TRUSTEE................................................... SECTION 6.4. REPORTS BY COMPANY................................................... ARTICLE VII REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON AN EVENT OF DEFAULT SECTION SECTION SECTION SECTION SECTION SECTION SECTION 7.1. 7.2. 7.3. 7.4. 7.5. 7.6. 7.7. EVENTS OF DEFAULT.................................................... PAYMENTS OF DEBENTURES ON DEFAULT; SUIT THEREFOR..................... APPLICATION OF MONIES COLLECTED BY TRUSTEE........................... PROCEEDINGS BY DEBENTUREHOLDER....................................... PROCEEDINGS BY TRUSTEE............................................... REMEDIES CUMULATIVE AND CONTINUING................................... DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF DEBENTUREHOLDERS..................................................... NOTICE OF DEFAULTS................................................... UNDERTAKING TO PAY COSTS.............................................

SECTION 7.8. SECTION 7.9. ARTICLE VIII CONCERNING THE TRUSTEE SECTION 8.1. SECTION 8.2. SECTION 8.3. SECTION 8.4. SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION 8.5. 8.6. 8.7. 8.8. 8.9. 8.10. 8.11. 8.12. 8.13. 8.14.

DUTIES AND RESPONSIBILITIES OF TRUSTEE............................... RELIANCE ON DOCUMENTS, OPINIONS, ETC................................. NO RESPONSIBILITY FOR RECITALS, ETC.................................. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN DEBENTURES.......................................................... MONIES TO BE HELD IN TRUST........................................... COMPENSATION AND EXPENSES OF TRUSTEE................................. OFFICERS' CERTIFICATE AS EVIDENCE.................................... CONFLICTING INTERESTS OF TRUSTEE..................................... ELIGIBILITY OF TRUSTEE............................................... RESIGNATION OR REMOVAL OF TRUSTEE.................................... ACCEPTANCE BY SUCCESSOR TRUSTEE...................................... SUCCESSION BY MERGER, ETC............................................ PREFERENTIAL COLLECTION OF CLAIMS.................................... TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE COMPANY..............

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ARTICLE IX CONCERNING THE DEBENTUREHOLDERS SECTION 9.1. ACTION BY DEBENTUREHOLDERS........................................... SECTION 9.2. PROOF OF EXECUTION BY DEBENTUREHOLDERS............................... SECTION 9.3. WHO ARE DEEMED ABSOLUTE OWNERS....................................... SECTION 9.4. COMPANY-OWNED DEBENTURES DISREGARDED................................. SECTION 9.5. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND......................... ARTICLE X DEBENTUREHOLDERS' MEETINGS SECTION 10.1. SECTION 10.2. SECTION 10.3. SECTION 10.4. SECTION 10.5. SECTION 10.6. SECTION 10.7. ARTICLE XI SUPPLEMENTAL INDENTURES SECTION 11.1. SECTION 11.2. SECTION 11.3. SECTION 11.4. SECTION 11.5.

PURPOSE OF MEETINGS.................................................. CALL OF MEETINGS BY TRUSTEE.......................................... CALL OF MEETINGS BY COMPANY OR DEBENTUREHOLDERS...................... QUALIFICATIONS FOR VOTING............................................ REGULATIONS.......................................................... VOTING............................................................... NO DELAY OF RIGHTS BY MEETING........................................

SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS...... SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS............. EFFECT OF SUPPLEMENTAL INDENTURE..................................... NOTATION ON DEBENTURES............................................... EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE....................................................

ARTICLE XII CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 12.1. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS........................ SECTION 12.2. SUCCESSOR CORPORATION TO BE SUBSTITUTED.............................. SECTION 12.3. OPINION OF COUNSEL TO BE GIVEN TRUSTEE............................... ARTICLE XIII SATISFACTION AND SECTION SECTION SECTION SECTION SECTION DISCHARGE 13.1. 13.2. 13.3. 13.4. 13.5. OF INDENTURE DISCHARGE OF INDENTURE............................................... DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE...................... PAYING AGENT TO REPAY MONIES HELD.................................... RETURN OF UNCLAIMED MONIES........................................... REINSTATEMENT........................................................

ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.1. INDENTURE AND DEBENTURES SOLELY CORPORATE OBLIGATIONS................

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ARTICLE XV CONVERSION OF DEBENTURES SECTION 15.1. SECTION 15.2. SECTION SECTION SECTION SECTION SECTION SECTION 15.3. 15.4. 15.5. 15.6. 15.7. 15.8.

SECTION 15.9. SECTION 15.10. ARTICLE XVI MISCELLANEOUS PROVISIONS SECTION 16.1. SECTION 16.2. SECTION 16.3. SECTION 16.4. SECTION 16.5. SECTION SECTION SECTION SECTION SECTION SECTION SECTION 16.6. 16.7. 16.8. 16.9. 16.10. 16.11. 16.12.

RIGHT TO CONVERT..................................................... EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS.................. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES........................... CONVERSION PRICE..................................................... ADJUSTMENT OF CONVERSION PRICE....................................... EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE............ TAXES ON SHARES ISSUED............................................... RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK................... RESPONSIBILITY OF TRUSTEE............................................ NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS...........................

PROVISIONS BINDING ON COMPANY'S SUCCESSORS........................... OFFICIAL ACTS BY SUCCESSOR CORPORATION............................... ADDRESSES FOR NOTICES, ETC........................................... GOVERNING LAW........................................................ EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE........................................................... LEGAL HOLIDAYS....................................................... TRUST INDENTURE ACT.................................................. NO SECURITY INTEREST CREATED......................................... BENEFITS OF INDENTURE................................................ TABLE OF CONTENTS, HEADINGS, ETC..................................... AUTHENTICATING AGENT................................................. EXECUTION IN COUNTERPARTS............................................

EXHIBIT A EXHIBIT B

FORM OF DEBENTURE............................................................................. ACCREDITED INVESTOR LETTER....................................................................

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INDENTURE INDENTURE, dated as of February 10, 1998, between Sepracor Inc., a Delaware corporation (hereinafter sometimes called the "Company", as more fully set forth in Section 1.1), and The Chase Manhattan Bank, a New York banking corporation, as trustee hereunder (hereinafter sometimes called the "Trustee", as more fully set forth in Section 1.1). WITNESSETH: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its 6 1/4% Convertible Subordinated Debentures due 2005 (hereinafter sometimes called the "Debentures"), in an aggregate principal amount not to exceed $189,475,000 and, to provide the terms and conditions upon which the Debentures are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, the Debentures, the certificate of authentication to be borne by the Debentures, a form of assignment, a form of option to elect repayment upon a Fundamental Change, and a form of conversion notice to be borne by the Debentures are to be substantially in the forms hereinafter provided for; and WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Debentures have in all respects been duly authorized. NOW THEREFORE THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Debentures are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures (except as otherwise provided below) as follows: ARTICLE I DEFINITIONS SECTION 1.1. DEFINITIONS. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All other terms used in this Indenture that are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise -1-

expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. The words "herein," "hereof," "hereunder" and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms defined in this Article include the plural as well as the singular. AFFILIATE: The term "Affiliate" of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person means, the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. BOARD OF DIRECTORS: The term "Board of Directors" shall mean the Board of Directors of the Company or a committee of such Board duly authorized to act for it hereunder. BUSINESS DAY: The term "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in The City of New York or the city in which the Corporate Trust Office is located are authorized or obligated by law or executive order to close or be closed. CLOSING PRICE: The term "Closing Price" shall have the meaning specified in Section 15.5(h)(1). COMMISSION: The term "Commission" shall mean the Securities and Exchange Commission. COMMON STOCK: The term "Common Stock" shall mean any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. Subject to the provisions of Section 15.6, however, shares issuable on conversion of Debentures shall include only shares of the class designated as common stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. -2-

COMPANY: The term "Company" shall mean Sepracor Inc., a Delaware corporation, having its principal office at 111 Locke Drive, Marlborough, MA 01752 and subject to the provisions of Article XII, shall include its successors and assigns. CONVERSION PRICE: The term "Conversion Price" shall have the meaning specified in Section 15.4. CORPORATE TRUST OFFICE: The term "Corporate Trust Office" or other similar term, shall mean the principal corporate trust office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office is, at the date as of which this Indenture is dated, located at The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York 10001-2697, Attention: Global Trust Services. CREDIT AGREEMENT: The term "Credit Agreement" shall mean that certain Amended and Restated Revolving Credit and Security Agreement, dated as of December 31, 1996, among the Company, Sepracor Securities Corporation and Fleet National Bank, as amended through the date hereof, as further amended, amended and restated, supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing, consolidating or otherwise restructuring (including adding subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any replacement or successor agreement, and whether by Fleet National Bank, individually or as agent for itself and other lenders, and whether or not increasing the amount of Indebtedness that may be incurred thereunder. The term "Credit Agreement" shall also include the Company's obligations under the put agreement with Fleet National Bank to purchase up to $2.0 million of Indebtedness of a former wholly owned Subsidiary in the event of a default thereof by such Subsidiary. CUSTODIAN: The term "Custodian" shall mean The Chase Manhattan Bank, as custodian with respect to the Debentures in global form, or any successor entity thereto. DEBENTURE OR DEBENTURES: The terms "Debenture" or "Debentures" shall mean any Debenture or Debentures, as the case may be, authenticated and delivered under this Indenture, including the Global Debenture. DEBENTUREHOLDER OR HOLDER: The terms "Debentureholder" or "holder" as applied to any Debenture, or other similar terms (but excluding the term "beneficial holder"), shall mean any Person in whose name at the time a particular Debenture is registered on the Debenture registrar's books. DEBENTURE REGISTER: The term "Debenture register" shall have the meaning specified in Section 2.5. DEFAULT: The term "default" shall mean any event that is, or after notice or passage of time, or both, would be, an Event of Default. -3-

DEPOSITARY: The term "Depositary" shall mean, with respect to the Debentures issuable or issued in whole or in part in global form, the person specified in Section 2.5(d) as the Depositary with respect to such Debentures, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, "Depositary" shall mean or include such successor. DESIGNATED SENIOR OBLIGATIONS: The term "Designated Senior Obligations" shall mean Senior Obligations under the Credit Agreement or any other Senior Obligations in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Senior Obligations shall be "Designated Senior Obligations" for purposes of this Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Obligations to exercise the rights of Designated Senior Obligations). If any payment made to any holder of any Designated Senior Obligations or its Representative with respect to such Designated Senior Obligations is rescinded or must otherwise be returned by such holder or Representative upon the insolvency, bankruptcy or reorganization of the Company or otherwise, the reinstated Indebtedness of the Company arising as a result of such rescission or return shall constitute Designated Senior Obligations effective as of the date of such rescission or return. EXCHANGE ACT: The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. EVENT OF DEFAULT: The term "Event of Default" shall mean any event specified in Section 7.1(a), (b), (c), (d) or (e). FUNDAMENTAL CHANGE: The term "Fundamental Change" shall mean the occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, be converted into, be acquired for, or constitute in all material respects solely the right to receive, consideration which is not all or substantially all common stock which is (or, upon consummation of or immediately following such transaction or event, will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise). INDEBTEDNESS: The term "Indebtedness" shall mean, with respect to any Person, and without duplication, (a) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of the Company in respect of overdrafts, foreign exchange contracts, currency exchange agreements, interest rate protection agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments, and all commitment, stand by and other fees due and payable to financial institutions with respect to credit facilities available to such Person) or evidenced by bonds, debentures, notes -4-

or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof) (other than any account payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services); (b) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers' acceptances; (c) all obligations and liabilities (contingent or otherwise) in respect of leases of real or personal property or other assets of such Person required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and all obligations and other liabilities (contingent or otherwise) under any lease or related document (including a purchase agreement) in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase such leased property; (d) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement; (e) all direct or indirect guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d); (f) any indebtedness or other obligations described in clauses (a) through (e) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person; and (g) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). INDENTURE: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. INITIAL PURCHASERS: The term "Initial Purchasers" shall mean Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., Smith Barney Inc. and Vector Securities International, Inc. INSTITUTIONAL ACCREDITED INVESTOR: The term "Institutional Accredited Investor" shall mean an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act. LIQUIDATED DAMAGES: The term "Liquidated Damages" shall have the meaning specified in Section 2(f) of the Registration Rights Agreement. NON-U.S. PERSON: The term Non-U.S. Person shall mean a person other than a U.S. Person (as defined in Regulation S). -5-

OFFICERS' CERTIFICATE: The term "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by both (a) the President or Chief Executive Officer or any Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) by the Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of the Company. OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel reasonably acceptable to the Trustee. OUTSTANDING: The term "outstanding," when used with reference to Debentures, shall, subject to the provisions of Section 9.4, mean, as of any particular time, all Debentures authenticated and delivered by the Trustee under this Indenture, except (a) Debentures theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Debentures, or portions thereof, (i) for the redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or (ii) which shall have been otherwise defeased in accordance with Article XIII; (c) Debentures in lieu of which, or in substitution for which, other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6; and (d) Debentures converted into Common Stock pursuant to Article XV and Debentures deemed not outstanding pursuant to Article III. PAYMENT BLOCKAGE NOTICE: The term "Payment Blockage Notice" shall have the meaning specified in Section 4.2. PERSON: The term "Person" shall mean a corporation, an association, a partnership, a limited liability company, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof. PORTAL MARKET: The term "The Portal Market" shall mean The Portal Market operated by the National Association of Securities Dealers, Inc. or any successor thereto. PREDECESSOR DEBENTURE: The term "Predecessor Debenture" of any particular Debenture shall mean every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen -6-

Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture that it replaces. QIB: The term "QIB" shall mean a "qualified institutional buyer" as defined in Rule 144A. REGISTRATION RIGHTS AGREEMENT: The term "Registration Rights Agreement" shall mean that certain Registration Rights Agreement, dated as of February 5, 1998, between the Company and the Initial Purchasers, as amended from time to time in accordance with its terms, a copy of which is attached as Exhibit C hereto. REGULATION S: The term "Regulation S" shall mean Regulation S as promulgated under the Securities Act. REPRESENTATIVE: The term "Representative" shall mean the (a) indenture trustee or other trustee, agent or representative for any Senior Obligations or (b) with respect to any Senior Obligations that do not have any such trustee, agent or other representative, (i) in the case of such Senior Obligations issued pursuant to an agreement providing for voting arrangements as among the holders or owners of such Senior Obligations, any holder or owner of such Senior Obligations acting with the consent of the required persons necessary to bind such holders or owners of such Senior Obligations and (ii) in the case of all other such Senior Obligations, the holder or owner of such Senior Obligations. RESPONSIBLE OFFICER: The term "Responsible Officer," when used with respect to the Trustee, shall mean an officer assigned to the Corporate Trust Office, including any managing director, vice president, assistant vice president, assistant treasurer, assistant secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and having direct responsibility for the administration of this Indenture, and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. RESTRICTED SECURITIES: The term "Restricted Securities" shall have the meaning specified in Section 2.5. RULE 144A: The term "Rule 144A" shall mean Rule 144A as promulgated under the Securities Act. SECURITIES ACT: The term "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. SENIOR OBLIGATIONS: The term "Senior Obligations" shall mean the principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable -7-

as a claim in any such proceeding) and rent payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to, the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Debentures or expressly provides that such Indebtedness is "pari passu" or "junior" to the Debentures. Notwithstanding the foregoing, the term Senior Obligations shall not include the aggregate principal amount of $80,880,000 in 7% Convertible Subordinated Debentures due 2002 or any Indebtedness of the Company to any subsidiary of the Company, a majority of the voting stock of which is owned, directly or indirectly, by the Company. If any payment made to any holder of any Senior Obligations or its Representative with respect to such Senior Obligations is rescinded or must otherwise be returned by such holder or Representative upon the insolvency, bankruptcy or reorganization of the Company or otherwise, the reinstated Indebtedness of the Company arising as a result of such rescission or return shall constitute Senior Obligations effective as of the date of such rescission or return. Notwithstanding anything else to the contrary in this Indenture, the term "Senior Obligations" shall include Indebtedness under the Credit Agreement. SIGNIFICANT SUBSIDIARY: The term "Significant Subsidiary" shall mean, as of any date of determination, a subsidiary of the Company, a majority of the voting stock or other voting power of which is owned directly or indirectly by the Company, if as of such date of determination either (a) the assets of such subsidiary equal 10% or more of the Company's total consolidated assets or (b) the total revenue of which represented 10% or more of the Company's consolidated total revenue for the most recently completed fiscal year; provided, however, for purposes of this Indenture, BioSepra, Inc. shall not be deemed to be a Significant Subsidiary. SUBSIDIARY: The term "Subsidiary" shall mean, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or managing general partner of which is such Person or a subsidiary of such Person or (b) the only general partners of which are such Person or one or more subsidiaries of such Person (or any combination thereof). TRADING DAY: The term "Trading Day" shall have the meaning specified in Section 15.5(h)(5). TRIGGER EVENT: The term "Trigger Event" shall have the meaning specified in Section 15.5(d). -8-

TRUST INDENTURE ACT: The term "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 11.3 and 15.6; provided, however, that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term "Trust Indenture Act" shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. TRUSTEE: The term "Trustee" shall mean The Chase Manhattan Bank, and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors be a party and any successor trustee at the time serving as successor trustee hereunder. The definitions of certain other terms are as specified in Sections 2.5 and 3.5 and Article XV. ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF DEBENTURES SECTION 2.1. DESIGNATION AMOUNT AND ISSUE OF DEBENTURES. The Debentures shall be designated as "6 1/4% Convertible Subordinated Debentures due 2005." Debentures not to exceed the aggregate principal amount of $165,000,000 (or $189,475,000 if the over-allotment option set forth in Section 2 of the Purchase Agreement dated February 5, 1998 (as amended from time to time by the parties thereto) by and between the Company and the Initial Purchasers is exercised in full) (except pursuant to Sections 2.5, 2.6, 3.3, 3.5 and 15.2 hereof) upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures to or upon the written order of the Company, signed by its (a) Chief Executive Officer, President, any Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) Treasurer or Assistant Treasurer or its Secretary or any Assistant Secretary, without any further action by the Company hereunder. In authenticating any Debentures, the Trustee shall be entitled to receive prior to the first authentication of any Debentures, and shall be fully protected in relying upon, unless and until such documents have been superseded or revoked: (1) an Officers' Certificate setting forth the form or forms and terms of the Debentures, stating that the form or forms and terms of the Debentures have been, or will be when established in accordance with such procedures as shall be referred to therein, established in compliance with this Indenture; and (2) an Opinion of Counsel substantially to the effect that the form or forms and terms of the Debentures have been, or will be when established in accordance with such procedures as shall be referred to therein, established in compliance with this Indenture -9-

and that the supplemental indenture, to the extent applicable, and Debentures have been duly authorized and, if executed and authenticated in accordance with the provisions of the Indenture and delivered to and duly paid for by the purchasers thereof on the date of such opinion, would be entitled to the benefits of the Indenture and would be valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting creditors' rights generally, general principles of equity, and such other matters as shall be specified therein. SECTION 2.2. FORM OF DEBENTURES. The Debentures and the Trustee's certificate of authentication to be borne by such Debentures shall be substantially in the form set forth in Exhibit A, which is incorporated in and made a part of this Indenture. Any of the Debentures may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Debentures may be listed, or to conform to usage. Any Debenture in global form shall represent such of the outstanding Debentures as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Debentures from time to time endorsed thereon and that the aggregate amount of outstanding Debentures represented thereby may from time to time be increased or reduced to reflect transfers or exchanges permitted hereby. Any endorsement of a Debenture in global form to reflect the amount of any increase or decrease in the amount of outstanding Debentures represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon written instructions given by the holder of such Debentures in accordance with this Indenture. Payment of principal of and interest and premium, if any, on any Debenture in global form shall be made to the holder of such Debenture. The terms and provisions contained in the form of Debenture attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.3. DATE AND DENOMINATION OF DEBENTURES; PAYMENTS OF INTEREST. The Debentures shall be issuable in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. Every Debenture shall be dated the date of its authentication and shall bear interest from the applicable date in each case as specified on the face of the form of Debenture attached as Exhibit A hereto. Interest on the Debentures shall be computed on the basis of a 360-day year comprised of twelve (12) 30-day months and shall be payable semi-annually on each of February 15 and August 15 of each year. -10-

The Person in whose name any Debenture (or its Predecessor Debenture) is registered on the Debenture register at the close of business on any record date with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date, except (i) that the interest payable upon redemption (unless the date of redemption is an interest payment date) will be payable to the person to whom principal is payable and (ii) as set forth in the next succeeding sentence. In the case of any Debenture (or portion thereof) which is converted into Common Stock of the Company during the period from (but excluding) a record date for any interest payment date to (but excluding) such interest payment date either (i) if such Debenture (or portion thereof) has been called for redemption on a redemption date which occurs during such period, or is to be redeemed in connection with a Fundamental Change on a Repurchase Date (as defined in Section 3.5) which occurs during such period, the Company shall not be required to pay interest on such interest payment date in respect of any such Debenture (or portion thereof) except to the extent required to be paid upon redemption of such Debenture or portion thereof pursuant to Section 3.3 or 3.5 hereof or (ii) if otherwise, any such Debenture (or portion thereof) submitted for conversion during such period shall be accompanied by funds equal to the interest payable on such interest payment date on the principal amount so converted. Interest may, as the Company shall specify to the paying agent in writing by each record date, be paid either (i) by check mailed to the address of the person entitled thereto as it appears in the Debenture register (provided that a holder of Debentures with an aggregate principal amount in excess of $2,000,000 shall, at the written election of such holder, be paid by wire transfer in immediately available funds) or (ii) by transfer to an account maintained by such person located in the United States; provided, however, that payments to the Depositary will be made by wire transfer of immediately available funds to the account of the Depositary or its nominee. The term "record date" with respect to any interest payment date shall mean the January 31 or July 31 preceding said February 15 or August 15, respectively. Any interest on any Debenture which is payable, but is not punctually paid or duly provided for, on any said February 15 or August 15 (herein called "Defaulted Interest") shall forthwith cease to be payable to the Debentureholder on the relevant record date by virtue of his having been such Debentureholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (1) or (2) below; (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Debentures (or their respective Predecessor Debentures) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Debenture and the date of the payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust -11-

for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment, and not more than ten (10) days after the receipt by the Trustee of the notice of the proposed payment, the Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Debentureholder at his address as it appears in the Debenture register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Debentures (or their respective Predecessor Debentures) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (2) of this Section 2.3. (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Debentures may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.4. EXECUTION OF DEBENTURES. The Debentures shall be signed in the name and on behalf of the Company by the facsimile signature of its Chief Executive Officer or President or any Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and attested by the facsimile signature of its Secretary or any of its Assistant Secretaries or Treasurer or any of its Assistant Treasurers (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Debentures as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Debenture attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 16.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of -12-

the Company by such persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer: SECTION 2.5. EXCHANGE AND REGISTRATION OF TRANSFER OF DEBENTURES; RESTRICTIONS ON TRANSFER; DEPOSITARY. (a) The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 5.2 being herein sometimes collectively referred to as the "Debenture register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Debentures and of transfers of Debentures. The Debenture register shall be in written form or in any form capable of being converted into written form within a reasonably prompt period of time. The Trustee is hereby appointed "Debenture registrar" for the purpose of registering Debentures and transfers of Debentures as herein provided. The Company may appoint one or more co-registrars in accordance with Section 5.2. Upon surrender for registration of transfer of any Debenture to the Debenture registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.5, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture. Debentures may be exchanged for other Debentures of any authorized denominations and of a like aggregate principal amount, upon surrender of the Debentures to be exchanged at any such office or agency maintained by the Company pursuant to Section 5.2. Whenever any Debentures are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Debentures which the Debentureholder making the exchange is entitled to receive bearing registration numbers not contemporaneously outstanding. All Debentures issued upon any registration of transfer or exchange of Debentures shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Debentures surrendered upon such registration of transfer or exchange. All Debentures presented or surrendered for registration of transfer or for exchange, redemption or conversion shall (if so required by the Company or the Debenture registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, and the Debentures shall be duly executed by the Debentureholder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Debentures, but the Company may require payment of a sum sufficient to cover any tax, -13-

assessment or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Debentures. Neither the Company nor the Trustee nor any Debenture registrar or any Company registrar shall be required to exchange or register a transfer of (a) any Debentures for a period of fifteen (15) days next preceding any selection of Debentures to be redeemed or (b) any Debentures or portions thereof called for redemption pursuant to Section 3.2 or (c) any Debentures or portion thereof surrendered for conversion pursuant to Article XV or (d) any Debentures or portions thereof tendered for redemption (and not withdrawn) pursuant to Section 3.5. (b) So long as the Debentures are eligible for book-entry settlement with the Depositary, or unless otherwise required by law, all Debentures that upon initial issuance are beneficially owned by QIBs and all Debentures that are beneficially owned by Non-U.S. Persons as a result of a sale or transfer after initial issuance will be represented by one or more Debentures in global form registered in the name of the Depositary or the nominee of the Depositary (each, a "Global Debenture"), except as otherwise specified below. The transfer and exchange of beneficial interests in any such Global Debenture shall be effected through the Depositary in accordance with this Indenture and the procedures of the Depositary therefor. The Trustee shall make appropriate endorsements to reflect increases or decreases in the principal amounts of any such Global Debenture as set forth on the face of the Debenture ("Principal Amount") to reflect any such transfers. Except as provided below, beneficial owners of a Global Debenture shall not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and will not be considered holders of such Debentures in global form. (c) So long as the Debentures are eligible for book-entry settlement, or unless otherwise required by law, upon any transfer of a definitive Debenture to a QIB in accordance with Rule 144A or to a Non-U.S. Person in accordance with Regulation S, and upon receipt of the definitive Debenture or Debentures being so transferred, together with a certification, substantially in the form on the reverse of the Debenture, from the transferor that the transfer is being made in compliance with Rule 144A or to a Non-U.S. Person in accordance with Regulation S (or other evidence satisfactory to the Trustee), the Trustee shall make an endorsement on the applicable Global Debenture to reflect an increase in the aggregate Principal Amount of the Debentures represented by such Debenture in global form, the Trustee shall cancel such definitive Debenture or Debentures in accordance with the standing instructions and procedures of the Depositary, the aggregate Principal Amount of Debentures represented by such Debenture in global form to be increased accordingly; provided that no definitive Debenture, or portion thereof, in respect of which the Company or an Affiliate of the Company held any beneficial interest shall be included in such Debenture in global form until such definitive Debenture is freely tradable in accordance with Rule 144(k); provided further that the Trustee shall issue Debentures in definitive form upon any transfer of a beneficial interest in the Debenture in global form to the Company or any Affiliate of the Company. -14-

Upon any sale or transfer of a Debenture to an Institutional Accredited Investor (other than pursuant to a registration statement that has been declared effective under the Securities Act), such Institutional Accredited Investor shall, prior to such sale or transfer, furnish to the Company and/or the Trustee a signed letter containing representations and agreements relating to restrictions on transfer substantially in the form set forth in Exhibit B to this Indenture. Any Debenture in global form may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Custodian, the Depositary or by the National Association of Securities Dealers, Inc. in order for the Debentures to be tradeable on The Portal Market or as may be required for the Debentures to be tradeable on any other market developed for trading of securities pursuant to Rule 144A or Regulation S or required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange or automated quotation system upon which the Debentures may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Debentures are subject. (d) Every Debenture that bears or is required under this Section 2.5(d) to bear the legend set forth in this Section 2.5(d) (together with any Common Stock issued upon conversion of the Debentures and required to bear the legend set forth in Section 2.5(e), collectively, the "Restricted Securities") shall be subject to the restrictions on transfer set forth in this Section 2.5(d) (including those set forth in the legend set forth below) unless such restrictions on transfer shall be waived by written consent of the Company, and the holder of each such Restricted Security, by such holder's acceptance thereof, agrees to be bound by all such restrictions on transfer. As used in Sections 2.5(d) and 2.5 (e), the term "transfer" encompasses any sale, pledge, transfer or other disposition whatsoever of any Restricted Security. Until the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision), any certificate evidencing such Debenture (and all securities issued in exchange therefor or substitution thereof, other than Common Stock, if any, issued upon conversion thereof, which shall bear the legend set forth in Section 2.5(e), if applicable) shall bear a legend in substantially the following form, unless such Debenture has been sold pursuant to a registration statement that has been declared effective under the Securities Act (and which continues to be effective at the time of such transfer), or unless otherwise agreed by the Company in writing, with written notice thereof to the Trustee: THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) -15-

REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A UNITED STATES PERSON AND IS ACQUIRING THE DEBENTURE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR OTHERWISE TRANSFER THE DEBENTURE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH DEBENTURE EXCEPT (A) TO SEPRACOR INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE DEBENTURE EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS APPLICABLE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(F) ABOVE), IT WILL FURNISH TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS SUCH TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (4) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE DEBENTURE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE DEBENTURE EVIDENCED HEREBY UNDER RULE 144 (K) UNDER THE SECURITIES -16-

ACT (OR ANY SUCCESSOR PROVISION), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE). IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS NOT A UNITED STATES PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THE DEBENTURE EVIDENCED HEREBY PURSUANT TO CLAUSE 2(F) ABOVE OR UPON ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "UNITED STATES PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. Any Debenture (or security issued in exchange or substitution therefor) as to which such restrictions on transfer shall have expired in accordance with their terms or as to which the conditions for removal of the foregoing legend set forth therein have been satisfied may, upon surrender of such Debenture for exchange to the Debenture registrar in accordance with the provisions of this Section 2.5, be exchanged for a new Debenture or Debentures, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by this Section 2.5(d). Notwithstanding any other provisions of this Indenture (other than the provisions set forth in Section 2.5(c) and in this Section 2.5(d)), a Debenture in global form may not be transferred as a whole or in part except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Debentures in global form. Initially, Global Debentures shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Custodian for Cede & Co. -17-

If at any time the Depositary for a Debenture in global form notifies the Company that it is unwilling or unable to continue as Depositary for such Debenture, the Company may appoint a successor Depositary with respect to such Debenture. If a successor Depositary is not appointed by the Company within ninety (90) days after the Company receives such notice, the Company will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Debentures, will authenticate and deliver, Debentures in certificated form, in aggregate principal amount equal to the principal amount of such Debenture in global form, in exchange for such Debenture in global form. If a Debenture in certificated form is issued in exchange for any portion of a Debenture in global form after the close of business at the office or agency where such exchange occurs on any record date and before the opening of business at such office or agency on the next succeeding interest payment date, interest will not be payable on such interest payment date in respect of such Debenture, but will be payable on such interest payment date, subject to the provisions of Section 2.3, only to the person to whom interest in respect of such portion of such Debenture in global form is payable in accordance with the provisions of this Indenture. Debentures in certificated form issued in exchange for all or a part of a Debenture in global form pursuant to this Section 2.5 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Debentures in certificated form to the persons in whose names such Debentures in certificated form are so registered. At such time as all interests in a Debenture in global form have been redeemed, converted, canceled, exchanged for Debentures in certificated form, or transferred to a transferee who receives Debentures in certificated form thereof, such Debenture in global form shall, upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and instructions existing between the Depositary and the Custodian. At any time prior to such cancellation, if any interest in a global Debenture is exchanged for Debentures in certificated form, redeemed, converted, repurchased or canceled, exchanged for Debentures in certificated form or transferred to a transferee who receives Debentures in certificated form therefor or any Debenture in certificated form is exchanged or transferred for part of a Debenture in global form, the principal amount of such Debenture in global form shall, in accordance with the standing procedures and instructions existing between the Depositary and the Custodian, be appropriately reduced or increased, as the case may be, and an endorsement shall be made on such Debenture in global form, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction or increase. (e) Until the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision), any stock certificate representing Common Stock issued upon conversion of such Debenture shall bear a legend in substantially the following form, unless such Common Stock has been sold pursuant to a registration statement that has been declared effective under the Securities Act (and which -18-

continues to be effective at the time of such transfer) or such Common Stock has been issued upon conversion of Debentures that have been transferred pursuant to a registration statement that has been declared effective under the Securities Act, or unless otherwise agreed by the Company in writing with written notice thereof to the transfer agent: THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT UNTIL THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), (1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY EXCEPT (A) TO SEPRACOR INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN COMPLIANCE WITH RULE 144A, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT PRIOR TO SUCH TRANSFER FURNISHES TO BOSTON EQUISERVE LP, AS TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRANSFER AGENT OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (F) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (2) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(F) ABOVE), IT WILL FURNISH TO BOSTON EQUISERVE LP, AS TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) IT WILL DELIVER -19-

TO EACH PERSON TO WHOM THE COMMON STOCK EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(F) ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY PURSUANT TO CLAUSE 1(F) ABOVE OR UPON ANY TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. Any such Common Stock as to which such restrictions on transfer shall have expired in accordance with their terms or as to which the conditions for removal of the foregoing legend set forth therein have been satisfied may, upon surrender of the certificates representing such shares of Common Stock for exchange in accordance with the procedures of the transfer agent for the Common Stock, be exchanged for a new certificate or certificates for a like number of shares of Common Stock, which shall not bear the restrictive legend required by this Section 2.5 (e). (f) Any Debenture or Common Stock issued upon the conversion or exchange of a Debenture that, prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision), is purchased or owned by the Company or any Affiliate thereof may not be resold by the Company or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements of the Securities Act in a transaction which results in such Debentures or Common Stock, as the case may be, no longer being "restricted securities" (as defined under Rule 144). SECTION 2.6. MUTILATED, DESTROYED, LOST OR STOLEN DEBENTURES. In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and make available for delivery, a new Debenture, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof. Following receipt by the Trustee or such authenticating agent, as the case may be, of satisfactory security or indemnity and evidence, as described in the preceding paragraph, the -20-

Trustee or such authenticating agent may authenticate any such substituted Debenture and make available for delivery such Debenture. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debenture which has matured or is about to mature or has been called for redemption or has been tendered for redemption (and not withdrawn) or is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Debenture), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any paying agent or conversion agent of the destruction, loss or theft of such Debenture and of the ownership thereof. Every substitute Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. To the extent permitted by law, all Debentures shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. SECTION 2.7. TEMPORARY DEBENTURES. Pending the preparation of Debentures in certificated form, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon the written request of the Company, authenticate and deliver temporary Debentures (printed or lithographed). Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the Debentures in certificated form, but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every such temporary Debenture shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Debentures in certificated form. Without unreasonable delay the Company will execute and deliver to the Trustee or such authenticating agent Debentures in certificated form (other than in the case of Debentures in global form) and thereupon any or all temporary Debentures (other than any such Debenture in global form) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 5.2 and the Trustee or such authenticating agent shall authenticate and make available for delivery in exchange for such temporary Debentures an equal aggregate principal amount of Debentures in certificated form. Such exchange shall be -21-

made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Debentures in certificated form authenticated and delivered hereunder. SECTION 2.8. CANCELLATION OF DEBENTURES PAID, ETC. All Debentures surrendered for the purpose of payment, redemption, conversion, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent or any Debenture registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall return such canceled Debentures to the Company. If the Company shall acquire any of the Debentures, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are delivered to the Trustee for cancellation. SECTION 2.9. CUSIP NUMBERS. The Company in issuing the Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Debentureholders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. ARTICLE III REDEMPTION OF DEBENTURES SECTION 3.1. REDEMPTION PRICES. The Company may not redeem the Debentures prior to February 18, 2001. At any time on or after February 18, 2001, the Company , at its option, redeem all or from time to time any part of the Debentures on any date prior to maturity, upon notice as set forth in Section 3.2, and at the optional redemption prices set forth in the form of Debenture attached as Exhibit A hereto, together with accrued interest to, but excluding, the date fixed for redemption. SECTION 3.2. NOTICE OF REDEMPTION; SELECTION OF DEBENTURES. In case the Company shall desire to exercise the right to redeem all or, as the case may be, any part of the Debentures pursuant to Section 3.1, it shall fix a date for redemption and it or, at its written request received by the Trustee not fewer than fortyfive (45) days prior (or such shorter period of time as may be acceptable to the Trustee) to the date fixed for redemption, the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption not less than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture register; provided that if the Company shall give such notice, it shall -22-

also give written notice, and written notice of the Debentures to be redeemed, to the Trustee. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. Each such notice of redemption shall specify the aggregate principal amount of Debentures to be redeemed, the CUSIP numbers, the date fixed for redemption (which shall be a Business Day), the redemption price at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portion thereof to be redeemed will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Debentures or portions thereof into Common Stock will expire. If fewer than all the Debentures are to be redeemed, the notice of redemption shall identify the Debentures to be redeemed (including CUSIP numbers, if any). In case any Debenture is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued. On or prior to the redemption date specified in the notice of redemption given as provided in this Section 3.2, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.4) an amount of money sufficient to redeem on the redemption date all the Debentures (or portions thereof) so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the appropriate redemption price, together with accrued interest to, but excluding, the date fixed for redemption; provided that if such payment is made on the redemption date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. New York City time, on such date. If any Debenture called for redemption is converted pursuant hereto, any money deposited with the Trustee or any paying agent or so segregated and held in trust for the redemption of such Debenture shall be paid to the Company upon its written request, or, if then held by the Company, shall be discharged from such trust. Whenever any Debentures are to be redeemed, the Company will give the Trustee written notice in the form of an Officers' Certificate not fewer than forty-five (45) days (or such shorter period of time as may be acceptable to the Trustee) prior to the redemption date as to the aggregate principal amount of Debentures to be redeemed. If fewer than all the Debentures are to be redeemed, the Trustee shall select the Debentures or portions thereof of the Global Debenture or the Debentures in certificated form to be redeemed (in principal amounts of $1,000 or integral multiples thereof), by lot, on a pro rata basis or by another method the Trustee deems fair and appropriate. If any Debenture selected for partial redemption is converted in part after such selection, the converted portion of -23-

such Debenture shall be deemed (so far as may be) to be the portion to be selected for redemption. The Debentures (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Debenture is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all Debentures, the Company and the Trustee may (but need not) treat as outstanding any Debentures surrendered for conversion during the period of fifteen (15) days next preceding the mailing of a notice of redemption and may (but need not) treat as outstanding any Debenture authenticated and delivered during such period in exchange for the unconverted portion of any Debenture converted in part during such period. SECTION 3.3. PAYMENT OF DEBENTURES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Debentures or portion of Debentures with respect to which such notice has been given shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the date fixed for redemption and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Debentures at the redemption price, together with interest accrued to said date), interest on the Debentures or portion of Debentures so called for redemption shall cease to accrue and such Debentures shall cease after the close of business on the Business Day next preceding the date fixed for redemption to be convertible into Common Stock and, except as provided in Sections 8.5 and 13.4, to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Debentures except the right to receive the redemption price thereof and unpaid interest to (but excluding) the date fixed for redemption. On presentation and surrender of such Debentures at a place of payment in said notice specified, the said Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to (but excluding) the date fixed for redemption; provided that, if the applicable redemption date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holders of such Debentures registered as such on the relevant record date instead of the holders surrendering such Debentures for redemption on such date. Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures, of authorized denominations, in principal amount equal to the unredeemed portion of the Debentures so presented. Notwithstanding the foregoing, the Trustee shall not redeem any Debentures or mail any notice of optional redemption during the continuance of a default in payment of interest or premium on the Debentures or of any Event of Default of which, in the case of any Event of Default other than under Sections 7.1 (a) or 7.1 (b), a Responsible Officer of the Trustee has actual knowledge. If any Debenture called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Debenture and such -24-

Debenture shall remain convertible into Common Stock until the principal and premium, if any, shall have been paid or duly provided for. SECTION 3.4. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In connection with any redemption of Debentures, the Company may arrange for the purchase and conversion of any Debentures by an agreement with one or more investment bankers or other purchasers to purchase such Debentures by paying to the Trustee in trust for the Debentureholders, on or before the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, of such Debentures. Notwithstanding anything to the contrary contained in this Article III, the obligation of the Company to pay the redemption price of such Debentures, together with interest accrued to (but excluding) the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which will be filed with the Trustee prior to the date fixed for redemption, any Debentures not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article XV) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the date fixed for redemption (and the right to convert any such Debentures shall be extended through such time), subject to payment of the above amount as aforesaid. At the written direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Debentures. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Debentures shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture. SECTION 3.5. REDEMPTION AT OPTION OF HOLDERS. (a) If there shall occur a Fundamental Change, then each Debentureholder shall have the right, at such holder's option, to require the Company to redeem all of such holder's Debentures, or any portion thereof that is an integral multiple of $1,000 principal amount, on the date (the "Repurchase Date") that is thirty (30) days after the date of the Company Notice (as defined in Section 3.5(b) below) of such Fundamental Change (or, if such 30th day is not a Business Day, the next succeeding Business Day) at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the date of redemption; provided that, if such Repurchase Date is February 15 or August 15, then the interest payable on such date shall be paid to the holders of record of the Debentures on the next preceding January 31 or July 31, respectively. Upon presentation of any Debenture redeemed in part only, the Company shall execute and, upon the Company's written direction to the Trustee, the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Debenture or Debentures, of authorized denominations, in principal amount equal to the unredeemed portion of the Debentures so presented. -25-

(b) On or before the tenth day after the occurrence of a Fundamental Change, the Company, or, at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice as described below), the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed to all holders of record on the date of the Fundamental Change a notice (the "Company Notice") of the occurrence of such Fundamental Change and of the redemption right at the option of the holders arising as a result thereof. Such notice shall be mailed in the manner and with the effect set forth in the first paragraph of Section 3.2. The Company shall also deliver a copy of the Company Notice to the Trustee at such time as it is mailed to Debentureholders. Each Company Notice shall specify the circumstances constituting the Fundamental Change, the Repurchase Date, the price at which the Company shall be obligated to redeem Debentures, the latest time on the Repurchase Date by which the holder must exercise the redemption right (the "Fundamental Change Expiration Time"), that the holder shall have the right to withdraw any Debentures surrendered prior to the Fundamental Change Expiration Time, a description of the procedure which a Debentureholder must follow to exercise such redemption right and to withdraw any surrendered Debentures, the place or places where the holder is to surrender such holder's Debentures, and the amount of interest accrued on each Debenture to the Repurchase Date. No failure of the Company to give the foregoing notices and no defect therein shall limit the Debentureholders' redemption rights or affect the validity of the proceedings for the repurchase of the Debentures pursuant to this Section 3.5. (c) For a Debenture to be so redeemed at the option of the holder, the Company must receive at the office or agency of the Company maintained for that purpose or, at the option of such holder, the Corporate Trust Office, such Debenture with the form entitled "Option to Elect Repayment Upon A Fundamental Change" on the reverse thereof duly completed, together with such Debentures duly endorsed for transfer, on or before the Fundamental Change Expiration Time. All questions as to the validity, eligibility (including time of receipt) and acceptance of any Debenture for repayment shall be determined by the Company, whose determination shall be final and binding absent manifest error. (d) On or prior to the Repurchase Date, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.4) an amount of money sufficient to repay on the Repurchase Date all the Debentures to be repaid on such date at the redemption price, together with accrued interest to (but excluding) the Repurchase Date; provided that if such payment is made on the Repurchase Date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. New York City time, on such date. Payment for Debentures surrendered for redemption (and not withdrawn) prior to the Fundamental Change Expiration Time will be made promptly (but in no event more than five (5) Business Days) following the Repurchase Date by mailing checks for the amount payable to the holders of such Debentures entitled thereto as they shall appear on the Debenture register of the Company. -26-

(e) In the case of a reclassification, change of the outstanding shares of Common Stock, consolidation, merger, combination, sale or conveyance to which Section 15.6 applies, in which the Common Stock of the Company is changed or exchanged as a result into the right to receive stock, securities or other property or assets (including cash), which includes shares of Common Stock of the Company or another Person that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States and such shares constitute at the time such change or exchange becomes effective in excess of 50% of the aggregate fair market value of such stock, securities or other property or assets (including cash), then the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture (accompanied by an Opinion of Counsel that such supplemental indenture complies with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) modifying the provisions of this Indenture relating to the right of holders of the Debentures to cause the Company to repurchase the Debentures following a Fundamental Change, including without limitation the applicable provisions of this Section 3.5 and the definitions of Common Stock and Fundamental Change, as appropriate, as determined in good faith by the Company, to make such provisions apply to the common stock and the issuer thereof if different from the Company and Common Stock of the Company (in lieu of the Company and the Common Stock of the Company). (f) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act to the extent then applicable in connection with the redemption rights of the holders of Debentures in the event of a Fundamental Change. ARTICLE IV SUBORDINATION OF DEBENTURES SECTION 4.1. AGREEMENT OF SUBORDINATION. The Company covenants and agrees, and each holder of Debentures issued hereunder by its acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article IV; and each Person holding any Debenture, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. The payment of the principal of, premium, if any, and interest (including Liquidated Damages, if any) on all Debentures (including, but not limited to, the redemption price with respect to the Debentures called for redemption in accordance with Section 3.2 or submitted for redemption in accordance with Section 3.5, as the case may be, as provided in the Indenture) issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all Senior Obligations, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article IV shall prevent the occurrence of any default or Event of Default hereunder. -27-

SECTION 4.2. PAYMENTS TO DEBENTUREHOLDERS. No payment shall be made with respect to the principal of, premium, if any, or interest (including Liquidated Damages, if any) on the Debentures (including, but not limited to, the redemption price with respect to the Debentures to be called for redemption in accordance with Section 3.2 or submitted for redemption in accordance with Section 3.5, as the case may be, as provided in this Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, if: (i) a default in the payment of principal, premium, if any, interest, rent or other obligations in respect of Senior Obligations occurs and is continuing (a "Payment Default"), unless and until such Payment Default shall have been cured or waived or shall have ceased to exist; or (ii) a default, other than a Payment Default, on any Designated Senior Obligations occurs and is continuing that then permits holders of such Designated Senior Obligations to accelerate its maturity and the Trustee receives a written notice of the default (a "Payment Blockage Notice") from a holder of Designated Senior Obligations, a Representative of Designated Senior Obligations or the Company (a "Non-Payment Default"). If the Trustee receives any Payment Blockage Notice pursuant to clause (ii) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 4.2 unless and until at least 365 days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice. No Non-Payment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Debentures, including any past scheduled payments of the principal of, premium, if any, and interest (including Liquidated Damages, if any) on such Debentures to which the holders of the Debentures would have been entitled but for the provisions of this Article IV: (1) in the case of a Payment Default, on the date upon which such Payment Default is cured or waived or ceases to exist, and (2) in the case of a Non-Payment Default, the earlier of (a) the date upon which such default is cured or waived or ceases to exist or (b) 179 days after the Payment Blockage Notice is received by the Trustee if the maturity of such Designated Senior Obligations has not been accelerated and no Payment Default with respect to any Senior Obligations has occurred which has not been cured or waived or ceased to exist (in such event clause (1) above shall instead be applicable), unless this Article IV otherwise prohibits the payment or distribution at the time of such payment or distribution. -28-

Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Obligations shall first be paid in full in cash or other payment satisfactory to the holders of such Senior Obligations, or payment thereof in accordance with its terms provided for in cash or other payment satisfactory to the holders of such Senior Obligations before any payment is made on account of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on the Debentures (except payments made pursuant to Article XIII from monies deposited with the Trustee pursuant thereto prior to commencement of proceedings for such dissolution, winding up, liquidation or reorganization); and upon any such dissolution or winding up or liquidation or reorganization of the Company or bankruptcy, insolvency, receivership or other proceeding, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Debentures or the Trustee would be entitled, except for the provision of this Article IV, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Debentures or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Obligations (pro rata to such holders on the basis of the respective amounts of Senior Obligations held by such holders, or as otherwise required by law or a court order) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Obligations may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Obligations in full, in cash or other payment satisfactory to the holders of such Senior Obligations, after giving effect to any concurrent payment or distribution to or for the holders of Senior Obligations, before any payment or distribution is made to the holders of the Debentures or to the Trustee. For purposes of this Article IV, the words, "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article IV with respect to the Debentures to the payment of all Senior Obligations which may at the time be outstanding; provided that (i) the Senior Obligations are assumed by the new corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Obligations are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 4.2 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XII. -29-

In the event of the acceleration of the Debentures because of an Event of Default, no payment or distribution shall be made to the Trustee or any holder of Debentures in respect of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on the Debentures (including, but not limited to, the redemption price with respect to the Debentures called for redemption in accordance with Section 3.2 or submitted for redemption in accordance with Section 3.5, as the case may be, as provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, until all Senior Obligations have been paid in full in cash or other payment satisfactory to the holders of Senior Obligations or such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the Debentures is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Obligations of the acceleration. In the event that, notwithstanding the foregoing provisions, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of setoff or otherwise), prohibited by the foregoing provisions in this Section 4.2, shall be received by the Trustee or the holders of the Debentures before all Senior Obligations are paid in full in cash or other payment satisfactory to the holders of such Senior Obligations, or provision is made for such payment thereof in accordance with its terms in cash or other payment satisfactory to the holders of such Senior Obligations, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Obligations or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Obligations may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of any Senior Obligations remaining unpaid to the extent necessary to pay all Senior Obligations in full in cash or other payment satisfactory to the holders of such Senior Obligations, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Obligations. Nothing in this Section 4.2 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.6. This Section 4.2 shall be subject to the further provisions of Section 4.5. SECTION 4.3. SUBROGATION OF DEBENTURES. Subject to the payment in full of all Senior Obligations, the rights of the holders of the Debentures shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Obligations pursuant to the provisions of this Article IV (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Debentures are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Obligations to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Obligations until the principal, premium, if any, and interest (including Liquidated Damages, if any) on the Debentures shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Obligations of any cash, property or securities to which the holders of the Debentures or the Trustee would be entitled except for the provisions of this -30-

Article IV, and no payment over pursuant to the provisions of this Article IV, to or for the benefit of the holders of Senior Obligations by holders of the Debentures or the Trustee, shall, as between the Company, its creditors other than holders of Senior Obligations, and the holders of the Debentures, be deemed to be a payment by the Company to or on account of the Senior Obligations; and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Debentures pursuant to the subrogation provisions of this Article IV, which would otherwise have been paid to the holders of Senior Obligations shall be deemed to be a payment by the Company to or for the account of the Debentures. It is understood that the provisions of this Article IV are and are intended solely for the purposes of defining the relative rights of the holders of the Debentures, on the one hand, and the holders of the Senior Obligations, on the other hand. Nothing contained in this Article IV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Obligations, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of, premium, if any, and interest (including Liquidated Damages, if any) on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company other than the holders of the Senior Obligations, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article IV of the holders of Senior Obligations in respect of cash, property or securities of the Company received upon the exercise of any such remedy. SECTION 4.4. AUTHORIZATION TO EFFECT SUBORDINATION. Each holder of a Debenture by the holder's acceptance thereof authorizes and directs the Trustee on the holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article IV and appoints the Trustee to act as the holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in the third paragraph of Section 7.2 hereof at least thirty (30) days before the expiration of the time to file such claim, the holders of any Senior Obligations or their representatives are hereby authorized to file an appropriate claim for and on behalf of the holders of the Debentures. SECTION 4.5. NOTICE TO TRUSTEE. The Company shall give prompt written notice in the form of an Officers' Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company which would prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Debentures pursuant to the provisions of this Article IV. Notwithstanding the provisions of this Article IV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article IV, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office -31-

from the Company (in the form of an Officers' Certificate) or a Representative or a holder or holders of Senior Obligations or from any trustee thereof; and before the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided that if on a date not less than two (2) Business Days prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest (including Liquidated Damages, if any) on any Debenture) the Trustee shall not have received, with respect to such monies, the notice provided for in this Section 4.5, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to apply monies received to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Notwithstanding anything in this Article IV to the contrary, nothing shall prevent any payment by the Trustee to the Debentureholders of monies deposited with it pursuant to Section 13.1, provided such deposit was not in violation of this Article IV, and any such payment shall not be subject to the provisions of Section 4.1 or 4.2. The Trustee shall be entitled to conclusively rely on the delivery to it of a written notice by a Representative or a person representing himself to be a holder of Senior Obligations (or a trustee on behalf of such holder) to establish that such notice has been given by a Representative or a holder of Senior Obligations or a trustee on behalf of any such holder or holders. The Trustee shall not be required to make any payment or distribution to or on behalf of a holder of Senior Obligations pursuant to this Article IV unless it has received reasonably satisfactory evidence as to the amount of Senior Obligations held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article IV. SECTION 4.6. TRUSTEE'S RELATION TO SENIOR OBLIGATIONS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article IV in respect of any Senior Obligations at any time held by it, to the same extent as any other holder of Senior Obligations, and nothing in Section 8.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Obligations, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article IV, and no implied covenants or obligations with respect to the holders of Senior Obligations shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Obligations. SECTION 4.7. NO IMPAIRMENT OF SUBORDINATION. No right of any present or future holder of any Senior Obligations to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the -32-

Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. SECTION 4.8. CERTAIN CONVERSIONS NOT DEEMED PAYMENT. For the purposes of this Article IV only, (1) the issuance and delivery of junior securities upon conversion of Debentures in accordance with Article XV shall not be deemed to constitute a payment or distribution on account of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on Debentures or on account of the purchase or other acquisition of Debentures, and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 15.3), property or securities (other than junior securities) upon conversion of a Debenture shall be deemed to constitute payment on account of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on such Debenture. For the purposes of this Section 4.8, the term "junior securities" means (a) shares of any stock of any class of the Company or (b) securities of the Company that are subordinated in right of payment to all Senior Obligations that may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Debentures are so subordinated as provided in this Article. Nothing contained in this Article IV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as among the Company, its creditors (other than holders of Senior Obligations) and the Debentureholders, the right, which is absolute and unconditional, of the Holder of any Debenture to convert such Debenture in accordance with Article XV. SECTION 4.9. ARTICLE APPLICABLE TO PAYING AGENTS. If at any time any paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article in addition to or in place of the Trustee; provided, however, that the first paragraph of Section 4.5 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent. The Trustee shall not be responsible for the actions or inactions of any other paying agents (including the Company if acting as its own paying agent) and shall have no control of any funds held by such other paying agents. SECTION 4.10. SENIOR OBLIGATIONS ENTITLED TO RELY. The holders of Senior Obligations (including, without limitation, Designated Senior Obligations) shall have the right to rely upon this Article IV, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. SECTION 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Debentureholders shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the -33-

benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Debentureholders, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Obligations and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. ARTICLE V PARTICULAR COVENANTS OF THE COMPANY SECTION 5.1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any (including upon redemption pursuant to Article III), and interest (including Liquidated Damages, if any) on each of the Debentures at the places, at the respective times and in the manner provided herein and in the Debentures. Each installment of interest on the Debentures due on any semi-annual interest payment date may be paid either (i) by check mailed to the address of the person entitled thereto as it appears in the Debenture register; provided that the holder of Debentures with an aggregate principal amount in excess of $2,000,000 shall, at the written election of such holder, be paid by wire transfer in immediately available funds; or (ii) by transfer to an account maintained by such person located in the United States; provided, however, that payments to the Depositary will be made by wire transfer of immediately available funds to the account of Depositary or its nominee. SECTION 5.2. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain an office or agency in The Borough of Manhattan, The City of New York, where the Debentures may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion or redemption and where notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency not designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office or the office or agency of the Trustee in The Borough of Manhattan, The City of New York (which shall initially be located at 450 West 33rd Street, 15th Floor, New York, New York 10001-2697). The Company may also from time to time designate co-registrars and one or more other offices or agencies where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Debenture registrar, Custodian and conversion agent and each of the Corporate Trust Office of the Trustee -34-

and the office or agency of the Trustee in The Borough of Manhattan, The City of New York (which shall initially be located at The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York 100012697), shall be considered as one such office or agency of the Company for each of the aforesaid purposes. So long as the Trustee is the Debenture registrar, the Trustee agrees to mail, or cause to be mailed, the notice set forth in Section 8.10(a) and, if requested by the Company, the notice set forth in the third paragraph of Section 8.11. If co-registrars have been appointed in accordance with this Section, the Trustee shall mail such notices only to the Company and the holders of Debentures it can identify from its records. SECTION 5.3. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 5.4 PROVISIONS AS TO PAYING AGENT. (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.4: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures; (2) that it will give the Trustee written notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of and premium, if any, or interest on the Debentures when the same shall be due and payable; and (3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust. The Company shall, on or before each due date of the principal of, premium, if any, or interest on the Debentures, deposit with the paying agent a sum sufficient to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action; provided that if such deposit is made on the due date, such deposit shall be received by the paying agent by 10:00 a.m. New York City time, on such date. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest (including Liquidated Damages, if any) -35-

on the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures a sum sufficient to pay such principal, premium, if any, or interest (including Liquidated Damages, if any) so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or any other obligor under the Debentures) to make any payment of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on the Debentures when the same shall become due and payable. (c) Anything in this Section 5.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 5.4, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. (d) Anything in this Section 5.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.4 is subject to Sections 13.3 and 13.4. The Trustee shall not be responsible for the actions of any other paying agents (including the Company if acting as its own paying agent) and shall have no control of any funds held by such other paying agents. SECTION 5.5. EXISTENCE. Subject to Article XII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and rights (charter and statutory); provided, however, that the Company shall not be required to preserve any such right if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the holders. SECTION 5.6. MAINTENANCE OF PROPERTIES. The Company will cause all properties used or useful in the conduct of its business or the business of any Significant Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Significant Subsidiary and not disadvantageous in any material respect to the holders. SECTION 5.7. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge, or cause to be paid or discharged, before the same become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Company or any Significant Subsidiary or upon the income, profits or property of the Company or any Significant Subsidiary, -36-

(ii) all claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon the property of the Company or any Significant Subsidiary and (iii) all stamps and other duties, if any, which may be imposed by the United States or any political subdivision thereof or therein in connection with the issuance, transfer, exchange or conversion of any Debentures or with respect to this Indenture; provided, however, that, in the case of clauses (i) and (ii), the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (A) if the failure to do so will not, in the aggregate, have a material adverse impact on the Company, or (B) if the amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 5.8. RULE 144A INFORMATION REQUIREMENT. Within the period prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision), the Company covenants and agrees that it shall, during any period in which it is not subject to Section 13 or 15(d) under the Exchange Act, make available to any holder or beneficial holder of Debentures or any Common Stock issued upon conversion thereof (other than a holder or beneficial holder of Debentures or any Common Stock issued upon conversion thereof that is an Affiliate of the Company) which continue to be Restricted Securities in connection with any sale thereof and any prospective purchaser of Debentures or such Common Stock from such holder or beneficial holder, the information required pursuant to Rule 144A(d)(4) under the Securities Act upon the request of any holder or beneficial holder of the Debentures or such Common Stock and it will take such further action as any holder or beneficial holder of such Debentures or such Common Stock may reasonably request, all to the extent required from time to time to enable such holder or beneficial holder to sell its Debentures or Common Stock without registration under the Securities Act within the limitation of the exemption provided by Rule 144A, as such Rule may be amended from time to time. Upon the request of any holder or any beneficial holder of the Debentures or such Common Stock, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. SECTION 5.9. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest (including Liquidated Damages, if any) on the Debentures as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 5.10. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within one hundred twenty (120) days after the end of each fiscal year of the Company, a certificate signed by either the principal executive officer, principal financial officer or principal accounting -37-

officer of the Company, stating whether or not to the best knowledge of the signer thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which the signer may have knowledge. The Company will deliver to a Responsible Officer of the Trustee, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in this Indenture, or any Event of Default, an Officers' Certificate specifying with particularity such default or Event of Default and further stating what action the Company has taken, is taking or proposes to take with respect thereto. Any notice required to be given under this Section 5.10 shall be delivered to the Trustee at its Corporate Trust Office. ARTICLE VI DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.1. DEBENTUREHOLDERS' LISTS. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each January 31 and July 31 in each year beginning with July 31, 1998, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Debentures as of a date not more than fifteen (15) days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished by the Company to the Trustee so long as the Trustee is acting as the sole Debenture registrar. SECTION 6.2. PRESERVATION AND DISCLOSURE OF LISTS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures contained in the most recent list furnished to it as provided in Section 6.1 or maintained by the Trustee in its capacity as Debenture registrar or co-registrar in respect of the Debentures, if so acting. The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. (b) The rights of Debentureholders to communicate with other holders of Debentures with respect to their rights under this Indenture or under the Debentures, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. -38-

(c) Every Debentureholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Debentures made pursuant to the Trust Indenture Act. SECTION 6.3. REPORTS BY TRUSTEE (a) Within sixty (60) days after August 15 of each year commencing with the year 1998, the Trustee shall transmit to holders of Debentures such reports dated as of August 15 of the year in which such reports are made concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of such report shall, at the time of such transmission to holders of Debentures, be filed by the Trustee with each stock exchange and automated quotation system upon which the Debentures are listed and with the Company. The Company will notify the Trustee in writing within a reasonable time when the Debentures are listed on any stock exchange or automated quotation system. SECTION 6.4. REPORTS BY COMPANY. The Company shall file with the Trustee (and the Commission if at any time after the Indenture becomes qualified under the Trust Indenture Act), and transmit to holders of Debentures, such information, documents and other reports and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act, whether or not the Debentures are governed by such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within fifteen (15) days after the same is so required to be filed with the Commission. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to conclusively rely exclusively on Officers' Certificates). ARTICLE VII REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON AN EVENT OF DEFAULT SECTION 7.1. EVENTS OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: -39-

(a) default in the payment of any installment of interest (including Liquidated Damages, if any) upon any of the Debentures as and when the same shall become due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is permitted under Article IV hereof; or (b) default in the payment of the principal of or premium, if any, on any of the Debentures as and when the same shall become due and payable either at maturity or in connection with any redemption pursuant to Article III, by acceleration or otherwise, whether or not such payment is permitted under Article IV hereof; or (c) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Debentures or in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.1 specifically dealt with) continued for a period of sixty (60) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least twenty-five percent (25%) in aggregate principal amount of the Debentures at the time outstanding determined in accordance with Section 9.4; or (d) the Company or any Significant Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or any Significant Subsidiary or its or such Significant Subsidiary's debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any Significant Subsidiary or any substantial part of the property of the Company or any Significant Subsidiary, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or any Significant Subsidiary, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; provided that a liquidation or winding up of a Significant Subsidiary pursuant to applicable corporate law shall not be deemed an Event of Default hereunder; or (e) an involuntary case or other proceeding shall be commenced against the Company or any Significant Subsidiary seeking liquidation, reorganization or other relief with respect to it or any Significant Subsidiary or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any Significant Subsidiary or any substantial part of the property of the Company or any Significant Subsidiary, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) consecutive days; then, and in each and every such case (other than an Event of Default specified in Section 7.1 (d) or (e) with respect to the Company), unless the principal of all of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Debentures then outstanding hereunder determined in accordance with Section 9.4, by notice in writing to the Company (and to the -40-

Trustee if given by Debentureholders), may declare the principal of and premium, if any, on all the Debentures and the interest accrued thereon (including Liquidated Damages, if any) to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Debentures contained to the contrary notwithstanding. If an Event of Default specified in Section 7. 1(d) or (e) with respect to the Company occurs, the principal of all the Debentures and the interest accrued thereon (including Liquidated Damages, if any) shall be immediately and automatically due and payable without necessity of further action on the part of the Trustee or the Debentureholders. This provision, however, is subject to the conditions that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon (including Liquidated Damages, if any) all Debentures and the principal of and premium, if any, on any and all Debentures which shall have become due otherwise than by acceleration (with interest on overdue installments of interest (including Liquidated Damages, if any) (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Debentures, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 8.6, and if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued interest on (including Liquidated Damages, if any) Debentures which shall have become due by acceleration, shall have been cured or waived pursuant to Section 7.7 -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent thereon. The Company shall notify, in writing, a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Debentures, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Debentures, and the Trustee shall continue as though no such proceeding had been taken. SECTION 7.2. PAYMENTS OF DEBENTURES ON DEFAULT; SUIT THEREFOR. In the event that the Trustee or the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Debentures then outstanding hereunder determined in accordance with Section 9.4 have declared the principal of and premium, if any, on all the Debentures and the interest accrued thereon (including Liquidated Damages, if any) to be due and payable immediately in accordance with Section 7.1, and the Company shall have failed forthwith to pay such amounts, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute -41-

any actions or proceedings at law or in equity for the collection of the sums so due and unpaid (including such further amounts as shall be sufficient to cover the costs and expenses of collection, including compensation to the Trustee, its agents, attorneys, custodians, nominees and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith), and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on the Debentures wherever situated the monies adjudged or decreed to be payable. In the case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest (including Liquidated Damages, if any) owing and unpaid in respect of the Debentures, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements, and advances of the Trustee, its agents, and counsel) and of the Debentureholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 8.6; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official in any such judicial proceeding, is hereby authorized by each of the Debentureholders to make such payments to the Trustee as administrative expenses associated with any such proceeding, and, in the event that the Trustee shall consent to the making of such payments directly to the Debentureholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements of the Trustee and its agents, including counsel fees incurred by it up to the date of such distribution and any other amounts due to the Trustee under Section 8.6 hereof. To the extent that such payment of reasonable compensation, expenses, advances and disbursements of the Trustee, its agents, and counsel, and any other amounts due to the Trustee under Section 8.6 hereof out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Debentures may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall -42-

be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Debentureholder any plan or reorganization, arrangement, adjustment or composition affecting the Debentureholder or the rights of any Debentureholder thereof, or to authorize the Trustee to vote in respect of the claim of any Debentureholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents, attorneys, custodians, nominees and counsel, be for the ratable benefit of the holders of the Debentures. In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings. SECTION 7.3. APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies collected by the Trustee pursuant to this Article VII shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Debentures, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 8.6; SECOND: Subject to the provisions of Article IV, in case the principal of the outstanding Debentures shall not have become due and be unpaid, to the payment of interest on (including Liquidated Damages, if any) the Debentures in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest (including Liquidated Damages, if any) at the rate borne by the Debentures, such payments to be made ratably to the persons entitled thereto; THIRD: Subject to the provisions of Article IV, in case the principal of the outstanding Debentures shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount then owing and unpaid upon the Debentures for principal and premium, if any, and interest (including Liquidated Damages, if any), with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest (including Liquidated Damages, if any) at the rate borne by the Debentures; and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Debentures, then to the payment of such principal and premium, if any, and interest (including Liquidated Damages, if any) without preference or priority of principal and premium, if any, over interest (including Liquidated Damages, if any), -43-

or of interest (including Liquidated Damages, if any) over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Debenture over any other Debenture, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest; and FOURTH: Subject to the provisions of Article IV, to the payment of the remainder, if any, to the Company or any other person lawfully entitled thereto. SECTION 7.4. PROCEEDINGS BY DEBENTUREHOLDER. No holder of any Debenture shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Debentures then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.7; it being understood and intended, and being expressly covenanted by the taker and holder of every Debenture with every other taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures (except as otherwise provided herein). For the protection and enforcement of this Section 7.4, each and every Debentureholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provision of this Indenture and any provision of any Debenture, the right of any holder of any Debenture to receive payment of the principal of and premium, if any (including upon redemption pursuant to Article III), and accrued interest on (including Liquidated Damages, if any) such Debenture, on or after the respective due dates expressed in such Debenture or in the event of redemption, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture or the Debentures to the contrary notwithstanding, the holder of any Debenture, without the consent of either the Trustee or the holder of any other Debenture, in its own behalf and for its own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, its rights of conversion as provided herein. -44-

SECTION 7.5. PROCEEDINGS BY TRUSTEE. In case of an Event of Default the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 7.6. REMEDIES CUMULATIVE AND CONTINUING. Except as provided in Section 2.6, all powers and remedies given by this Article VII to the Trustee or to the Debentureholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein; and, subject to the provisions of Section 7.4, every power and remedy given by this Article VII or by law to the Trustee or to the Debentureholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Debentureholders. SECTION 7.7. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF DEBENTUREHOLDERS. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding determined in accordance with Section 9.4 shall have the right to direct in writing the time, method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided, however, that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction and (c) the Trustee may decline to take any action that would benefit some Debentureholder to the detriment of other Debentureholders. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding determined in accordance with Section 9.4 may on behalf of the holders of all of the Debentures waive any past default or Event of Default hereunder and its consequences except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Debentures which has not been cured pursuant to the provisions of Section 7.1, (ii) a failure by the Company to convert any Debentures into Common Stock, (iii) a default in the payment of redemption price pursuant to Article III or (iv) a default in respect of a covenant or provisions hereof which under Article XI cannot be modified or amended without the consent of the holders of all Debentures then outstanding. Upon any such waiver, the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.7, said default or Event of Default shall for all purposes of the Debentures and this Indenture be -45-

deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 7.8. NOTICE OF DEFAULTS. The Trustee shall, within ninety (90) days after a Responsible Officer of the Trustee has actual knowledge of the occurrence of a default, mail to all Debentureholders, as the names and addresses of such holders appear upon the Debenture register, notice of all defaults actually known to a Responsible Officer, unless such defaults shall have been cured or waived before the giving of such notice; and provided that, except in the case of default in the payment of the principal of, or premium, if any, or interest (including Liquidated Damages, if any) on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Debentureholders. SECTION 7.9. UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 7.9 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any Debentureholder, or group of Debentureholders, holding in the aggregate more than ten percent in principal amount of the Debentures at the time outstanding determined in accordance with Section 9.4, or to any suit instituted by any Debentureholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Debenture on or after the due date expressed in such Debenture or to any suit for the enforcement of the right to convert any Debenture in accordance with the provisions of Article XV. ARTICLE VIII CONCERNING THE TRUSTEE SECTION 8.1. DUTIES AND RESPONSIBILITIES OF TRUSTEE. The Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing of all Events of Default with respect to the Debentures which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. -46-

No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture and the Trust Indenture Act against the Trustee; and (2) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the holders of not less than a majority in principal amount of the Debentures at the time outstanding determined as provided in Section 9.4 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Debentures; (d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section; (e) the Trustee shall not be liable in respect of any payment (as to the correctness of amount, entitlement to receive or any other matters relating to payment) or notice effected by the Company or any paying agent or any records maintained by any co-registrar with respect to the Debentures; (f) if any party fails to deliver a notice relating to an event the fact of which, pursuant to this Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its failure to receive such notice as reason to act as if no such event occurred; -47-

(g) in no event shall the Trustee be liable for the selection of investments or for investment losses incurred thereon or for losses incurred as a result of the liquidation of any such investment prior to its stated maturity or the failure of the party directing such investment to provide timely written investment direction, and the Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of such written investment direction; and (h) in the event that the Trustee is also acting as Custodian, Debenture registrar, paying agent, conversion agent or transfer agent hereunder, the rights and protections afforded to the Trustee pursuant to this Article VIII shall also be afforded to such Custodian, Debenture registrar, paying agent, conversion agent or transfer agent. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not assured to it. SECTION 8.2. RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as otherwise provided in Section 8.1: (a) the Trustee may conclusively rely and shall be fully protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties and the Trustee need not investigate any fact or matter stated in the document; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) before the Trustee acts or refrains from acting, the Trustee may consult with counsel and require an Opinion of Counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Debentureholders pursuant to the provisions of this Indenture, unless such Debentureholders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby; -48-

(e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, may consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, attorney, custodian or nominee appointed by it with due care hereunder; and (g) before the Trustee acts or refrains from acting, it may require an Officers' Certificate and the Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officer's Certificate. SECTION 8.3. NO RESPONSIBILITY FOR RECITALS, ETC. The recitals contained herein and in the Debentures (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. SECTION 8.4. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN DEBENTURES. The Trustee, any paying agent, any conversion agent or Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, paying agent, conversion agent or Debenture registrar. SECTION 8.5. MONIES TO BE HELD IN TRUST. Subject to the provisions of Section 13.4 and Section 4.2, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed from time to time by the Company and the Trustee. SECTION 8.6. COMPENSATION AND EXPENSES OF TRUSTEE. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as mutually agreed to in writing between the Company and the Trustee, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this -49-

Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence, willful misconduct, recklessness or bad faith. The Company also covenants to indemnify the Trustee (or any officer, director, agent or employee of the Trustee) in any capacity under this Indenture and any other documents and transactions entered into in connection therewith and its agents and any authenticating agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee or such officers, directors, employees and agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 8.6 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. The Trustee's right to receive payment of any amounts due under this Section 8.6 shall not be subordinate to any other liability or indebtedness of the Company (even though the Debentures may be so subordinated). The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture and the earlier removal or resignation of the Trustee. When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 7.1(d) or (e) with respect to the Company occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws. SECTION 8.7. OFFICERS' CERTIFICATE AS EVIDENCE. Whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee. SECTION 8.8. CONFLICTING INTERESTS OF TRUSTEE. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 8.9. ELIGIBILITY OF TRUSTEE. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 (or if such Person is a member of a bank holding company system, its bank holding company shall have a combined capital and surplus of at least $50,000,000). If such person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes -50-

of this Section, the combined capital and surplus of such person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 8.10. RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and to the holders of Debentures. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment sixty (60) days after the mailing of such notice of resignation to the Debentureholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six (6) months may, subject to the provisions of Section 7.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with Section 8.8 after written request therefor by the Company or by any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six (6) months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.9 and shall fail to resign after written request therefor by the Company or by any such Debentureholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.9, any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee; provided that if no successor Trustee shall have been appointed and have accepted appointment sixty (60) days after either the Company or the -51-

Debentureholders has removed the Trustee, the Trustee so removed may petition any court of competent jurisdiction for an appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless within ten (10) days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Debentureholder, upon the terms and conditions and otherwise as in Section 8.10(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. SECTION 8.11. ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any and all amounts then due and owing to it hereunder, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Debentures, to secure any amounts then due it hereunder. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.8 and be eligible under the provisions of Section 8.9. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company (or the former trustee, at the written direction and at the expense of the Company) shall mail or cause to be mailed notice of the succession of such trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture register. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. -52-

SECTION 8.12. SUCCESSION BY MERGER, ETC. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including any trust created by this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that in the case of any corporation succeeding to all or substantially all of the corporate trust business of the Trustee such corporation shall be qualified under the provisions of Section 8.8 and eligible under the provisions of Section 8.9. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Debentures either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 8.13. PREFERENTIAL COLLECTION OF CLAIMS. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Debentures), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of the claims against the Company (or any such other obligor). SECTION 8.14. TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE COMPANY. Any application by the Trustee for written instructions from the Company (other than with regard to any action proposed to be taken or omitted to be taken by the Trustee that affects the rights of the holders of the Debentures or holders of Senior Obligations under this Indenture, including, without limitation, under Article IV hereof) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three (3) Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted. ARTICLE IX -53-

CONCERNING THE DEBENTUREHOLDERS SECTION 9.1. ACTION BY DEBENTUREHOLDERS. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Debentureholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Debentures voting in favor thereof at any meeting of Debentureholders duly called and held in accordance with the provisions of Article X, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Debentureholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Debentures, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action. SECTION 9.2. PROOF OF EXECUTION BY DEBENTUREHOLDERS. Subject to the provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any instrument by a Debentureholder or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Debentures shall be proved by the registry of such Debentures or by a certificate of the Debenture registrar. The record of any Debentureholders' meeting shall be proved in the manner provided in Section 10.6. SECTION 9.3. WHO ARE DEEMED ABSOLUTE OWNERS. Subject to Section 2.3, the Company, the Trustee, any paying agent, any conversion agent and any Debenture registrar may deem the person in whose name such Debenture shall be registered upon the Debenture register to be, and may treat it as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture, for conversion of such Debenture and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Debenture. SECTION 9.4. COMPANY-OWNED DEBENTURES DISREGARDED. In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent, waiver or other action under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or any Affiliate of the Company or any -54-

other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Debentures which a Responsible Officer actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not the Company, any other obligor on the Debentures or any Affiliate of the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Debentures, if any, known by the Company to be owned or held by or for the account of any of the above described persons; and, subject to Section 8.1, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Debentures not listed therein are outstanding for the purpose of any such determination. SECTION 9.5. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder of a Debenture which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 9.2, revoke such action so far as concerns such Debenture. Except as aforesaid, any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture and of any Debentures issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor. ARTICLE X DEBENTUREHOLDERS' MEETINGS SECTION 10.1. PURPOSE OF MEETINGS. A meeting of Debentureholders may be called at any time and from time to time pursuant to the provisions of this Article X for any of the following purposes: (1) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Debentureholders pursuant to any of the provisions of Article VII; -55-

(2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VIII; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.2; or (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Debentures under any other provision of this Indenture or under applicable law. SECTION 10.2. CALL OF MEETINGS BY TRUSTEE. The Trustee may, at the expense of the Company, at any time call a meeting of Debentureholders to take any action specified in Section 10.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Debentureholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 9.1, shall be mailed to holders of Debentures at their addresses as they shall appear on the Debenture register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the meeting. Any meeting of Debentureholders shall be valid without notice if the holders of all Debentures then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Debentures outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. SECTION 10.3. CALL OF MEETINGS BY COMPANY OR DEBENTUREHOLDERS. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent (10%) in aggregate principal amount of the Debentures then outstanding, shall have requested the Trustee to call a meeting of Debentureholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such Debentureholders may determine the time and the place for such meeting and call such meeting to take any action authorized in Section 10.1, by mailing notice thereof as provided in Section 10.2. SECTION 10.4. QUALIFICATIONS FOR VOTING. To be entitled to vote at any meeting of Debentureholders a person shall (a) be a holder of one or more Debentures on the record date pertaining to such meeting or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Debentures. The only persons who shall be entitled to be present or to speak at any meeting of Debentureholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. -56-

SECTION 10.5. REGULATIONS. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Debentureholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Debentureholders as provided in Section 10.3, in which case the Company or the Debentureholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Debentures represented at the meeting and entitled to vote at the meeting. Subject to the provisions of Section 9.4, at any meeting each Debentureholder or proxyholder shall be entitled to one vote for each $1,000 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Debentureholders. Any meeting of Debentureholders duly called pursuant to the provisions of Section 10.2 or 10.3 may be adjourned from time to time by the holders of a majority of the aggregate principal amount of Debentures represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 10.6. VOTING. The vote upon any resolution submitted to any meeting of Debentureholders shall be by written ballot on which shall be subscribed the signatures of the holders of Debentures or of their representatives by proxy and the principal amount of the Debentures held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Debentureholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.2. The record shall show the principal amount of the Debentures voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. -57-

Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 10.7. NO DELAY OF RIGHTS BY MEETING. Nothing in this Article X contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Debentureholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Debentureholders under any of the provisions of this Indenture or of the Debentures. ARTICLE XI SUPPLEMENTAL INDENTURES SECTION 11.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee, at the Company's expense, may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (b) to make provision with respect to the conversion rights of the holders of Debentures pursuant to the requirements of Section 15.6 and the redemption obligations of the Company pursuant to the requirements of Section 3.5(e); (b) subject to Article IV, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Debentures, any property or assets; (c) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article XII; (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (e) to provide for the issuance under this Indenture of Debentures in coupon form (including Debentures registrable as to principal only) and to provide for exchangeability of such Debentures with the Debentures issued hereunder in fully registered form and to make all appropriate changes for such purpose; -58-

(f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not materially adversely affect the interests of the holders of the Debentures; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debentures; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the Trust Indenture Act, or under any similar federal statute hereafter enacted. Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any supplemental indenture, the Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 11.2. Notwithstanding any other provision of the Indenture or the Debentures, the Registration Rights Agreement and the obligation to pay Liquidated Damages thereunder may be amended, modified or waived in accordance with the provisions of the Registration Rights Agreement. SECTION 11.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS. With the consent (evidenced as provided in Article IX) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may, at the Company's expense, from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debenture, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Debentureholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the -59-

Debentures, or modify the provisions of this Indenture with respect to the subordination of the Debentures in a manner adverse to the Debentureholders in any material respect, or change the obligation of the Company to redeem any Debenture upon the happening of a Fundamental Change in a manner adverse to the holder of Debentures, or impair the right to convert the Debentures into Common Stock subject to the terms set forth herein including Section 15.6, in each case, without the consent of the holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Debentures then outstanding. Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Debentureholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Debentureholders under this Section 11.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 11.3. EFFECT OF SUPPLEMENTAL INDENTURE. Any supplemental indenture executed pursuant to the provisions of this Article XI shall comply with the Trust Indenture Act, as then in effect; provided that this Section 11.3 shall not require such supplemental indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights; obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 11.4. NOTATION ON DEBENTURES. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article XI may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any -60-

modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 16.11) and delivered in exchange for the Debentures then outstanding, upon surrender of such Debentures then outstanding. SECTION 11.5. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE. Prior to entering into any supplemental indenture, the Trustee may request an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article XI. ARTICLE XII CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 12.1. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS. Subject to the provisions of Section 12.2 and notwithstanding anything to the contrary in this Indenture, the Company shall not consolidate or merge with or into any other Person (whether or not affiliated with the Company), or sale, convey or lease all or substantially all of its assets or properties to any Person unless the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases the assets or properties of the Company substantially as an entirety shall be a corporation organized under the laws of the United States of America, any state thereof or the District of Columbia. Further, upon any such consolidation, merger, sale, conveyance or lease, the due and punctual payment of the principal of and premium, if any, and interest (including Liquidated Damages, if any) on all of the Debentures, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired or leased such property, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.6. SECTION 12.2. SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any such consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debentures and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of Sepracor Inc. any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the -61-

Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Debentures which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Debentures which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale, conveyance or lease, the person named as the "Company" in the first paragraph of this Indenture or any successor which shall thereafter have become such in the manner prescribed in this Article XII may be dissolved, wound up and liquidated at any time thereafter and such person shall be released from its liabilities as obligor and maker of the Debentures and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form (but not in substance) may be made in the Debentures thereafter to be issued as may be appropriate. SECTION 12.3. OPINION OF COUNSEL TO BE GIVEN TRUSTEE. The Trustee shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance or lease and any such assumption complies with the provisions of this Article XII. ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 13.1. DISCHARGE OF INDENTURE. When (a) the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which have been destroyed, lost or stolen and in lieu of or in substitution for which other Debentures shall have been authenticated and delivered) and not theretofore canceled, or (b) all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption of all of the Debentures (other than any Debentures which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Debentures shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, accompanied by a verification report, as to the sufficiency of the deposited amount, from an independent certified accountant or other financial professional satisfactory to the Trustee, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) remaining rights -62-

of registration of transfer, substitution and exchange and conversion of Debentures, (ii) rights hereunder of Debentureholders to receive payments of principal of and premium, if any, and interest on, the Debentures and the other rights, duties and obligations of Debentureholders, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee, (iii) the rights, obligations and immunities of the Trustee hereunder and (iv) the obligations of the Company under Section 8.6), and the Trustee, on written demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.5 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Debentures. SECTION 13.2. DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE. Subject to Section 13.4, all monies deposited with the Trustee pursuant to Section 13.1, provided such deposit was not in violation of Article IV, shall be held in trust for the sole benefit of the Debentureholders and shall not be subject to the subordination provisions of Article IV, and such monies shall be applied by the Trustee to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. SECTION 13.3. PAYING AGENT TO REPAY MONIES HELD. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Debentures (other than the Trustee) shall, upon written request of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. SECTION 13.4. RETURN OF UNCLAIMED MONIES. Subject to the requirements of applicable law, any monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for two years after the date upon which the principal of, premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on written demand and all liability of the Trustee shall thereupon cease with respect to such monies; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect unless an applicable abandoned property law designates another Person. SECTION 13.5. REINSTATEMENT. If the Trustee or the paying agent is unable to apply any money in accordance with Section 13.2 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.1 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 13.2; provided, -63-

however, that if the Company makes any payment of interest on or principal of any Debenture following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Debentures to receive such payment from the money held by the Trustee or paying agent. ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.1. INDENTURE AND DEBENTURES SOLELY CORPORATE OBLIGATIONS. No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures. ARTICLE XV CONVERSION OF DEBENTURES SECTION 15.1. RIGHT TO CONVERT. Subject to and upon compliance with the provisions of this Indenture, including without limitation Article IV, the holder of any Debenture shall have the right, at its option, at any time after ninety (90) days following the latest date of original issuance thereof through the close of business on February 15, 2005 (except that, with respect to any Debenture or portion of a Debenture which shall be called for redemption, such right shall terminate, except as provided in Section 15.2 or Section 3.4, at the close of business on the Business Day next preceding the date fixed for redemption of such Debenture or portion of a Debenture unless the Company shall default in payment due upon redemption thereof) to convert the principal amount of any such Debenture, or any portion of such principal amount which is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Debenture or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Debenture so to be converted in whole or in part in the manner provided, together with any required funds, in Section 15.2. A Debenture in respect of which a holder is exercising its option to require redemption upon a Fundamental Change pursuant to Section 3.5 may be converted only if such holder withdraws its election to exercise in accordance with Section 3.5. A holder of Debentures is not entitled to any rights of a holder of Common Stock until such holder has converted his Debentures to Common Stock, and only -64-

to the extent such Debentures are deemed to have been converted to Common Stock under this Article XV. SECTION 15.2. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to exercise the conversion privilege with respect to any Debenture in certificated form, the holder of any such Debenture to be converted in whole or in part shall surrender such Debenture, duly endorsed, at an office or agency maintained by the Company pursuant to Section 5.2, accompanied by the funds, if any, required by the penultimate paragraph of this Section 15.2, and shall give written notice of conversion in the form provided on the Debentures (or such other notice which is acceptable to the Company) to the office or agency that the holder elects to convert such Debenture or the portion thereof specified in said notice. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 15.7. Each such Debenture surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Debenture, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. In order to exercise the conversion privilege with respect to any interest in a Debenture in global form, the holder must complete the appropriate instruction form for conversion pursuant to the Depository's book-entry conversion program, deliver by book-entry delivery an interest in such Debenture in global form, furnish appropriate endorsements and transfer documents if required by the Company or the Trustee or conversion agent, and pay the funds, if any, required by this Section 15.2 and any transfer taxes if required pursuant to Section 15.7. As promptly as practicable after satisfaction of the requirements for conversion set forth above, subject to compliance with any restrictions on transfer if shares issuable on conversion are to be issued in a name other than that of the Debentureholder (as if such transfer were a transfer of the Debenture or Debentures (or portion thereof) so converted), the Company shall issue and shall deliver to such holder at the office or agency maintained by the Company for such purpose pursuant to Section 5.2, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Debenture or portion thereof in accordance with the provisions of this Article and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 15.3. In case any Debenture of a denomination greater than $1,000 shall be surrendered for partial conversion, and subject to Section 2.3, the Company shall execute and the Trustee shall authenticate and deliver to the holder of the Debenture so surrendered, at the Company's expense, a new Debenture or Debentures in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Debenture. Each conversion shall be deemed to have been effected as to any such Debenture (or portion thereof) on the date on which the requirements set forth above in this Section 15.2 have been satisfied as to such Debenture (or portion thereof), and the person in whose name any -65-

certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such Debenture shall be surrendered. Any Debenture or portion thereof surrendered for conversion during the period from (but excluding) a record date for any interest payment date to (but excluding) such interest payment date shall (unless such Debenture or portion thereof being converted shall have been called for redemption on a redemption date which occurs during such period) be accompanied by payment, in New York Clearing House funds or other funds acceptable to the Company, of an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; provided, however, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Debentures. Except as provided above in this Section 15.2, no payment or other adjustment shall be made for interest accrued on any Debenture converted or for dividends on any shares issued upon the conversion of such Debenture as provided in this Article. Upon the conversion of an interest in a Debenture in global form, the Trustee (or other conversion agent appointed by the Company), or the Custodian at the direction of the Trustee (or other conversion agent appointed by the Company), shall make a notation on such Debenture in global form as to the reduction in the principal amount represented thereby. The Company shall notify the Trustee in writing of any conversions of Debentures effected through any conversion agent other than the Trustee. SECTION 15.3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Debentures (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Debenture or Debentures, the Company shall make an adjustment and payment therefor in cash at the current market price thereof to the holder of Debentures. The current market price of a share of Common Stock shall be the Closing Price on the last Business Day immediately preceding the day on which the Debentures (or specified portions thereof) are deemed to have been converted. SECTION 15.4. CONVERSION PRICE. The conversion price shall be as specified in the form of Debenture (herein called the "Conversion Price") attached as Exhibit A hereto, subject to adjustment as provided in this Article XV. -66-

SECTION 15.5. ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from time to time by the Company as follows: (a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. If any dividend or distribution of the type described in this Section 15.5(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (b) In case the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within forty-five (45) days after the date fixed for determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined below) on the date fixed for determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date fixed for determination of stockholders entitled to receive such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the total number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be successively made whenever any such rights and warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common -67-

Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined in good faith by the Board of Directors. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 15.5(a) applies) or evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in Section 15.5(b), and excluding any dividend or distribution (x) paid exclusively in cash or (y) referred to in Section 15.5(a) (any of the foregoing hereinafter in this Section 15.5(d) called the "Securities")), then, in each such case (unless the Company elects to reserve such Securities for distribution to the Debentureholders upon the conversion of the Debentures so that any such holder converting Debentures will receive upon such conversion, in addition to the shares of Common Stock to which such holder is entitled, the amount and kind of such Securities which such holder would have received if such holder had converted its Debentures into Common Stock immediately prior to the Record Date (as defined in Section 15.5(h) for such distribution of the Securities), the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on such Record Date less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) on the Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be the Current Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; provided, however, that in the event the fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Debentureholder shall have the right to receive upon conversion the amount of Securities such holder would have received had such holder converted each Debenture on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value -68-

of any distribution for purposes of this Section 15.5(d) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the Common Stock. Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 15.5 (and no adjustment to the Conversion Price under this Section 15.5 will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price shall be made under this Section 15.5(d). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 15.5 was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued. Notwithstanding the foregoing, in the event that the Company shall distribute rights or warrants to subscribe for additional shares of the Common Stock (other than rights or warrants described in Section 15.5(b)), pro rata to holders of Common Stock, the Company may, in lieu of making any adjustment pursuant to this Section 15.5(d), make proper provision so that each holder of a Debenture who converts such Debenture (or any portion thereof) after the record date for such distribution shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of such rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a -69-

holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to such rights or warrants; and (ii) if such conversion occurs after the Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which the principal amount of the Debenture so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of, and applicable to such rights or warrants. For purposes of this Section 15.5(d) and Sections 15.5(a) and (b), any dividend or distribution to which this Section 15.5(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Price reduction required by this Section 15.5(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 15.5(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "the date fixed for such determination" within the meaning of Sections 15.5(a) and (b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 15.5(a). (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding (x) any quarterly cash dividend on the Common Stock to the extent the aggregate cash dividend per share of Common Stock in any fiscal quarter does not exceed the greater of (A) the amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock to the extent that such preceding quarterly dividend did not require any adjustment of the Conversion Price pursuant to this Section 15.5(e) (as adjusted to reflect subdivisions or combinations of the Common Stock), and (B) 3.75% of the arithmetic average of the Closing Price (determined as set forth in Section 15.5(h)) during the ten (10) Trading Days (as defined in Section 15.5(h)) immediately prior to the date of declaration of such dividend, and (y) any dividend or distribution in connection with the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary), then, in such case, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction of which the numerator shall be the Current Market Price of the Common Stock on the Record Date less the amount of cash so distributed (and not excluded as provided above) applicable to one share of Common Stock and the denominator shall be such Current Market Price of the Common Stock, such reduction to be effective immediately prior to the opening of business on the day following the Record Date; provided, however, that in the event the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of -70-

the foregoing adjustment, adequate provision shall be made so that each Debentureholder shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Debenture on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If any adjustment is required to be made as set forth in this Section 15.5(e) as a result of a distribution that is a quarterly dividend, such adjustment shall be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant hereto. If an adjustment is required to be made as set forth in this Section 15.5(e) above as a result of a distribution that is not a quarterly dividend, such adjustment shall be based upon the full amount of the distribution. (f) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock (other than tender or exchange offers for less than fifteen percent (15%) of the outstanding shares of Common Stock of the Company) shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that as of the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. (g) In case of a tender or exchange offer made by a person other than the Company or any Subsidiary for an amount which increases the offeror's ownership of Common Stock to more than twenty-five percent (25%) of the Common Stock outstanding and shall -71-

involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) at the last time (the "Offer Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, and in which, as of the Offer Expiration Time the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Offer Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Offer Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Offer Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Accepted Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Accepted Purchased Shares) on the Offer Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Offer Expiration Time. In the event that such person is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 15.5(g) shall not be made if, as of the Offer Expiration Time, the offering documents with respect to such offer disclose a plan or intention to cause the Company to engage in any transaction described in Article XII; provided, however, that if such transaction is not consummated within twelve (12) months of the Offer Expiration time, the adjustment described in this Section 15.5(g) shall be made. (h) For purposes of this Section 15.5, the following terms shall have the meaning indicated: (1) "Closing Price" with respect to any securities on any day shall mean the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner -72-

as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof, whose determination shall be conclusive. (2) "Current Market Price" shall mean the average of the daily Closing Prices per share of Common Stock for the ten (10) consecutive Trading Days immediately prior to the date in question; provided, however, that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution or Fundamental Change requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs during such ten (10) consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance, distribution or Fundamental Change requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance, distribution or Fundamental Change requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof in a manner consistent with any determination of such value for purposes of Section 15.5(d), (f) or (g), whose determination shall be conclusive and described in a resolution of the Board of Directors or such duly authorized committee thereof, as the case may be) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 15.5(f) or (g), the Current Market Price of the Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the "ex" date for any event (other than the tender or exchange offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the Expiration Time or Offer Expiration Time, as the case may be, for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for. each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (1) when used with respect to any issuance or distribution, -73-

means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Offer Expiration Time of such offer. (3) "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction. (4) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (5) "Trading Day" shall mean (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or another national security exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made on thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (i) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 15.5 (a), (b), (c), (d), (e), (f) or (g) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to holders of record of the Debentures a notice of the reduction at least fifteen (15) days prior to the date the reduced Conversion Price takes effect, -74-

and such notice shall state the reduced Conversion Price and the period during which it will be in effect. (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such price; provided, however, that any adjustments which by reason of this Section 15.5(j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article XV shall be made by the Company and shall be made to the nearest cent or to the nearest one-hundredth (1/100) of a share, as the case may be. No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. To the extent the Debentures become convertible into cash, assets, property or securities (other than capital stock of the Company), no adjustment need be made thereafter as to the cash, assets, property or such securities. Interest will not accrue on the cash. (k) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Debenture at his last address appearing on the Debenture register provided for in Section 2.5 of this Indenture within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (l) In any case in which this Section 15.5 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Debenture converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.3. (m) For purposes of this Section 15.5, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. SECTION 15.6. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 15.5(c) applies), (ii) any consolidation, merger or combination of the Company with another corporation as a result -75-

of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that such Debenture shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Debentures (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to convert all such Debentures) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("nonelecting share")), then for the purposes of this Section 15.6 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Debentures, at its address appearing on the Debenture register provided for in Section 2.5 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. If this Section 15.6 applies to any event or occurrence, Section 15.5 shall not apply. SECTION 15.7. TAXES ON SHARES ISSUED. The issue of stock certificates on conversions of Debentures shall be made without charge to the converting Debentureholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of any Debenture converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the -76-

issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 15.8. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock to provide for the conversion of the Debentures from time to time as such Debentures are presented for conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Debentures, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock which may be issued upon conversion of Debentures will upon issue be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Debentures hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that if at any time the Common Stock shall be listed on the Nasdaq National Market or any other national securities exchange or automated quotation system the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion of the Debentures; provided, however, that if rules of such exchange or automated quotation system permit the Company to defer the listing of such Common Stock until the first conversion of the Debentures into Common Stock in accordance with the provisions of this Indenture, the Company covenants to list such Common Stock issuable upon conversion of the Debentures in accordance with the requirements of such exchange or automated quotation system at such time. SECTION 15.9. RESPONSIBILITY OF TRUSTEE. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Debentures to determine the Conversion Price or whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered -77-

upon the conversion of any Debenture; and the Trustee and any other conversion agent make no representations with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Debenture for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 15.6 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Debentureholders upon the conversion of their Debentures after any event referred to in such Section 15.6 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 8.1, may accept as conclusive evidence of the correctness of any such provisions, and shall be fully protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. SECTION 15.10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Price pursuant to Section 15.5; or (b) the Company shall authorize the granting to the holders of all or substantially all of its Common Stock of rights or warrants to subscribe for or purchase any share of any class of its capital stock or any other rights or warrants; or (c) of any reclassification or reorganization of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company or any Significant Subsidiary; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company or any Significant Subsidiary; the Company shall cause to be filed with the Trustee and to be mailed to each holder of Debentures at his address appearing on the Debenture register provided for in Section 2.5 of this Indenture, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is -78-

expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. ARTICLE XVI MISCELLANEOUS PROVISIONS SECTION 16.1. PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the covenants, stipulations, promises and agreements by the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. SECTION 16.2. OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 16.3. ADDRESSES FOR NOTICES, ETC. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debentures on the Company shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Sepracor Inc., 111 Locke Drive, Marlborough, MA 01752, Attention: Chief Financial Officer. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office, which office is, at the date as of which this Indenture is dated, located at The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York 10001-2697, Attention: Global Trust Services. The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Debentureholder shall be mailed to him by first class mail, postage prepaid, at his address as it appears on the Debenture register and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Debentureholder or any defect in it shall not affect its sufficiency with respect to other Debentureholders. If a notice or -79-

communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 16.4. GOVERNING LAW. This Indenture and each Debenture shall be deemed to be a contract made under the laws of The Commonwealth of Massachusetts, and for all purposes shall be construed in accordance with the laws of The Commonwealth of Massachusetts. SECTION 16.5. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based: (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 16.6. LEGAL HOLIDAYS. In any case where the date of maturity of interest on or principal of the Debentures or the date fixed for redemption of any Debenture will not be a Business Day, then payment of such interest on or principal of the Debentures need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period from and after such date. SECTION 16.7. TRUST INDENTURE ACT. This Indenture is hereby made subject to, and shall be governed by, the provisions of the Trust Indenture Act required to be part of and to govern indentures qualified under the Trust Indenture Act; provided, however, that, unless otherwise required by law, notwithstanding the foregoing, this Indenture and the Debentures issued hereunder shall not be subject to the provisions of subsections (a)(1), (a)(2), and (a)(3) of Section 314 of the Trust Indenture Act as now in effect or as hereafter amended or modified; provided, further, that this Section 16.7 shall not require this Indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in an indenture qualified under the Trust Indenture Act, such required provision shall control. -80-

SECTION 16.8. NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Debentures, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its subsidiaries is located. SECTION 16.9. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Debentures, expressed or implied, shall give to any Person, other than the parties hereto, any paying agent, any authenticating agent, any Debenture registrar and their successors hereunder, the holders of Debentures and the holders of Senior Obligations, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 16.10. TABLE OF CONTENTS, HEADINGS, ETC. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 16.11. AUTHENTICATING AGENT. The Trustee may appoint an authenticating agent which shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Debentures in connection with the original issuance thereof and transfers and exchanges of Debentures hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3 and 3.5, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Debentures. For all purposes of this Indenture, the authentication and delivery of Debentures by the authenticating agent shall be deemed to be authentication and delivery of such Debentures "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Debentures for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a person eligible to serve as trustee hereunder pursuant to Section 8.9. Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section 16.11, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall either promptly appoint a successor authenticating agent or itself assume the duties and obligations of the former authenticating agent under this Indenture, and upon such -81-

appointment of a successor authenticating agent, if made, shall give written notice of such appointment of a successor authenticating agent to the Company and shall mail notice of such appointment of a successor authenticating agent to all holders of Debentures as the names and addresses of such holders appear on the Debenture register. The Trustee agrees to pay to the authenticating agent from time to time reasonable compensation for its services (to the extent pre-approved by the Company in writing), and the Trustee shall be entitled to be reimbursed for such pre-approved payments, subject to Section 8.6. The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section 16.11 shall be applicable to any authenticating agent. SECTION 16.12. EXECUTION IN COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this indenture to be duly executed. SEPRACOR INC.
By: /s/Timothy J. Barberich -----------------------------------------Name: Timothy J. Barberich Title: President and Chief Executive Officer

THE CHASE MANHATTAN BANK, as Trustee
By: /s/Kathleen Perry -----------------------------------------Name: Kathleen Perry Title: Second Vice President

-82-

EXHIBIT A [For Global Debenture only: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY," WHICH TERM INCLUDES ANY SUCCESSOR DEPOSITARY FOR THE CERTIFICATES) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. (OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR"); (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR OTHERWISE TRANSFER THE DEBENTURE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH DEBENTURE EXCEPT (A) TO SEPRACOR INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE DEBENTURE EVIDENCED HEREBY (THE FORM OF WHICH

LETTER CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS APPLICABLE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(F) ABOVE), IT WILL FURNISH THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (4) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE DEBENTURE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE DEBENTURE EVIDENCED HEREBY PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE DEBENTURE EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE). IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS SUCH TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THE DEBENTURE EVIDENCED HEREBY PURSUANT TO CLAUSE 2(F) ABOVE OR UPON ANY TRANSFER OF THE DEBENTURES EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-2

SEPRACOR INC. 6 1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2005 No: _______ CUSIP: ________ SEPRACOR INC., a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the "Company"), which term includes any successor corporation under the Indenture referred to on the reverse hereof, for value received hereby promises to pay to ___________________________________ or registered assigns, the principal sum of ________________ ($____________) on February 15, 2005, at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, or, at the option of the holder of this Debenture, at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on February 15 and August 15, of each year, commencing August 15, 1998, on said principal sum at said office or agency, in like coin or currency, at the rate per annum of 6 1/4% from February 10, 1998 and thereafter to maturity from the February 15 or August 15, as the case may be, next preceding the date of this Debenture to which interest has been paid or duly provided for, unless the date hereof is a date to which interest has been paid or duly provided for, in which case from the date of this Debenture, or unless no interest has been paid or duly provided for on the Debentures, in which case from February 10, 1998, until payment of said principal sum has been made or duly provided for. Notwithstanding the foregoing, if the date hereof is after any January 31 or July 31, as the case may be, and before the following February 15 or August 15, this Debenture shall bear interest from such February 15 or August 15; provided, however, that if the Company shall default in the payment of interest due on such February 15 or August 15, then this Debenture shall bear interest from the next preceding February 15 or August 15, to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on such Debenture, from February 10, 1998. The interest payable on the Debenture pursuant to the Indenture on any February 15 or August 15 will be paid to the person entitled thereto as it appears in the Debenture register at the close of business on the record date, which shall be the January 31 or July 31 (whether or not a Business Day) next preceding such February 15 or August 15, as provided in the Indenture; provided that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Interest may, at the option of the Company, be paid either (i) by check mailed to the registered address of such person (provided that the holder of Debentures with an aggregate principal amount in excess of $2,000,000 shall, at the written election of such holder, be paid by wire transfer in immediately available funds) or (ii) by transfer to an account maintained by such person located in the United States. A-3

Reference is made to the further provisions of this Debenture set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on the Debentures to the prior payment in full of all Senior Obligations, as defined in the Indenture, and provisions giving the holder of this Debenture the right to convert this Debenture into Common Stock of the Company on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of said State. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture. IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed under its corporate seal to be affixed or imported hereon. SEPRACOR INC. BY: ________________________________________ Name: Title: Attest: ______________________________________ Name: Title: Dated:___________________________ A-4

TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures described in the within-named Indenture. THE CHASE MANHATTAN BANK, as Trustee By: ___________________________________ Authorized Signatory By: ___________________________________ As Authenticating Agent (if different from Trustee) A-5

[FORM OF REVERSE OF DEBENTURE] SEPRACOR INC. 6 1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2005 This Debenture is one of a duly authorized issue of Debentures of the Company, designated as its 6 1/4% Convertible Subordinated Debentures due 2005 (herein called the "Debentures"), limited to the aggregate principal amount of $____________ all issued or to be issued under and pursuant to an Indenture dated as of February 10, 1998 (herein called the "Indenture"), between the Company and The Chase Manhattan Bank as trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of, premium, if any, and accrued interest (including Liquidated Damages, if any) on all Debentures may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture: The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debenture, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Debentureholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Debenture, or modify the provisions of the Indenture with respect to the subordination of the Debentures in a manner adverse to the Debentureholders in any material respect, or change the obligation of the Company to make redemption of any Debenture upon the happening of a Fundamental Change in a manner adverse to the holder of the Debentures, or impair the right to convert the Debentures into Common Stock subject to the terms set forth in the Indenture, including Section 15.6 thereof, without the consent of the holder of each Debenture so affected or (ii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent A-6

to any such supplemental indenture, without the consent of the holders of all Debentures then outstanding. It is also provided in the Indenture that, prior to any declaration accelerating the maturity of the Debentures, the holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive any past default or Event of Default under the Indenture and its consequences except a default in the payment of interest (including Liquidated Damages, if any) or any premium on or the principal of any of the Debentures, a default in the payment of redemption price pursuant to Article III or a failure by the Company to convert any Debentures into Common Stock of the Company. Any such consent or waiver by the holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debenture and any Debentures which may be issued in exchange or substitute hereof, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. The indebtedness evidenced by the Debentures is, to the extent and in the manner provided in the Indenture, expressly subordinate and subject in right of payment to the prior payment in full of all Senior Obligations of the Company, as defined in the Indenture, whether outstanding at the date of the Indenture or thereafter incurred, and this Debenture is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Debenture, by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his attorney-in-fact for such purpose. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest (including Liquidated Damages, if any) on this Debenture at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Debentures shall be computed on the basis of a year of twelve 30-day months. The Debentures are issuable in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or exchange of Debentures, Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations. A-7

The Debentures will not be redeemable at the option of the Company prior to February 18, 2001. At any time on or after February 18, 2001, and prior to maturity, the Debentures may be redeemed at the option of the Company as a whole, or from time to time in part, upon mailing a notice of such redemption not less than thirty (30) days before the date fixed for redemption to the holders of Debentures at their last registered addresses, all as provided in the Indenture, at the following optional redemption prices (expressed as percentages of the principal amount), together in each case with accrued interest (including Liquidated Damages, if any) to, but excluding, the date fixed for redemption: If redeemed during the period beginning February 18, 2001 and ending on February 14, 2002, at a redemption price of 103.571%, and if redeemed during the 12-month period beginning February 15:
YEAR 2002 2003 2004 REDEMPTION PRICE 102.679% 101.786% 100.893%

and 100% at February 15, 2005; provided that if the date fixed for redemption is on February 15 or August 15, then the interest payable on such date shall be paid to the holder of record on the next preceding January 31 or July 31, respectively. The Debentures are not subject to redemption through the operation of any sinking fund. If a Fundamental Change (as defined in the Indenture) occurs at any time prior to February 15, 2005, the Debentures will be redeemable on the 30th day after notice thereof at the option of the holder at a redemption price equal to 100% of the principal amount of the Debenture (or portion thereof) redeemed, together with accrued interest to the date of redemption; provided that if such Repurchase Date is February 15 or August 15, then the interest payable on such date shall be paid to the holder of record of the Debenture on the next preceding July 31 or August 31, respectively. The Company shall mail to all holders of record of the Debentures a notice of the occurrence of a Fundamental Change and of the redemption right arising as a result thereof on or before the 10th day after the occurrence of such Fundamental Change. For a Debenture to be so repaid at the option of the holder, the Company must receive at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, such Debenture with the form entitled "Option to Elect Repayment Upon a Fundamental Change" on the reverse thereof duly completed, together with such Debentures duly A-8

endorsed for transfer, on or before the 30th day after the date of such notice (or if such 30th day is not a Business Day, the next succeeding Business Day). Subject to the provisions of the Indenture, the holder hereof has the right, at its option, at any time after ninety (90) days following the latest date of original issuance thereof through the close of business on February 15, 2005, or, as to all or any portion hereof called for redemption, prior to the close of business on the Business Day immediately preceding the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal which is $1,000 or an integral multiple thereof into that number of shares of the Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Debenture or portion thereof to be converted by the Conversion Price of $47.369 or such Conversion Price as adjusted from time to time as provided in the Indenture, upon surrender of this Debenture, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Debenture, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. No adjustment in respect of interest or dividends will be made upon any conversion; provided, however, that if this Debenture shall be surrendered for conversion during the period from (but excluding) a record date for any interest payment date to (but excluding) such interest payment date, this Debenture (unless it or the portion being converted shall have been called for redemption during such period) must be accompanied by an amount, in New York Clearing House funds or other funds acceptable to the Company, equal to the interest payable on such interest payment date on the principal amount being converted. No fractional shares will be issued upon any conversion, but an adjustment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Debenture or Debentures for conversion. Any Debentures called for redemption, unless surrendered for conversion on or before the close of business on the date fixed for redemption, may be deemed to be purchased from the holder of such Debentures at an amount equal to the applicable redemption price, together with accrued interest (including Liquidated Damages, if any) to (but excluding) the date fixed for redemption, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Debentures from the holders thereof and convert them into Common Stock of the Company and to make payment for such Debentures as aforesaid to the Trustee in trust for such holders. Upon due presentment for registration of transfer of this Debenture at the office or agency of the Company maintained for that purpose in accordance with the terms of the A-9

Indenture, or at the option of the holder of this Debenture, at the Corporate Trust Office, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Debenture registrar may deem and treat the registered holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Debenture registrar), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor any other conversion agent nor any Debenture registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Debenture. No recourse for the payment of the principal of or any premium or interest on this Debenture, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Terms used in this Debenture and defined in the Indenture are used herein as therein defined. A-10

ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Debenture, shall be construed as though they were written out in full according to applicable laws or regulations:
-------------------------------------------------------------------------------TEN COM- as tenants in common UNIF GIFT MIN ACT -Custodian -------------------(Cust) -------------------(Minor) -------------------------------------------------------------------------------TEN ENT- as tenants by the entireties -------------------------------------------------------------------------------JT TEN- as joint tenants with right of under Uniform Gifts to Minors Act survivorship and not as tenants in common -------------------(State) --------------------------------------------------------------------------------

ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST. A-11

CONVERSION NOTICE To: SEPRACOR INC. The undersigned registered owner of this Debenture hereby irrevocably exercises the option to convert this Debenture, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of Sepracor Inc. in accordance with the terms of the Indenture referred to in this Debenture, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Debentures representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Debenture not converted are to be issued in the name of a person other than the undersigned, the undersigned will check the appropriate box below and pay all transfer taxes payable with respect thereto. Any amount required to be paid to the undersigned on account of interest accompanies this Debenture.
Dated:____________________________ ________________________________________ ________________________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if shares of Common Stock are to be issued, or Debentures to be delivered, other than to and in the name of the registered holder.

________________________________________ Signature Guarantee

A-12

Exhibit 10.35 EXECUTION COPY REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of February 5, 1998 by and among SEPRACOR INC., a Delaware corporation (the "Company") and MORGAN STANLEY & CO. INCORPORATED, LEHMAN BROTHERS INC., SMITH BARNEY INC. and VECTOR SECURITIES INTERNATIONAL, INC. (the "Initial Purchasers") pursuant to the Purchase Agreement, dated as of February 5, 1998 (the "Purchase Agreement"), between the Company and the Initial Purchasers. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The Company agrees with the Initial Purchasers, (i) for their benefit as Initial Purchasers and (ii) for the benefit of the holders from time to time of the Debentures (including the Initial Purchasers) and the holders from time to time of the Common Stock issued upon conversion of the Debentures (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following terms have the following meanings: AFFILIATE: "Affiliate" means, with respect to any specified person, (i) any other person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such specified person or (ii) any officer or director of such other person. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") of a person means the possession, direct or indirect, of the power (whether or not exercised) to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. BUSINESS DAY: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. COMMON STOCK: The shares of common stock, par value $.10 per share, of the Company and any other shares of stock as may constitute "Common Stock" for purposes of the Indenture, in each case, as issuable or issued upon conversion of the Debentures.

DAMAGES ACCRUAL PERIOD: See Section 2(f) hereof. DAMAGES PAYMENT DATE: Each of the semi-annual interest payment dates provided in the Indenture. DEBENTURES: 6 1/4_% Convertible Subordinated Debentures due 2005 of the Company being issued and sold pursuant to the Purchase Agreement and the Indenture. DEFERRAL PERIOD: See Section 2(e) hereof. EFFECTIVENESS PERIOD: The period commencing with the date hereof and ending on the date that all Registrable Securities (other than Registerable Securities held by Affiliates of the Company) have ceased to be Registrable Securities. EVENT: See Section 2(f) hereof. EVENT DATE: See Section 2(f) hereof. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. FILING DATE: See Section 2(a) hereof. HOLDER: See the second paragraph of this Agreement. INDENTURE: The Indenture, dated as of February 10, 1998, between the Company and The Chase Manhattan Bank, as Trustee, pursuant to which the Debentures are being issued, as amended or supplemented from time to time in accordance with the terms thereof. INITIAL PURCHASERS: Morgan Stanley & Co. Incorporated, Lehman Brothers, Inc., Salomon Smith Barney and Vector Securities International, Inc. INITIAL SHELF REGISTRATION: See Section 2(a) hereof. LIQUIDATED DAMAGES: See Section 2(f) hereof. LOSSES: See Section 6 hereof. MANAGING UNDERWRITERS: The investment banking firm or firms that shall manage or co-manage an Underwritten Offering. NOTICE AND QUESTIONNAIRE: A WRITTEN NOTICE DELIVERED TO THE COMPANY CONTAINING SUBSTANTIALLY THE INFORMATION CALLED FOR BY THE NOTICE AND QUESTIONNAIRE ATTACHED AS APPENDIX B TO THE OFFERING MEMORANDUM OF THE COMPANY RELATING TO THE DEBENTURES. -2-

NOTICE HOLDER: See Section 2(d) hereof. PROSPECTUS: The prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by an amendment or prospectus supplement, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. PURCHASE AGREEMENT: See the first paragraph of this Agreement. RECORD HOLDER: (i) With respect to any Damages Payment Date relating to any Debenture as to which any such Liquidated Damages have accrued, the registered holder of such Debenture on the record date with respect to the interest payment date under the Indenture on which such Damages Payment Date shall occur and (ii) with respect to any Damages Payment Date relating to any Common Stock as to which any such Liquidated Damages have accrued, the registered holder of such Common Stock fifteen (15) days prior to the next succeeding Damages Payment Date. REGISTRABLE SECURITIES: (A) The Common Stock of the Company into which the Debentures are convertible or converted, whether or not such Debentures have been converted, and any Common Stock issued with respect thereto upon any stock dividend, split or similar event until, in the case of any such Common Stock, (i) it is effectively registered under the Securities Act and resold in accordance with the Registration Statement covering it, (ii) it is saleable by the holder thereof pursuant to Rule 144(k) (or any successor provision) or (iii) it is sold to the public pursuant to Rule 144, and, as a result of the event or circumstance described in any of the foregoing clauses (i) through (iii), the legends with respect to transfer restrictions required under the Indenture (other than any such legends required solely as the consequence of the fact that such Common Stock (or the Debentures, upon the conversion of which, such Common Stock was issued or is issuable) is owned by, or was previously owned by, the Company or an Affiliate of the Company) are removed or removable in accordance with the terms of the Indenture; (B) the Debentures, until, in the case of such Debenture, (i) it is converted into shares of Common Stock in accordance with the terms of the Indenture, (ii) it is effectively registered under the Securities Act and resold in accordance with the Registration Statement covering it, (iii) it is saleable by the holder thereof pursuant to Rule 144(k) or (iv) it is sold to the public pursuant to Rule 144, and, as a result of the event or circumstance described in any of the foregoing clauses (ii) through (iv), the legends with respect to transfer restrictions required under the Indenture (other than any such legends required solely as the consequence of the fact that such Debenture is owned by, or was previously owned by, the Company or an Affiliate of the Company) are removed or removable in accordance with the terms of the Indenture. -3-

REGISTRATION STATEMENT: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. RULE 144: Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. RULE 144A: Rule 144A under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. SECURITIES ACT: The Securities Act of 1933, as amended, and the rules and regulations promulgated by the SEC thereunder. SHELF REGISTRATION: See Section 2(a) hereof. SPECIAL COUNSEL: Ropes & Gray, or such successor counsel as shall be specified by the Holders of a majority of the Registrable Securities, the fees and expenses of which will be paid by the Company pursuant to Section 5 hereof. SUBSEQUENT SHELF REGISTRATION: See Section 2(b) hereof. TIA: The Trust Indenture Act of 1939, as amended. TRUSTEE: The Trustee under the Indenture. UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. SHELF REGISTRATION. (a) SHELF REGISTRATION. The Company shall prepare and file with the SEC, as soon as practicable but in any event on or prior to the date ninety (90) days following the Closing Date of the original issuance of the Debentures (without effect to the exercise of any over-allotment option) (the "Filing Date"), a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 of the Securities Act (a "Shelf Registration") registering the resale from time to time by Holders thereof of all of the Registrable Securities (the "Initial Shelf Registration"). The Initial Shelf Registration shall be on Form S-1, Form S-3 or another appropriate form permitting registration of such Registrable Securities for resale by the Holders in the manner or manners designated by them. If the Holders of Registrable Securities so elect, an offering of Registrable -4-

Securities pursuant to the Shelf Registration may be effected in the form of an Underwritten Offering; provided, however, that the Company shall not be obligated to arrange for more than one (1) such Underwritten Offering. In any Underwritten Offering, the Holders of a majority of the Registrable Securities requested to be sold shall select the Managing Underwriter (subject to the consent of the Company, which consent shall not be unreasonably withheld) of such Underwritten Offering. The Company shall use reasonable best efforts to cause the Initial Shelf Registration to be declared effective under the Securities Act as promptly as practicable and to keep the Initial Shelf Registration continuously effective under the Securities Act until the earlier of the expiration of the Effectiveness Period or the date a Subsequent Shelf Registration, as defined below, covering all of the Registrable Securities has been declared effective under the Securities Act. (b) If the Initial Shelf Registration or any Subsequent Shelf Registration, as defined below, ceases to be effective for any reason as a result of the issuance of a stop order by the SEC at any time during the Effectiveness Period, the Company shall use its reasonable best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within thirty (30) days of such cessation of effectiveness amend the Shelf Registration in a manner reasonably expected to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional Shelf Registration covering all of the Registrable Securities (a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed, the Company shall use its reasonable best efforts to cause the Subsequent Shelf Registration to be declared effective as soon as practicable after such filing and to keep such Registration Statement continuously effective until the end of the Effectiveness Period. (c) The Company shall supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the Initial Purchasers or by the Trustee on behalf of a majority of the Holders of the Registrable Securities covered by such Registration Statement or by any Managing Underwriter of such Registrable Securities in the event of an Underwritten Offering of the Registrable Securities. (d) Each Holder of Registrable Securities agrees that if such Holder wishes to sell its Registrable Securities pursuant to a Shelf Registration and related Prospectus, it will do so only in accordance with this Section 2(d). Each Holder of Registrable Securities agrees to deliver a Notice and Questionnaire to the Company at least three (3) Business Days prior to any intended distribution of Registrable Securities under the Shelf Registration. As soon as practicable after the date the Notice and Questionnaire is provided to the Company, and in any event within two (2) Business Days after such date (or, if later, the filing of the Initial Shelf Registration), the Company shall (i) if necessary, prepare and file with the SEC a post-effective amendment to the Shelf Registration or a supplement to the related Prospectus or a supplement or amendment to any document -5-

incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide each Holder who has delivered a completed Notice and Questionnaire in accordance with this Section 2(d) (each, a "Notice Holder") copies of any documents filed pursuant to Section 2(d)(i); and (iii) inform each Notice Holder that the Company has complied with its obligation in Section 2(d)(i) (or that, if the Company has filed a post-effective amendment to the Shelf Registration which has not yet been declared effective, the Company will notify the Notice Holder to that effect, will use its reasonable best efforts to secure the effectiveness of such post-effective amendment and will immediately notify the Notice Holder when the amendment has become effective). Each Notice Holder shall furnish such other information with respect to such Holder and the intended method of distribution as required to amend the Shelf Registration or supplement the related Prospectus. (e) In the event, following the initial declaration of effectiveness of the Initial Shelf Registration filed hereunder, (i) of the happening of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi) hereof or (ii) that, in the judgment of the Company, it is advisable to suspend use of the Prospectus for a discrete period of time due to pending material corporate developments or similar material events that have not yet been publicly disclosed and as to which the Company believes public disclosure will be prejudicial to the Company, the Company shall deliver a certificate in writing, signed by an authorized executive officer of the Company, to the Notice Holders (including any Notice Holder providing a Notice and Questionnaire subsequent to the delivery by the Company of the certificate referenced above), the Special Counsel and the Managing Underwriters, if any, to the effect of the foregoing and, upon receipt of such certificate, each such Notice Holder shall not sell any Registrable Securities and shall not use the Prospectus until such Notice Holder's receipt of copies of the supplemented or amended Prospectus provided for in Section 2(d)(i) hereof, or until it is advised in writing by the Company that the Prospectus may be used and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus. The Company will use its reasonable best efforts to ensure that the use of the Prospectus may be resumed, and sales of Registrable Securities can commence or resume, as soon as practicable and, in the case of a pending development or event referred to in Section 2(e)(ii) hereof, as soon as the earlier of (x) public disclosure of such pending material corporate development or similar material event or (y) in the judgment of the Company, public disclosure of such material corporate development or similar material event would not be prejudicial to the Company. Notwithstanding any other provision in this Agreement, the Company shall not under any circumstances be entitled to exercise its rights under this Section 2(e) to defer sales of -6-

Registrable Securities except as follows: the Company may defer sales of Registrable Securities in accordance with this Section 2(e) for a period not to exceed an aggregate of sixty (60) days in any three hundred sixty five (365) day period, and the period in which sales of Registrable Securities are suspended shall not exceed fifteen (15) days unless the Company shall deliver to such Notice Holders one or more subsequent notices to the effect set forth above, each of which shall have the effect of extending the period during which sales of Registrable Securities are deferred by up to an additional fifteen (15) days, or such shorter period of time as is specified in such subsequent notice (each such period of deferral, as may be extended, a "Deferral Period"). (f) The parties hereto agree that the Holders of Registrable Securities will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if (i) the Initial Shelf Registration had not been filed on or prior to the Filing Date, (ii) prior to the end of the Effectiveness Period, the SEC shall have issued a stop order suspending the effectiveness of the Shelf Registration or proceedings have been initiated with respect to the Shelf Registration under Section 8(d) or 8(e) of the Securities Act, or (iii) the aggregate number of days in the Deferral Periods in any three hundred sixty five (365) day period exceeds the period permitted pursuant to Section 2(e) hereof (each of the events of a type described in any of the foregoing clauses (i) through (iii) are individually referred to herein as an "Event," and the Filing Date in the case of clause (i), the date on which the effectiveness of the Shelf Registration has been suspended or proceedings with respect to the Shelf Registration under Section 8(d) or 8(e) of the Securities Act have been commenced in the case of clause (ii), and the date on which the duration of the Deferral Periods in any three hundred sixty five (365) day period exceeds the period permitted by Section 2(e) hereof in the case of clause (iii) being referred to herein as an "Event Date"). Events shall be deemed to continue until the date of the termination of such Event, which shall be the following dates with respect to the respective types of Events: the date the Initial Registration Statement is filed in the case of an Event of the type described in clause (i), the date that all stop orders suspending effectiveness of the Shelf Registration have been removed and the proceedings initiated with respect to the Shelf Registration under Section 8(d) or 8(e) of the Securities Act have terminated, as the case may be, in the case of Events of the types described in clause (ii), and termination of the Deferral Period which caused the aggregate number of days in the Deferral Periods in any three hundred sixty five (365) day period to exceed the number permitted by Section 2(e) to be exceeded in the case of Events of the type described in clause (iii). Accordingly, upon the occurrence of any Event and until such time as there are no Events which have occurred and are continuing (a "Damages Accrual Period"), commencing on the Event Date on which such Damages Accrual Period began, the Company agrees to pay, as liquidated damages, and not as a penalty, an additional amount (the "Liquidated Damages"): (A)(i) to each holder of a Debenture that is a Notice Holder, accruing at an annual rate equal to one-quarter of one percent per annum (25 basis points) on the aggregate principal amount of Debentures held by such Notice Holder and (ii) to -7-

each holder of Common Stock that is a Notice Holder, accruing at an annual rate equal to one-quarter of one percent per annum (25 basis points) calculated on an amount equal to the product of (x) the then-applicable Conversion Price (as defined in the Indenture) or, in the event that each Debenture has been converted to Common Stock, the Conversion Price applicable to the Debenture last converted, multiplied by (y) the number of shares of Common Stock held by such holder; and (B) if the Damages Accrual Period continues for a period in excess of thirty (30) days from the Event Date, from and after the end of such thirty (30) days until such time as there are no Events which have occurred and are continuing, (i) to each holder of a Debenture (whether or not a Notice Holder), accruing at an annual rate equal to one-half of one percent per annum (50 basis points) on the aggregate principal amount of Debentures held by such holder and (ii) to each holder of Common Stock into which Debentures have been converted (whether or not a Notice Holder), accruing at an annual rate equal to one-half of one percent per annum (50 basis points) calculated on an amount equal to the product of (x) the then applicable Conversion Price (as defined in the Indenture) or, in the event that each Debenture has been converted to Common Stock, the Conversion Price applicable to the Debenture last converted, multiplied by (y) the number of shares of Common Stock held by such holder. Notwithstanding the foregoing, no Liquidated Damages shall accrue under clause (A) for the preceding sentence during any period for which Liquidated Damages accrue under clause (B) of the preceding sentence or as to any Registrable Securities from and after the expiration of the Effectiveness Period. The rate of accrual of the Liquidated Damages with respect to any period shall not exceed the rate provided for in this paragraph notwithstanding the occurrence of multiple concurrent Events. The Company shall pay the Liquidated Damages due on any Debentures or Common Stock by depositing with the Trustee under the Indenture, in trust, for the benefit of the holders of Debentures or Common Stock or Notice Holders, as the case may be, entitled thereto, at least one (1) Business Day prior to the applicable Damages Payment Date, sums sufficient to pay the Liquidated Damages accrued or accruing since the last preceding Damages Payment Date through such Damages Payment Date. The Liquidated Damages shall be paid by the Trustee at the direction and on behalf of the Company to the Record Holders on each Damages Payment Date by wire transfer of immediately available funds to the accounts specified by them or by mailing checks to their registered addresses as they appear in the Debenture register (as defined in the Indenture), in the case of the Debentures, and in the register of the Company for the Common Stock, in the case of the Common Stock, if no such accounts have been specified on or before the Damages Payment Date; provided, however, that any Liquidated Damages accrued with respect to any Debenture or portion thereof called for redemption on a redemption date, redeemed or repurchased in connection with a Fundamental Change (as defined in the Indenture) on a repurchase date, or converted into Common Stock on a conversion date prior to the Damages Payment Date, shall, in any such event, be paid instead to the holder who submitted such Debenture or portion thereof for redemption, repurchase or conversion on the applicable redemption date, repurchase date or conversion date, as the case may be, on such date (or promptly following the conversion date, in the -8-

case of conversion of a Debenture). The Trustee shall be entitled, on behalf of the holders of Debentures, holders of Common Stock and Notice Holders, to seek any available remedy for the enforcement of this Agreement, including for the payment of such Liquidated Damages. Notwithstanding the foregoing, the parties agree that the sole damages payable for a violation of the terms of this Agreement with respect to which Liquidated Damages are expressly provided shall be such Liquidated Damages. Nothing shall preclude a Notice Holder or Holder of Registrable Securities from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement, in addition to the payment of Liquidated Damages. All of the Company's obligations set forth in this Section 2(f) which are outstanding with respect to any Registrable Securities at the time such security ceases to be a Registrable Security shall survive until such time as all such obligations with respect to such security have been satisfied in full (notwithstanding termination of the Agreement pursuant to Section 8(o)). The parties hereto agree that the Liquidated Damages provided for in this Section 2(f) constitute a reasonable estimate of the damages that may be incurred by Holders of Registrable Securities (other than the Initial Purchasers) by reason of the failure of the Shelf Registration to be filed or declared effective or unavailable (absolutely or as a practical matter) for effecting resales of Registrable Securities, as the case may be, in accordance with the provisions hereof. 3. REGISTRATION PROCEDURES. In connection with the Company's registration obligations under Section 2 hereof, the Company shall effect such registrations to permit the sale of the Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall: (a) Prepare and file with the SEC a Registration Statement or Registration Statements on any appropriate form under the Securities Act available for the sale of the Registrable Securities by the Holders thereof in accordance with the intended method or methods of distribution thereof, and use its reasonable best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; provided that, before filing any such Registration Statement or Prospectus or any amendments or supplements thereto (other than documents that would be incorporated or deemed to be incorporated therein by reference and that the Company is required by applicable securities laws or stock exchange requirements to file), the Company shall furnish to the Initial Purchasers, the Special Counsel and the Managing Underwriters of such offering, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of the Initial Purchasers, the Special Counsel and such Managing Underwriters, and the Company shall not file any such Registration Statement or amendment thereto or any Prospectus or any supplement thereto (other than such documents which, upon filing, would be incorporated or deemed to be incorporated by reference therein and that the Company is required by applicable securities laws or stock exchange requirements to file) to which the Holders of a majority of the Registrable -9-

Securities covered by such Registration Statement, the Managing Underwriters, the Initial Purchasers or the Special Counsel shall reasonably object in writing within five (5) full days after receipt of such materials in the case of the Initial Shelf Registration Statement and two (2) full Business Days in every other case. (b) Subject to Section 2(e), prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period; cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement and Prospectus during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement as so amended or such Prospectus as so supplemented. (c) Notify all Notice Holders, the Initial Purchasers, the Special Counsel and the Managing Underwriters, if any, promptly, and (if requested by any such person) confirm such notice in writing, (i) when a Prospectus, any Prospectus supplement, a Registration Statement or a post-effective amendment to a Registration Statement has been filed with the SEC, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation or threatening of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (v) of the existence of any fact or happening of any event which makes any statement of a material fact in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue or which would require the making of any changes in the Registration Statement or Prospectus in order that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (vi) of the Company's determination that a post-effective amendment to a Registration Statement or a supplement to a Prospectus would be required. Notice of the filing and effectiveness of the Initial Shelf Registration and any Subsequent Registration shall be made by the Company by release made to Reuters Economic Services and Bloomberg Business News. -10-

(d) Use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. (e) If reasonably requested by the Initial Purchasers or the Managing Underwriters, if any, or the Holders of a majority of the Registrable Securities being sold, (i) promptly incorporate in a Prospectus supplement or posteffective amendment to a Registration Statement such information as the Initial Purchasers, the Special Counsel, the Managing Underwriters, if any, or such Holders, in connection with any offering of Registrable Securities, agree should be included therein as required by applicable law and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as reasonably practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any actions under this Section 3 (e) that are not, in the reasonable opinion of counsel for the Company, in compliance with applicable law. (f) Furnish to each Notice Holder, the Special Counsel, the Initial Purchasers and each Managing Underwriter, if any, without charge, at least one conformed copy of the Registration Statement or Statements and any amendment thereto, including financial statements but excluding schedules, all documents incorporated or deemed to be incorporated therein by reference and all exhibits (unless requested in writing by any such Notice Holder, Special Counsel, the Initial Purchasers or Managing Underwriter). (g) Deliver to each Notice Holder, the Special Counsel, the Initial Purchasers and each Managing Underwriter, if any, in connection with any offering of Registrable Securities, without charge, as many copies of the Prospectus or Prospectuses relating to such Registrable Securities (including each preliminary prospectus) and any amendment or supplement thereto as such persons may reasonably request; and the Company hereby consents to the use of such Prospectus or each amendment or supplement thereto by each of the Notice Holders of Registrable Securities and the underwriters, if any, in connection with any offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, to register or qualify or cooperate with the Notice Holders, the Managing Underwriters, if any, and the Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Notice Holder or Managing Underwriter reasonably requests in writing; keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable Registration Statement; provided, however, that the -11-

Company will not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action that would subject it to general service of process in suits or to taxation in any such jurisdiction where it is not then so subject. (i) If required, cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities within the United States, except as may be required solely as a consequence of the nature of such Notice Holder, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals, as may be necessary to enable the Notice Holder or Holders thereof or the Managing Underwriters, if any, to consummate the disposition of such Registrable Securities. (j) Other than during a Deferral Period, immediately upon the existence of any fact or the occurrence of any event as a result of which a Registration Statement shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or a Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, promptly prepare and file (subject to the proviso in Section 3(a)) a post-effective amendment to each Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document (such as a Current Report on Form 8-K) that would be incorporated by reference into the Registration Statement so that the Registration Statement shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and so that the Prospectus will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, and, in the case of a post-effective amendment to a Registration Statement, use its reasonable best efforts to cause it to become effective as soon as practicable. (k) Enter into such agreements (including, in the event of an Underwritten Offering, an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including, in the event of an Underwritten Offering, those reasonably requested by the Managing Underwriters, if any, or the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into, and if the registration is an underwritten registration, (i) make such representations and warranties, subject to the Company's ability to do so, to the Holders of such Registrable Securities -12-

and the underwriters with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings (provided that the scope and substance shall not be materially different than those contained in the Purchase Agreement) and confirm the same if and when requested; (ii) use its reasonable best efforts to obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any, and Special Counsel) addressed to each of the underwriters covering the matters customarily covered in opinions requested in underwritten offerings; (iii) use its reasonable best efforts to obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other certified public accountants of any business acquired or to be acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each of the Managing Underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings; and (iv) deliver such documents and certificates as may be reasonably requested by the Special Counsel and the Managing Underwriters, if any, to evidence the continued validity of the representations and warranties of the Company and its subsidiaries made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement as and to the extent required thereunder. (l) If requested in connection with a disposition of Registrable Securities pursuant to a Registration Statement, make available for inspection by a representative of the Holders of Registrable Securities being sold, any Managing Underwriter participating in any disposition of Registrable Securities, if any, and any attorney or accountant retained by such Notice Holders or underwriter, financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the executive officers, directors and employees of the Company and its subsidiaries, to supply all information reasonably requested by any such representative, Managing Underwriter, attorney or accountant in connection with such disposition, subject to reasonable assurances by each such person that such information will only be used in connection with matters relating to such Registration Statement; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such persons and shall be used solely for the purposes of exercising rights under this Agreement, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law, (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by any such person or (iv) such -13-

information becomes available to any such person from a source other than the Company and such source is not bound by a confidentiality agreement. (m) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earning statements (which need not be audited) satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than forty-five (45) days after the end of any twelve (12) month period (or ninety (90) days after the end of any twelve (12) month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company commencing after the effective date of a Registration Statement, which statements shall cover said twelve (12) month period. (n) Cooperate with the Notice Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as such Holders may request. (o) Provide the Trustee under the Indenture and the transfer agent for the Common Stock with printed certificates for the Registrable Securities which are in a form eligible for deposit with The Depositary Trust Company. (p) Cause the Common Stock covered by the Registration Statement to be listed on each securities exchange (or quoted on each automated quotation system on which any of the Company's "Common Stock," as that term is defined in the Indenture, is then listed or quoted) no later than the date the Registration Statement is declared effective and, in connection therewith, to the extent applicable, to make such filings under the Exchange Act (e.g., the filing of a Registration Statement on Form 8-A) and to have such filings declared effective thereunder. (q) Cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. 4. HOLDER'S OBLIGATIONS. Each Holder agrees, by acquisition of the Debentures and Registrable Securities, that no Holder of Registrable Securities shall be entitled to sell any of such Registrable Securities pursuant to a Registration Statement or to receive a Prospectus relating thereto, unless such Holder has furnished the Company with the Notice and Questionnaire required pursuant to Section 2(d) hereof and such other information regarding such Holder and the distribution of such Registrable Securities as may be required to be included in the Registration Statement or the Prospectus or as the Company may from time to time reasonably request. The Company may exclude from such registration the Registrable Securities of any Holder who does not furnish such information provided above for so long as such information is not so furnished. Each -14-

Holder of Registrable Securities as to which any Registration Statement is being effected agrees promptly to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not misleading. Any sale of any Registrable Securities by any Holder shall constitute a representation and warranty by such Holder that the information relating to such Holder and its plan of distribution is as set forth in the Prospectus delivered by such Holder in connection with such disposition, that such Prospectus does not as of the time of such sale contain any untrue statement of a material fact relating to such Holder or its plan of distribution and that such Prospectus does not as of the time of such sale omit to state any material fact relating to such Holder or its plan of distribution necessary to make the statements in such Prospectus, in light of the circumstances under which they were made, not misleading. 5. REGISTRATION EXPENSES. All fees and expenses incident to the Company's performance of or compliance with this Agreement shall be borne by the Company whether or not any of the Registration Statements become effective. Such fees and expenses shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (x) with respect to filings required to be made with the SEC or the National Association of Securities Dealers, Inc. and (y) relating to compliance with federal securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of Special Counsel in connection with Blue Sky qualifications of the Registrable Securities under the laws of such jurisdictions as the Managing Underwriters, if any, or Holders of a majority of the Registrable Securities being sold may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities in a form eligible for deposit with The Depository Trust Company and of printing prospectuses if the printing of prospectuses is requested by the Special Counsel or the Holders of a majority of the Registrable Securities included in any Registration Statement), (iii) the reasonable fees and disbursements of the Trustee and its counsel and of the registrar and transfer agent for the Common Stock, (iv) reasonable fees and disbursements of counsel for the Company and the Special Counsel in connection with the Shelf Registration (provided that the Company shall not be liable for the fees and expenses of more than one separate firm, in addition to counsel for the Company, for all parties participating in any transaction hereunder), (v) fees and disbursements of all independent certified public accountants referred to in Section 3(k)(iii) hereof (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance) and (vi) Securities Act liability insurance, to the extent obtained by the Company in its sole discretion. In addition, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange on which similar securities issued by the Company are then listed and the fees and expenses of any person, including special experts, retained by the Company. Notwithstanding the provisions of this Section 5, each seller of Registrable Securities shall pay all underwriting discounts, selling commissions -15-

and stock transfer taxes applicable to the Registrable Securities, all selling expenses and all registration expenses to the extent that the Company is prohibited by applicable Blue Sky laws from paying such expenses for or on behalf of such seller of Registrable Securities. 6. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. The Company shall indemnify and hold harmless the Initial Purchasers, each Holder and each person, if any, who controls the Initial Purchasers or any Holder (within the meaning of either Section 15 of the Securities Act or Section 20(a) of the Exchange Act) from and against all losses, liabilities, damages and expenses (including, without limitation, any reasonable legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (collectively, "Losses"), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such Losses arise out of or are based upon the information relating to the Initial Purchasers or any Holder furnished to the Company in writing by the Initial Purchasers or such Holder expressly for use therein (including, without limitation, any information relating to the plan of distribution of Registrable Securities furnished by such person); provided that the Company shall not be liable to any Holder of Registrable Securities (or any person controlling such Holder) to the extent that any such Losses arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if either (A)(i) such Holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale by such Holder to the person asserting the claims from which such Losses arise and (ii) the Prospectus would have corrected such untrue statement or alleged untrue statement or such omission or alleged omission, or (B)(x) such untrue statement or alleged untrue statement, omission or alleged omission is corrected in an amendment or supplement to the Prospectus and (y) having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such Holder thereafter fails to deliver such Prospectus as so amended or supplemented, with or prior to the delivery of written confirmation of the sale of a Registrable Security to the person asserting the claim from which Losses arise. The Company shall also indemnify each underwriter and each person who controls such person (within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act) to the same extent and with the same limitations as provided above with respect to the indemnification of the Initial Purchasers or the Holders of Registrable Securities. (b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each Holder agrees, and such agreement shall be evidenced by the Holder delivering the Notice and -16-

Questionnaire described in Section 2(d) hereof, severally and not jointly to indemnify and hold harmless the Initial Purchasers, the other Holders, the Company, its directors, its officers who sign a Registration Statement, and each person, if any, who controls the Company, the Initial Purchasers and any other Holder (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against all losses arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus or arising out of or based upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information relating to such Holder so furnished in writing by such Holder to the Company expressly for use in such Registration Statement or Prospectus. In no event shall the liability of any Holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, shall have the right to assume the defense of such proceeding and to retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate because there may be one or more legal defenses available to the indemnified party that conflicts with those available to the indemnifying party. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Initial Purchasers and all persons, if any, who control the Initial Purchasers within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all persons, if any, who control any Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign a Registration Statement and each person, if any, who controls the Company within the -17-

meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Company, and such directors, officers and the control persons of the Company, such firm shall be designated in writing by the Company. In such case involving the Initial Purchasers and persons who control the Initial Purchasers, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In such case involving the Holders and such persons who control Holders, such firm shall be designated in writing by the Holders of the majority of Registrable Securities sold pursuant to the Registration Statement. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability or claims that are the subject matter of such proceeding. (d) CONTRIBUTION. If the indemnification provided for in this Section 6 is unavailable to an indemnified party under Section 6(a) or 6(b) hereof in respect of any Losses or is insufficient to hold such indemnified party harmless, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses, (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the initial placement (before deducting expenses) of the Debentures pursuant to the Purchase Agreement. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions received by them pursuant to the Purchase Agreement and benefits received by any other Holders shall be deemed to be equal to the value of receiving Debentures registered under the Securities Act. Benefits received by any underwriter shall be deemed to be equal to the total discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. The relative fault of the Holders on the one hand and the Company on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Holders or by the Company and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such -18-

statement or omission. The Holders' respective obligations to contribute pursuant to this paragraph are several in proportion to the respective number of Registrable Securities they have sold pursuant to a Registration Statement, and not joint. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method or allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the Losses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding this Section 6(d), an indemnifying party that is a Holder of Registrable Securities shall not be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities sold by such indemnifying party and distributed to the public were offered to the public exceeds the amount of any damages which such indemnifying party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The indemnity, contribution and expense reimbursement obligations of the Company hereunder shall be in addition to any liability the Company may otherwise have hereunder, under the Purchase Agreement or otherwise. The provisions of this Section 6 shall survive so long as Registrable Securities remain outstanding, notwithstanding any transfer of the Registrable Securities by any Holder or any termination of this Agreement. The indemnity and contribution provisions contained in this Section 6 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Initial Purchasers, any Holder or any person controlling any Initial Purchaser or any Holder and (iii) the sale of any Registrable Securities by any Holder. 7. INFORMATION REQUIREMENTS. (a) The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act, and if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Registrable Securities, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 and Rule 144A under the Securities Act. The Company further covenants that it will cooperate with any Holder of Registrable Securities and take such further reasonable action as any Holder of Registrable Securities may reasonably request (including, without limitation, making such reasonable representations as any such Holder may reasonably request), all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation -19-

of the exemptions provided by Rule 144 and Rule 144A under the Securities Act. Upon the request of any Holder of Registrable Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such filing requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities under any such section of the Exchange Act. (b) The Company shall file the reports required to be filed by it under the Exchange Act and shall comply with all other requirements set forth in the instructions to Form S-3 in order to allow the Company to be eligible to file registration statements on Form S-3. 8. MISCELLANEOUS. (a) REMEDIES. In the event of a breach by the Company of its obligations under this Agreement, each Holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement, provided that the sole damages payable for a violation of the terms of this Agreement for which Liquidated Damages are expressly provided pursuant to Section 2(e) hereof shall be such Liquidated Damages. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) NO CONFLICTING AGREEMENTS. The Company has not, as of the date hereof, and shall not, on or after the date of this Agreement, enter into any agreement with respect to its securities which conflicts with the rights granted to the Holders of Registrable Securities in this Agreement. The Company represents and warrants that the rights granted to the Holders or Registrable Securities hereunder do not in any way conflict with the rights granted to the holders of the Company's securities under any other agreements. (c) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority of the then outstanding Common Stock constituting Registrable Securities (with Holders of Debentures deemed to be the Holders, for purposes of this Section, of the number of outstanding shares of Common Stock into which such Debentures are convertible as of such date of determination). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of Registrable Securities may be given by Holders of at least a majority of the Registrable Securities being sold by such Holders; provided that the provisions of this -20-

statement may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. (d) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing and shall be deemed given (i) when made, if made by hand delivery, (ii) upon confirmation, if made by telecopier or (ii) one (1) business day after being deposited with a reputable next-day courier, postage prepaid, to the parties as follows: (i) if to a Holder of Registrable Securities, at the most current address given by such Holder to the Company in accordance with the provisions of Sections 8(e): (ii) if to the Company, to: Sepracor Inc. 33 Locke Drive Marlborough, MA 01752 Attention: Chief Financial Officer Telecopy No: (508) 481-6700 with a copy to: Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention: Mark G. Borden Telecopy No: (617) 5265000 and (iii) if to the Initial Purchasers or Special Counsel to: Ropes & Gray One International Place Boston, MA 02110 Attention: Keith F. Higgins, Esq. Telecopy No: (617) 951-7050 or to such other address as such person may have furnished to the other persons identified in this Section 8(d) in writing in accordance herewith. (e) OWNER OF REGISTRABLE SECURITIES. The Company will maintain, or will cause its registrar and transfer agent to maintain, a register with respect to the Registrable Securities in which all transfers of Registrable Securities of which the Company has received notice will be recorded. The Company may deem and treat the person in whose -21-

name Registrable Securities are registered in such register of the Company as the owner thereof for all purposes, including without limitation, the giving of notices under this Agreement. (f) APPROVAL OF HOLDERS. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, (i) Holders of Debentures shall be deemed to be Holders, for such purposes, of the number of outstanding shares of Common Stock into which such Debentures are convertible and (ii) Registrable Securities held by the Company or its affiliates (as such term is defined in Rule 405 under the Securities Act) (other than the Initial Purchasers or subsequent Holders of Registrable Securities if such subsequent Holders are deemed to be such affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. (g) SUCCESSORS AND ASSIGNS. Any person who purchases any Registrable Securities from an Initial Purchaser shall be deemed, for purposes of this Agreement, to be an assignee of such Initial Purchaser. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties and shall inure to the benefit of and be binding upon each Holder of any Registrable Securities. (h) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be original and all of which taken together shall constitute one and the same agreement. (i) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (k) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be in the intention of the parties that they would have executed the remaining terms, provisions, covenants and -22-

restrictions without including any of such which may be hereafter declared invalid, illegal, void or unenforceable. (l) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and the registration rights granted by the Company with respect to the Registrable Securities. Except as provided in the Purchase Agreement, there are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and undertakings among the parties with respect to such registration rights. (m) ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (n) FURTHER ASSURANCES. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things reasonably necessary, proper or advisable under applicable law, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and the other documents contemplated hereby and consummate and make effective the transactions contemplated hereby. (o) TERMINATION. This Agreement and the obligations of the parties hereunder shall terminate upon the end of the Effectiveness Period, except for any liabilities or obligations under Section 4, 5 or 6 hereof and the obligations to make payments of and provide for Liquidated Damages under Section 2(e) hereof to the extent such damages accrue prior to the end of the Effectiveness Period, each of which shall remain in effect in accordance with their terms. -23-

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SEPRACOR INC.
By: /s/David P. Southwell ----------------------------------Name: David P. Southwell Title: Executive Vice President and Chief Financial Officer

Accepted as of the date first above written: MORGAN STANLEY & CO. INCORPORATED LEHMAN BROTHERS INC. SMITH BARNEY INC. VECTOR SECURITIES INTERNATIONAL, INC. By: MORGAN STANLEY & CO. INCORPORATED
By: /s/William H. Wright II ----------------------------------Name: William H. Wright II Title: Managing Director

-24-

Exhibit 10.36 SEPRACOR INC. 1997 STOCK OPTION PLAN 1. Purpose The purpose of this 1997 Stock Option Plan (the "Plan") of Sepracor Inc., a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of Sepracor Inc. defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. Eligibility All of the Company's employees (other than officers and directors who are employees), consultants and advisors are eligible to be granted options (each, an "Option") under the Plan. Any person who has been granted an Option under the Plan shall be deemed a "Participant". Neither officers nor directors of the Company are eligible to be granted Options under the Plan. 3. Administration, Delegation (a) Administration by Board of Directors. The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Options and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Option. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. (b) Delegation to Executive Officers. To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to make Options and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Options and the maximum number of shares for any one Participant to be

made by such executive officers. (c) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). To the extent required by the Code or the Securities Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-3 promulgated under the Exchange Act." All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Options (a) Number of Shares. Subject to adjustment under Section 4(c), Options may be made under the Plan for up to 500,000 shares of Common Stock. If any Option expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Option shall again be available for the grant of Options under the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 4(c), the maximum number of shares with respect to which an Option may be granted to any Participant under the Plan shall be 250,000 per calendar year. The per-participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162 (m) of the Code. (c) Adjustment to Common Stock. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (or substituted Options may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1) also applies to any event, Section 8(e)(1) shall be applicable to such event, and this Section 4(c) shall not be applicable. 2

5. Stock Options (a) General. The Board may grant Options to purchase Common Stock and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. Unless permitted under the Code, options granted hereunder shall not be Incentive Stock Options (as defined in Section 422 of the Code) and shall be designated "Nonstatutory Stock Options". (b) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement. (c) Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable Option agreement. No Option will be granted for a term in excess of 10 years. (d) Exercise of Option. Options may be exercised only by delivery to the Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(e) for the number of shares for which the Option is exercised. (e) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may otherwise provide in an Option agreement, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price or by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery; (3) to the extent permitted by the Board and explicitly provided in an Option agreement (i) by delivery of a promissory note of the Participant to the Company on terms determined by the Board (provided that the Participant pay cash equal to the par value of the shares purchased), or (ii) by payment of such other lawful consideration as the Board may determine; or (4) any combination of the above permitted forms of payment. 3

6. General Provisions Applicable to Options (a) Transferability of Options. Except as the Board may otherwise determine or provide in an Option, Options shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Option under the Plan shall be evidenced by a written instrument in such form as the Board shall determine. Each Option may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each type of Option may be made alone or in addition or in relation to any other type of Option. The terms of each type of Option need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an Option of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Option. (e) Acquisition Events (1) Consequences of Acquisition Events. Subject to Section 6 (e)(2), upon the occurrence of an Acquisition Event (as defined below), or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall take any one or more of the following actions with respect to then outstanding Options: (i) provide that outstanding Options shall be assumed, or equivalent Options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof); (ii) upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time (the "Acceleration Time") prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants between the Acceleration Time and the consummation of such Acquisition Event; and (iii) in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and each Participant shall receive, in 4

exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. An "Acquisition Event" shall mean: (a) any merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation; (b) any sale of all or substantially all of the assets of the Company; or (c) the complete liquidation of the Company. (2) Except to the extent otherwise provided in the instrument evidencing an Option or in any other agreement between a Participant and the Company, (i) upon the occurrence of a Change of Control Event, all Options then outstanding shall automatically be deemed waived only if and to the extent, if any, specified (whether at the time of grant or otherwise) by the Board. A "Change of Control Event" shall have occurred in the event that (i) an individual, entity or group (within the meaning of Section 13(d)(3) of 14(d)(2) of the Exchange Act) becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 50% or more of the outstanding voting securities of the Company, (ii) the Company is merged or consolidated with or into another corporation where, upon effectiveness of such merger or consolidation, the stockholders of the Company immediately prior to such merger or consolidation hold 50% or less of the voting securities of the corporation surviving such merger or consolidation, (iii) all or substantially all of the assets of the Company are sold in a single transaction or series of related transactions, or (iv) the Company is liquidated (each of such events described in clause (i) through (iv) being referred to herein as a "Triggering Event"), then, as of the date which is one business day prior to the date of such Triggering Event, the vesting schedule of this Option shall be accelerated so that all unvested options shall become immediately vested and exercisable. (3) Assumption of Options Upon Certain Events. The Board may grant Options under the Plan in substitution for stock and stock-based options held by employees of another corporation who become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The Substitute Options shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. (f) Withholding. Each Participant shall pay to the Company, or make 5

provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Options to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Option creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (g) Amendment of Option. The Board may amend, modify or terminate any outstanding Option, including but not limited to, substituting therefor another Option of the same or a different type and changing the date of exercise or realization, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (h) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Option have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (i) Acceleration. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, Options shall be free of all restrictions or that any other stock-based Options may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 7. Miscellaneous (a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Option, and the grant of an Option shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Option. (b) No Rights As Stockholder. Subject to the provisions of the applicable Option, no Participant or Designated Beneficiary shall have any rights as a 6

stockholder with respect to any shares of Common Stock to be distributed with respect to an Option until becoming the record holder of such shares. (c) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board. No Options shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but Options previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time. (e) Governing Law. The provisions of the Plan and all Options made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. Adopted by the Board of Directors on October 16, 1997 7

EXHIBIT 13 [SEPRACOR LOGO] Sepracor Inc., 111 Locke Drive, Marlborough, Massachusetts 01752

Feeling Better [FEELING BETTER PHOTO] Is Our Business [IS OUR BUSINESS PHOTO] 1997 Annual Report [SEPRACOR LOGO]

SEPRACOR is a specialty pharmaceutical company that develops and commercializes potentially improved versions of widely-prescribed drugs. Referred to as Improved Chemical Entities ("ICEs"), Sepracor's ICE(TM) Pharmaceuticals are being developed as proprietary, single-isomer or active-metabolite versions of these leading drugs. ICE Pharmaceuticals are designed to offer meaningful improvements in patient outcome through reduced side effects, increased therapeutic efficacy, or improved dosage forms. In some cases, our ICE Pharmaceuticals may provide an opportunity for additional indications. - Sepracor plans to market its ICE Pharmaceuticals directly where its specialty sales force can significantly penetrate target markets. For drugs and markets requiring substantial field sales support and extensive marketing resources, Sepracor seeks co-promotion, codevelopment, and licensing arrangements with [SEPRACOR PRODUCT CHART]
SEPRACOR PRODUCT Parent Drug CHEMISTRY FEXOFENADINE ALLEGRA(R) - Seldane(R) LEVALBUTEROL - Ventolin(R) /Proventil(R) NORASTEMIZOLE - Hismanal(R) (R,R)-FORMOTEROL - Foradil(R)/Atock(R) (S)-OXYBUTYNIN - Ditropan(R) (S)-FLUOXETINE - Prozac(R) (R)-KETOPROFEN - Orudis(R)/Actron(R) DESCARBOETHOXYLORATADINE - Claritin(R) (S)-DOXAZOSIN - Cardura(R) (2R, 4S)-ITRACONAZOLE - Sporanox(R) (R)-KETOROLAC - Toradol(R) (R)-BUPROPION - Zyban(TM) (-)-CERTIRIZINE - Zyrtec(R) (R)-FLUOXETINE - Prozac(R) (S)-LANSOPRAZOLE - Prevacid(R) NORCISAPRIDE - Propulsid(R) (R)-ONDANSETRON - Zofran(R) (-)-PANTOPRAZOLE - Pantozol(TM) (S)-SIBUTRAMINE - Meridia(R) (S)-ZOPICLONE - Imovane(R) PRECLINICAL PHASE I/II PHASE III NDA REVIEW TA LA

leading pharmaceutical companies. These partners provide the development and marketing resources to expand market penetration. - In 1993, Sepracor licensed its U.S. patents covering fexofenadine to Hoechst Marion Roussel, Inc. ("HMRI"), which developed and launched the drug. Marketed as Allegra(R) by HMRI, the drug is indicated for allergic conditions, but avoids the cardiovascular side effects associated with its parent drug, terfenadine (Seldane(R)). - Currently, Sepracor's New Drug Application (NDA) for levalbuterol HCl inhalation solution, the single-isomer version of the widely-sold bronchodilator, racemic albuterol, is being reviewed by the FDA. Racemic albuterol is marketed as Ventolin(R) by Glaxo-Wellcome and as Proventil(R) by ScheringPlough. -Sepracor recently completed a large-scale clinical trial for norastemizole, an active-metabolite of astemizole, marketed as Hismanal(R) by Johnson & Johnson. This study included 750 patients, and was conducted in 30 U.S. sites. Phase I and Phase II clinical trials indicate that norastemizole is a potentially safe and efficacious non-sedating antihistamine. - Sepracor has six ICE Pharmaceuticals in human clinical trials and thirteen additional active-metabolite or single-isomer drugs are undergoing preclinical investigation. [BACKGROUND PHOTO]

TO OUR SHAREHOLDERS: Nineteen ninety-seven was a year of considerable accomplishments for Sepracor. Our Annual Report describes the Company's progress in building a leading specialty pharmaceutical company based on our strategy of developing and commercializing ICETM Pharmaceuticals. ICEs are potentially improved single-isomer or active-metabolite versions of existing drugs. The estimated worldwide sales of the parent compounds of Sepracor's product pipeline exceeded $12 billion in 1997. - SEPRACOR ACHIEVED SIGNIFICANT CLINICAL AND COMMERCIAL MILESTONES IN 1997. A New Drug Application for levalbuterol was submitted to the U.S. Food and Drug Administration. We also completed a 750-patient, Phase II/III study for norastemizole, a potential third generation nonsedating antihistamine. In addition, we initiated clinical trials of both our long-acting beta agonist (R,R)-formoterol, for the treatment of asthma, and our urinary incontinence compound, (S)-oxybutynin. - WE HAVE SUBSTANTIALLY INCREASED THE VALUE OF OUR ANTIHISTAMINE PORTFOLIO THROUGH TWO MAJOR CORPORATE COLLABORATIONS IN 1997 AND EARLY 1998. Sepracor signed a licensing agreement in the fourth quarter of 1997 with Schering-Plough Corporation for the development of DCL, an active metabolite of the leading antihistamine Claritin(R). Pursuant to that agreement, Sepracor will be entitled to receive royalties beginning upon product launch. Under this agreement, Schering-Plough is developing DCL and intends to market the product worldwide. This potentially more potent antihistamine may serve as a new platform for extending the lifecycle of the Claritin (R) franchise. In addition, in the first quarter of 1998, we announced a collaboration with Janssen Pharmaceutica, N.V., a wholly-owned subsidiary of Johnson & Johnson, for the development and marketing of norastemizole. THIS YEAR, WE HAVE SEEN A CONTINUED VALIDATION OF SEPRACOR'S ICE PHARMACEUTICAL STRATEGY. While Sepracor is leading the emerging industry trend to develop singleisomer or active-metabolite versions of existing compounds, major pharmaceutical companies have also validated this strategy. For example, Johnson & Johnson successfully launched Levaquin(R), the single-isomer of the quinolone antibiotic ofloxacin, which has a broader spectrum of activity than its parent drug. SEPRACOR SALES FORCE GROWTH [SEPRACOR SALES FORCE GROWTH CHART] PLANNED ICE PHARMACEUTICAL INTRODUCTION SCHEDULE AND SEPRACOR RESPIRATORY SALES FORCE BUILD
SEPRACOR SALES FORCE

200

Levalbuterol Dry Powder Inhaler Norastemizole Norastemizole with Decongestant

(R,R)-fo

150 Levalbuterol Sustained Release 100 Levalbuterol Oral Levalbuterol Nebule YEAR 1998

Levalbuterol Metered Dose Inhaler

0

1999

2000

2001

2002

2

Marketed by Daiichi, this new anti-infective is already one of the largest pharmaceutical products in Japan. Astra announced its intention to develop the single-isomer version of Prilosec(R), the world's largest selling drug in 1997, which may offer improved efficacy. In addition, Hoechst Marion Roussel successfully completed its market conversion of the Seldane(R) franchise to Allegra(R), which does not exhibit the cardiovascular side effects associated with the parent drug. - OUR ICE PHARMACEUTICALS ARE NOW PROGRESSING FROM THE CLINICAL TRIAL PHASE TO FDA REVIEW, AND FINALLY, TO THE MARKETPLACE. The Company's strategy for commercializing its ICE Pharmaceuticals includes licensing agreements, co-promotion collaborations with major pharmaceutical companies, and direct marketing through one or more specialty sales forces. - Levalbuterol, under review by the FDA, would be the first drug to be sold by our respiratory sales force. Sepracor plans to launch levalbuterol in the second half of 1998. In the future, Sepracor plans to introduce other drugs to be sold by the Company's respiratory sales force, such as norastemizole and (R,R)-formoterol. Sepracor's agreement with Janssen illustrates our co-promotion strategy. In February 1998, the companies announced an agreement for the joint development and marketing of norastemizole. Sepracor has retained the right to co-promote the product in the United States. - OUR DRUG DISCOVERY EFFORTS ALSO HAVE BEGUN TO SHOW RESULTS. We are combining Sepracor's combinatorial chemistry and high-throughput screening expertise with known biological and new genomic-identified drug targets. Sepracor has discovered lead compounds that when further developed, could complement our ICE Pharmaceutical pipeline in the years to come. - Sepracor's consolidated cash position has never been stronger. For the year ended December 31, 1997, the Company had $92.6 million in consolidated cash and marketable securities. In February 1998, Sepracor completed a $189 million offering of convertible subordinated debentures. With approximately $275 million in cash and marketable securities following our recent financing, Sepracor is well positioned to continue developing and marketing its respiratory product line. In addition to these products, we are initiating development of several candidates in the fields of psychiatry/neurology and urology/gastroenterology. - We congratulate Sepracor's shareholders, partners, and employees on an excellent year. We look forward to sharing Sepracor's clinical and commercial successes with you throughout the coming year. [PHOTO of Timothy J. Barberich] Sincerely,
/s/ Timothy J. Barberich Timothy J. Barberich

President and Chief Executive Officer 3

Sepracor's ICE(TM) Strategy CHIRAL CHEMISTRY FORMS THE BASIS OF OUR ICE(TM)STRATEGY. Chiral molecules exist in mirror-image forms called optical isomers. Often only one optical isomer of the pair in a chiral drug is responsible for the drug's efficacy. The other may be inert or may cause undesirable side effects. Many established drugs on the market today are racemic mixtures with equal amounts of two isomers, an (R)-isomer and an (S)-isomer. The United States Food and Drug Administration's 1992 published stereoisomer policy guidelines have encouraged the development of optically pure drugs by suggesting that drug makers submit analyses on the pharmacological activities of each isomer of a new racemic drug candidate. [MOLECULE GRAPHIC] 4

SEPRACOR'S ICE(TM) PHARMACEUTICALS HAVE THE POTENTIAL TO BE PURER, SAFER, OR MORE POTENT VERSIONS OF THEIR PARENT DRUG COMPOUNDS. Since the parent drugs have well-known efficacy and safety profiles, ICE Pharmaceuticals generally can be developed significantly faster, at lower cost, and with decreased regulatory risk than new chemical entities. In addition, established franchises of the parent compounds, combined with long-term patent protection, provide a strong indicator of the market potential for ICE Pharmaceuticals. - SINGLE-ISOMER ICE PHARMACEUTICALS. Racemic drugs exist in mirror-image forms called isomers, designated as (R) and (S). Often only one isomer of a racemic drug is therapeutically active. The other isomer may be inert or may cause undesirable side effects. Racemic albuterol, a widely-prescribed asthma bronchodilator, consists of equal amounts of two isomers, (R)-albuterol and (S)albuterol. - Sepracor's development of the single-isomer version of racemic albuterol illustrates the potential benefits of purification. Based on preclinical and clinical research, Sepracor has demonstrated that racemic albuterol's therapeutic effect resides exclusively in the (R)-isomer. Scientific data have suggested the (S)-isomer may cause detrimental airway hyperreactivity. Sepracor is developing levalbuterol ((R)-albuterol) as a pure and potentially more efficacious single-isomer version of the racemic bronchodilator. - ACTIVE-METABOLITE ICE PHARMACEUTICALS. An active metabolite is a therapeutically active compound produced when a drug is metabolized in the body. Most drugs administered to treat diseases are transformed (metabolized) within the body into a variety of related forms (metabolites), some of which have therapeutic activity. - For example, fexofenadine is an active metabolite of the former best-selling nonsedating antihistamine Seldane(R) (terfenadine). Toxic levels of terfenadine can accumulate in the body when certain other medications interfere with its metabolism. Fexofenadine is marketed as Allegra(R) by HMRI under a patent licensing agreement with Sepracor. Allegra does not exhibit the rare but serious cardiac toxicity associated with its parent drug. - The following pages in this report discuss the clinical and commercial progress of Sepracor's ICE Pharmaceuticals. 5

Respiratory Therapy [DOG WALK PHOTO] Allergy ICE PHARMACEUTICALS FOR ALLERGY
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate FEXOFENADINE (ALLEGRA(R)) nonsedating antihistamine with reduced cardiovascular side effects NORASTEMIZOLE nonsedating antihistamine with improved potency, rapid onset, longer duration, reduced cardiovascular side effects DESCARBOETHOXYLORATADINE (DCL) nonsedating antihistamine with improved potency (-)-CERTIRIZINE antihistamine without sedation PARENT DRUG Current Marketer Seldane(R) HMRI EXPECTED INDICATION Allergy DEVELOPMENT STAGE Launched

HISMANAL(R) J & J

Allergy

Phase II/III

CLARITIN(R) Schering-Plough

Allergy

Preclinical

ZYRTEC(R) Pfizer/UCB

Allergy

Preclinical

1997 WORLDWIDE SALES TO TREAT ALLERGIES WERE APPROXIMATELY $3 BILLION* [PIE CHART] ALLEGRA(R) (SELDANE(R)) $400 MILLION HISMANAL(R) $150 MILLION CLARITIN(R) $1.7 BILLION ZYRTEC(R) $550 MILLION * INCLUDES RELATED BRANDS 6

OVER 40 MILLION AMERICANS SUFFER FROM SEASONAL ALLERGIC RHINITIS (HAY FEVER), AN ALLERGY TO AIRBORNE POLLENS. Symptoms include runny nose, watery eyes, and scratchy throat. Nonsedating antihistamines, such as Claritin(R) and Allegra(R), provide relief to allergy sufferers without causing drowsiness. Worldwide sales of nonsedating antihistamines were approximately $3 billion in 1997. Sales are forecasted to double to $6 billion in the next five years. - ALLEGRA...IMPROVED SELDANE(R) WITHOUT CARDIOTOXICITY. In 1993, Sepracor licensed its U.S. patents covering fexofenadine to HMRI, which developed the drug and launched it in late 1996 as Allegra, a nonsedating antihistamine. While Sepracor is entitled to receive royalty payments upon the expected expiration in 2001 of HMRI's composition-of-matter patent covering fexofenadine, the right to receive royalties is subject to successful resolution of a pending patent interference action. (See Sepracor Inc. Notes to Consolidated Financial Statements, N-Litigation). NORASTEMIZOLE...A POTENTIALLY SAFER AND MORE POTENT THIRD GENERATION NONSEDATING ANTIHISTAMINE. Janssen Pharmaceutica N.V.'s product, Hismanal(R) (astemizole), has a "black box" warning in its product labeling alerting physicians to serious cardiac side effects and the drug-drug interactions. In February 1998, Sepracor and Janssen, a wholly-owned subsidiary of Johnson & Johnson, announced an agreement under which the companies will jointly fund the development of Sepracor's ICE Pharmaceutical, norastemizole, one of the major metabolites of Hismanal. This development and commercialization agreement gives Janssen an option to acquire certain rights in the U.S. and abroad. Sepracor retains the right to co-promote norastemizole in the U.S. Sepracor's first 750-patient, 30-center, Phase III seasonal allergic rhinitis clinical trial has been completed. - DCL... METABOLITE OF CLARITIN WITH THE POTENTIAL FOR GREATER POTENCY. Loratadine, marketed by Schering Corporation as Claritin, is the world's largest-selling nonsedating antihistamine. Claritan sales rose 50% in 1997 to total $1.7 billion worlwide. Loratadine's active metabolite, DCL (descarboethoxyloratadine), has been shown in preclinical studies to offer the potential for greater potency than other commercial antihistamines. - In December 1997, Sepracor and Schering-Plough entered into an agreement which gives Schering-Plough exclusive worldwide rights to Sepracor's patents covering DCL. Under this agreement, Schering-Plough is developing DCL and intends to market the product worldwide. Based on its potential as a more potent antihistamine, DCL could serve as a platform for the evolution of the Claritin franchise. Sepracor is entitled to royalty payments upon the initial sale of the product. 7

Respiratory Therapy [KID IN POOL PHOTO] Asthma ICE PHARMACEUTICALS FOR ASTHMA
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate LEVALBUTEROL bronchodilator with improved safety and efficacy PARENT DRUG Current Marketer VENTOLIN(R)/ PROVENTIL(R) Glaxo-Wellcome, Schering-Plough and generics FORADIL(R)/ ATOCK(R) Novartis/ Yamanouchi EXPECTED INDICATION Asthma DEVELOPMENT STAGE NDA filed

(R,R) - FORMOTEROL bronchodilator with rapid onset and longer duration

Asthma

Phase I/II

1997 WORLDWIDE SALES OF SHORT-ACTING AND LONG-ACTING BRONCHODILATORS FOR ASTHMA THERAPY WERE $2.5 BILLION [PIE CHART] LONG-ACTING BRONCHODILATORS (SEREVENT(R)/ FORADIL(R)/Atock(R)) $.7 BILLION SHORT-ACTING BRONCHODILATORS (VENTOLIN(R)/Proventil(R)) AND OTHERS $1.8 BILLION 8

ASTHMA AFFECTS ABOUT 15 MILLION AMERICANS, INCLUDING 5 MILLION CHILDREN. THE INCIDENCE OF ASTHMA IS INCREASING IN AMERICA. People are twice as likely to suffer from asthma as compared to 1980. Approximately 5,000 deaths occur as a result of asthma in the U.S. each year. Bronchodilators are the primary treatment for acute and chronic asthma attacks and are necessary complements to other asthma therapies, such as steroids or leukotriene antagonists. Short-acting and long-acting bronchodilators prescribed for the treatment of asthma had worldwide sales of over $2.5 billion in 1997. Sepracor's levalbuterol is a single-isomer form of the current market-leading bronchodilator, racemic albuterol. In 1997, racemic albuterol sales exceeded $1.4 billion. - In addition to levalbuterol, Sepracor is developing (R,R)formoterol as a long-acting bronchodilator. This ICE Pharmaceutical is being investigated to determine onset and duration of action as a prophylactic asthma therapy. - LEVALBUTEROL...ADVANCING ASTHMA THERAPY THROUGH PURER MEDICINE. On July 1, 1997, Sepracor announced that it had submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for levalbuterol HCl nebulizer solution. The NDA submission came approximately two years after the drug entered U.S. clinical trials, confirming Sepracor's ability to rapidly develop its ICE Pharmaceuticals. If the FDA approves the NDA, Sepracor plans to launch levalbuterol using its own specialty respiratory sales force during the second half of 1998. - In addition to the nebulized dosage form, Sepracor will be initiating clinical trials with several other formulations and pulmonary drug delivery systems for levalbuterol, including syrup, controlled release tablet, metered-dose inhaler, and dry-powder inhaler versions. - (R,R)-FORMOTEROL ...POTENTIAL FOR RAPID ONSET OF ACTION COUPLED WITH LONG DURATION OF THERAPY. Sepracor is studying (R,R)formoterol, a single-isomer ICE Pharmaceutical, for the dual benefits of rapid onset of action and long duration of therapy. Worldwide sales of long-acting bronchodilators exceeded $700 million in 1997 (Norvartis' Foradil(R), Yamanouchi's Atock(R), Astra's Oxis(TM) Turbuhaler(R), and Glaxo-Wellcome's Serevent(R)). - As Sepracor continues to strengthen and expand its commercial capabilities, the Company is building a specialty respiratory sales force to market the portfolio of respiratory drugs under development. The sales force will sell directly to high-prescribing respiratory specialists, pediatricians, and primary care physicians in leading hospitals and clinics in the U.S. 9

Urology/ Gastroenterology [BACKPACKING PHOTO] ICE PHARMACEUTICALS FOR UROLOGICAL DISORDERS AND GASTROENTEROLOGY
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate (S) - OXYBUTYNIN reduced anticholinergic side effects including dry mouth, restlessness, nausea and palpitations (S) - DOXAZOSIN reduced orthostatic hypotension and improved potency NORCISAPRIDE improved potency without the adverse side effect of cardiac toxicity (S) - LANSOPRAZOLE improved dosing consistency and efficacy (-) - PANTOPRAZOLE GERD treatment with more consistent Byk/AHP plasma levels that may lead to better efficacy and safety PARENT DRUG Current Marketer DITROPAN(R) HMRI EXPECTED INDICATION STAGE Urinary Incontinence DEVELOPMENT

Phase I/II

CARDURA(R) Pfizer

Benign Prostatic Hyperplasia (BPH)

Preclinical

PROPULSID(R) J & J

Emesis (nausea, vomiting) Gastroesophageal Reflux Disease (GERD) Gastroesophageal Reflux Disease (GERD)

Preclinical

PREVACID(R) TAP Pharmaceuticals PANTOZOL(TM)

Preclinical

Preclinical

1997 WORLDWIDE SALES FOR URINARY INCONTINENCE PRODUCTS, ADULT DIAPERS AND DEVICES WERE $2.1 BILLION [PIE CHART] DITROPAN(R)* $134 MILLION DIAPERS AND DEVICES $2 BILLION * INCLUDES RELATED BRANDS 10

URINARY INCONTINENCE (UI) AFFECTS A BROAD RANGE OF ADULTS. THE CONDITION AFFECTS APPROXIMATELY 10 MILLION WOMEN AND 3 MILLION MEN IN THE UNITED STATES, with estimated annual treatment costs of $16 billion. The incidence of urinary incontinence increases progressively with age; approximately 15-30% of older adults have experienced problems with bladder control. Additionally, more than 50% of nursing home residents have been diagnosed with UI. - Drug therapy is rarely used to treat urinary incontinence due to the severe side effects of the existing compounds. A majority of patients use adult diapers or incontinence devices. U.S. sales of these alternatives exceed $2 billion annually. Ditropan(R) (racemic oxybutynin), the most widely used drug to treat urinary incontinence, is associated with unpleasant side effects including dry mouth, nausea, restlessness, and heart palpitations. As a result, pharmaceutical products capture only about 5% of the domestic UI market. - (S)-OXYBUTYNIN...A POTENTIAL TREATMENT FOR URINARY INCONTINENCE WITHOUT THE UNPLEASANT SIDE EFFECTS OF DITROPAN. Sepracor is developing (S)-oxybutynin as a treatment primarily for urge urinary incontinence, a disorder characterized by sudden and involuntary bladder contractions. Racemic oxybutynin is marketed as Ditropan by HMRI. While Ditropan is effective in blocking contractions, it is linked to undesirable anticholinergic side effects that limit the drug's usefulness. - Phase II clinical trials of (S)-oxybutynin are underway. The clinical trials are designed to investigate the drug's efficacy as well as its tolerability. - (S)-DOXAZOSIN...A POTENTIAL BPH TREATMENT WITH DECREASED ORTHOSTATIC HYPOTENSION COMPARED TO CARDURA(R). Sepracor is developing its proprietary (S)-doxazosin as a potentially improved single-isomer version of Cardura, Pfizer's treatment for benign prostatic hyperplasia (BPH). A primary side effect of treatment with alpha-blockers is orthostatic hypotension, which is a lowering of blood pressure that can cause severe dizziness and fainting. This side effect often requires prescribing physicians to titrate to effective dose levels, which necessitates multiple visits to the physician's office. - Sepracor's preclinical studies indicate that (S)-doxazosin may combine a significantly lower incidence of orthostatic hypotension with greater potency than the racemic parent drug. - Other Sepracor ICE Pharmaceuticals under development for the treatment of gastrointestinal and urological disorders include: norcisapride as anantiemetic to treat nausea and vomiting; (S)-lansoprazole and pantoprazole as treatments for gastroesophageal reflux disease (GERD). 11

Psychiatry/Neurology ICE PHARMACEUTICALS FOR PSYCHIATRY AND NEUROLOGY [HAPPY LADY PHOTO]
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate (R) - FLUOXETINE increase in flexibility in treating depression (S) - FLUOXETINE prevention of migraine headaches (S) - ZOPICLONE reduced anticholinergic side effects including dry mouth (S) - SIBUTRAMINE reduced anticholinergic side effects Knoll including dry mouth and constipation Pharmaceutical (R) - BUPROPION reduced incidence of seizures, dry mouth and insomnia PARENT DRUG Current Marketer PROZAC(R) Eli Lilly EXPECTED INDICATION Depression DEVELOPMENT STAGE Preclinical

PROZAC(R) Eli Lilly IMOVANE(R) Rhone-Poulenc Rorer MERIDIA(R)

Migraine

Phase I/II

Sleep Disorder

Preclinical

Obesity

Preclinical

ZYBAN(TM) Glaxo-Wellcome

Smoking Cessation

Preclinical

1997 WORLDWIDE SALES FOR THE SSRI MARKET WERE $6.5 BILLION, WHICH DOMINATED THE ANTIDEPRESSANT MARKET* [PIE CHART] PROZAC(R) $2.6 BILLION PAXIL(TM) $1.4 BILLION WELLBUTRIN(R) $.3 BILLION OTHER $.8 BILLION ZOLOFT(R) $1.4 BILLION * INCLUDES RELATED BRANDS 12

DEPRESSION IS A PSYCHIATRIC DISORDER THAT AFFECTS APPROXIMATELY 17 MILLION PEOPLE IN THE UNITED STATES ANNUALLY. Selective Serotonin Reuptake Inhibitors (SSRIs), such as racemic fluoxetine, are prescribed as first-line therapy for the treatment of depression. In 1997, worldwide sales of SSRIs reached $6.5 billion. In addition to SSRIs, other central nervous system (CNS) drugs are available to treat conditions such as sleep disorders, obesity, and smoking cessation. - (R)FLUOXETINE...POTENTIALLY INCREASED FLEXIBILITY IN THE TREATMENT OF DEPRESSION. Racemic fluoxetine is marketed as the antidepressant Prozac(R) by Eli Lilly & Co. Sepracor is conducting preclinical studies of the (R)-isomer of fluoxetine to treat depression. The Company is planning to initiate fullscale clinical trials during 1998. The use of (R)-fluoxetine may provide greater treatment flexibility by reducing the half-life, which would lead to an expedited washout period and the ability to switch drug therapies more rapidly. The single-isomer version of the drug may also increase the suitability of fluoxetine to treat the elderly, as well as other patient groups that have difficulty metabolizing certain drugs. - (S)-ZOPICLONE...A POTENTIAL TREATMENT FOR SLEEP DISORDERS WITH REDUCED ANTICHOLINERGIC SIDE EFFECTS. Sleep disorders affect 56 million people in the U.S. Zopiclone is marketed as Imovane(R) in Europe by RhonePoulenc Rorer Inc. Imovane is a non-benzodiazepine, short-acting hypnotic sedative for the treatment of sleep disorders. In 1997, worldwide sales of Imovane were approximately $144 million. Imovane was not developed for the U.S. market, which is served primarily by zolpidem tartrate, marketed as Ambien(R) by Searle. Ambien is a rapid onset, non-benzodiazepine hypnotic. U.S. sales of Ambien in 1997 were approximately $500 million. Preclinical studies show that the use of (S)-zopliclone has the potential to reduce anticholinergic side effects, particularly dry mouth. -(S)-SIBUTRAMINE...SINGLE-ISOMER FORM OF MERIDIA(R). Knoll Pharmaceutical Co., a division of BASF AG, markets racemic sibutramine as Meridia for the treatment of obesity. Sepracor has initiated an exploratory program to determine whether (S)-sibutramine may reduce anticholinergic side effects associated with Meridia. - Other ICE Pharmaceuticals in preclinical development for treatment of central nervous system disorders or for pain management include: (S)-fluoxetine for migraine prophylaxis; norcisapride as an anti-anxiety drug; (R)-ketoprofen and (R)-ketorolac for pain management; and (R)-bupropion for smoking cessation. 13

Drug Discovery SEPRACOR'S NEW CHEMICAL ENTITIES SEPRACOR LEAD COMPOUND DISEASE

[LAB PHOTO]

RECEPTOR/ENZYME Adenosine A2A A3 Phosphatase P1B Opiate mm kappa Glucocorticoid Estrogen Infectious Disease narrow spectrum, resistant gram-positive infection

SEP - 89,068 SEP - 42,960

Pain, Anxiety Asthma

SEP - 121,788

Diabetes, Cancer

SEP - 130,551 SEP - 130,169 SEP - 119,249 SEP - 119,244 SEP - 132,613 SEP - 119,255

Pain, Respiratory

Inflammation Osteoporosis, Cancer Bacterial Infection

THE DRUG DISCOVERY PROCESS [FLOW CHART] COMBINATORIAL CHEMISTRY MANY COMPOUNDS FUNCTIONAL GENOMICS DISEASE TARGETS BIOINFORMATICS COMPUTER CONTROL HIGH-THROUGHPUT SCREENING "HITS" LEAD COMPOUNDS PRECLINICAL AND CLINICAL TRIALS 14

SEPRACOR'S DISCOVERY STRATEGY IS CLOSELY ALIGNED WITH THE ICE PHARMACEUTICAL STRATEGY. BOTH PROGRAMS FOCUS ON RELATED THERAPEUTIC AREAS, such as inflammation, pain, and urological diseases. While the ICE Pharmaceutical strategy potentially improves existing drugs, the Discovery approach creates new chemical entities, which may lead to breakthrough compounds. By focusing drug discovery efforts on synthetic, medicinal, and combinatorial chemistries, Sepracor has developed a proprietary and highly diverse corporate file of small, drug-like molecules with potential therapeutic advantages over compounds currently used for treatment. - COMBINATORIAL CHEMISTRY TECHNIQUES ARE USED TO PRODUCE LIBRARIES OF NOVEL COMPOUNDS FOR SCREENING. For both known biological and new genomic-identified drug targets, relevant assays are designed and implemented in high-throughput screening formats. Sepracor's unique method of leveraging combinatorial chemistry combined with high-throughput screening provides for competitive advantages in the drug discovery arena. The Company's propriety chemistry allows Sepracor to create specifically shaped molecules that will target receptors in a highly precise manner. This process is generating more selective and potent lead compounds, which complement Sepracor's current therapeutic focus. - Sepracor's collaborative relationships with select biotechnology partners give the Company access to proprietary molecular targets that are within Sepracor's therapeutic areas of interest and are suitable for high-throughput screening formats. The relationship between high-throughput screening and combinatorial chemistry dramatically shortens the time to discover lead compounds and develop drug candidates. - THE POTENCY, SELECTIVITY, AND STRUCTURE OF A LEAD COMPOUND, COMBINED WITH ITS PHYSICAL PROPERTIES AND BIOAVAILABILITY, INCREASE THE PROBABILITY THAT THE SUBSTANCE WILL BECOME A DRUG. When a lead is discovered, focused libraries are designed and synthesized utilizing directed combinatorial chemistry techniques. Using this technology, Sepracor has generated a number of lead compounds in less than one year. For example, Sepracor has identified SEP-132,613 as a promising lead anti-infective compound with "in vitro" potency against a wide range of resistant organisms. Sepracor has also identified SEP-42,960 and SEP-89,068 as unique, druglike molecules with "in vitro" activity against the adenosine receptor subtypes. Other lead compounds that have shown high potency and selectivity against the opiate receptor subtypes "in vitro" are SEP-130,551 and SEP130,169. - IN THE FUTURE, SEPRACOR EXPECTS THESE DRUG DISCOVERY ACTIVITIES TO COMPLEMENT THE COMPANY'S ICE PHARMACEUTICAL PIPELINE. 15

SEPRACOR INC. SELECTED FINANCIAL DATA
Year Ended December 31, (in thousands, except per share data) 1997 1996 1995 --------------------------------------------------------------------------------------------------------STATEMENT OF OPERATIONS DATA: Revenues: Product sales $ 9,636 $ 13,784 $ 14,271 Collaborative research and development 58 25 1,036 License fees and royalties 5,643 1,232 900 ----------------------------------------Total revenues 15,337 15,041 16,207 ----------------------------------------Costs and expenses: Cost of products sold 5,992 6,784 10,410 Research and development 43,055 35,828 21,707 Purchase of in-process research and development (1) ---Selling, general, administrative and patent costs 17,254 16,312 20,411 Restructuring and impairment charges (2) 4,179 -4,144 ----------------------------------------Total costs and expenses 70,480 58,924 56,672 ----------------------------------------Loss from operations (55,143) (43,883) (40,465) ----------------------------------------Other income (expense): Equity in investee losses (3) (2,755) (17,539) (808) Interest income 5,766 6,713 3,228 Interest expense (5,976) (6,140) (2,077) Gain on Sale of ChiRex, Inc. 30,069 --Other (4) 547 (107) (1,171) ----------------------------------------Net loss before minority interests (27,492) (60,956) (41,293) Minority interests in subsidiaries 1,369 846 7,881 ----------------------------------------Net loss $(26,123) $(60,110) $(33,412) ----------------------------------------Net loss applicable to common shares (5) $(26,723) $(60,710) $(33,412) ----------------------------------------Basic and diluted net loss per common share $ (0.97) $ (2.25) $ (1.54) Basic and diluted weighted average number of common shares outstanding 27,599 27,032 21,637 BALANCE SHEET DATA (IN THOUSANDS): Cash and marketable securities Total assets Long-term debt Stockholders' equity

$ 92,560 128,507 84,268 12,032

$103,650 146,689 85,267 30,392

$143,250 202,713 85,818 89,227

(1) Represents a charge in connection with an acquisition by BioSepra Inc. (2) Represents restructuring and impairment charges taken by BioSepra in December 1997 and June 1995. See Footnote H - Notes to Consolidated Financial Statements. (3) 1996 figures reflect a net loss for ChiRex and HemaSure that includes one-time charges taken in connection with ChiRex's initial public offering and related transactions and HemaSure's loss from discontinued operations, respectively. See Footnote D - Notes to Consolidated Financial Statements. (4) Includes a write-off of approximately $800,000 relating to certain deferred finance charges taken in September 1995. (5) Includes $600,000 in preferred stock dividends. See Footnote B - Notes to Consolidated Financial Statements. 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The consolidated financial statements include the accounts of Sepracor Inc. and its majority and wholly-owned subsidiaries, including BioSepra Inc. ("BioSepra"), Sepracor Canada Limited, HemaSure Inc. ("HemaSure") (from January 1994 to September 1995), SepraChem Inc. (from January 1996 to March 1996), New England Pharmaceuticals, Inc. (from June 1995 to June 1996 when it was merged into Sepracor), and Versicor (from May 1995 to December 1997). In September 1995, HemaSure completed the sale of 2,500,000 shares of its common stock, $.01 par value per share, pursuant to an underwritten public offering. As a result of the sale, the Company's ownership of the outstanding shares of common stock of HemaSure was reduced from approximately 55% to approximately 37%. Effective September 27, 1995, the Company no longer consolidates HemaSure's financial statements and accounts for the Company's investment in HemaSure using the equity method. The sale resulted in a gain of approximately $15,235,000, which was recorded as an increase to Sepracor's additional paid-in capital. At December 31, 1997, the Company's investment in HemaSure was recorded to zero. In March 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that is a combination of Sterling Organics Limited, a United Kingdom fine chemical manufacturer, and the chiral chemistry business of Sepracor, which was conducted through its subsidiary SepraChem, completed an initial public offering of common stock. ChiRex sold 6,675,000 shares of its common stock at $13 per share. In exchange for the contribution of SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a result Sepracor owned approximately 32% of ChiRex. Sepracor accounted for this transaction as a non monetary exchange of assets and, therefore, no gain or loss was recorded as a result of this transaction. From March 11, 1996 until March 31, 1997, Sepracor carried its investment in ChiRex using the equity method of accounting and, accordingly, recorded $2,518,000 as its share of ChiRex's losses for the year ended December 31, 1996 and $383,000 as its share of ChiRex's income for the quarter ended March 31, 1997. On March 31, 1997, Sepracor received net proceeds of approximately $31,125,000 from the public sale of all of its shares of ChiRex common stock. As a result of this transaction, Sepracor recognized a gain of $30,069,000, which was recorded as other income. In March 1996, Sepracor loaned BioSepra $3,500,000. In addition, Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997 (the "loans"). Interest on the loans was prime plus 3/4%. The loans, including any interest thereon, were convertible into shares of BioSepra stock, at the option of Sepracor at any time prior to payment. On June 10, 1996, BioSepra borrowed the additional $2,000,000 and Sepracor converted the outstanding principal amount of $5,500,000 plus accrued interest of $47,639 into 1,369,788 shares of BioSepra common stock. As a result of the conversion, Sepracor owns approximately 64% of BioSepra. Versicor was formed in May 1995 to develop novel drug candidates principally for the treatment of infectious diseases. In 1995, Versicor entered into a Convertible Subordinated Note Agreement ("the Note Agreement") with Sepracor. Under this Note Agreement, Sepracor agreed to loan to Versicor until October 2, 1998, up to an aggregate of $4,700,000. Amounts outstanding accrued interest at the prime rate plus 1/2% not to exceed 9.5%. Amounts outstanding were convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. In 1996, Versicor entered into a loan agreement with Sepracor. Under this agreement, Sepracor agreed to loan to Versicor until October 2, 1998 up to an aggregate of $7,500,000. As of June 23, 1997, this agreement was amended to provide that principal and interest payments due to Sepracor, would be convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock, by dividing the amount outstanding, including principal and interest, by $0.7833. The loan accrued interest equal to the prime rate minus 1/4%, adjusted under certain circumstances. On December 10, 1997, Versicor completed a private equity financing for approximately $22,000,000 and issued Series C Preferred Stock. As part of the transaction, Sepracor exercised its conversion option on the

Versicor Convertible Subordinated Notes (the "Notes") in the amount of $9,530,000. The remaining $6,034,000, which was outstanding under the Notes at the time, was repaid to Sepracor before the end of 1997. Sepracor recognized a gain of approximately $5,688,000 on the transaction, which was recorded as an increase to additional paid-in capital. At December 31, 1997, Sepracor had an investment in Versicor of $3,971,000 and there were no amounts outstanding under the Notes. Sepracor's ownership as of December 31, 1997 was approximately 22%, thereby making Versicor an affiliate and reportable under the equity method. Sepracor recorded $75,000 as its share of Versicor losses for the period December 10 though December 31, 1997. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 REVENUE Product sales were $9,636,000 in 1997, $13,784,000 in 1996 and $14,271,000 in 1995. Product sales are primarily attributable to BioSepra's sales of bioprocessing media, supplies and equipment. The decrease in revenue from 1995 to 1996 was primarily due to only consolidating the results of SepraChem through March 11, 1996. The decrease in revenue from 1996 to 1997 is attributable to fluctuations in the timing of large production scale media orders and to the absence of one-time stocking orders from a major distributor of research instruments, which occurred in 1996. In addition, the Company believes that the sales of HyperD media have historically been adversely affected by the now settled patent litigation with PerSeptive Biosystems Inc. BioSepra's future success is dependent, in part, on its ability to generate increased sales of its HyperD media products and research devices. Collaborative research and development revenues were $58,000, $25,000 and $1,036,000, in 1997, 1996 and 1995, respectively. The decrease from 1995 to 1996 was primarily related to a milestone 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) payment recorded in 1995 from Bayer Corporation. This contract was subsequently terminated by Bayer. License fees and royalties were $5,643,000 in 1997, $1,232,000 in 1996 and $900,000 in 1995. The increase from 1995 to 1996 was due to revenue recognized by BioSepra under an agreement with Beckman Instruments Inc. ("Beckman") in 1996. The increase from 1996 to 1997 was due to a $1,875,000 milestone payment from Hoechst Marion Roussel Inc. ("HMRI") under the patent license agreement on terfenadine carboxylate, marketed by HMRI as AllegraTM, and $3,600,000 recognized by BioSepra under the agreement with Beckman, that was revised in December 1997. The increases in 1996 and 1997 were offset by decreases in royalties received by Tanabe Seiyake Co. Ltd. ("Tanabe") relating to Tanabe's licensing and use of Sepracor's technology in the manufacture of the chiral intermediate of diltiazem: $168,000 in 1997, $333,000 in 1996 and $675,000 in 1995. Beginning in March 1996, Sepracor splits the royalty revenue from Tanabe with ChiRex on a 50/50 basis. In December 1997, Sepracor signed a licensing agreement with Schering-Plough Corporation ("Schering") giving Schering exclusive worldwide rights to Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active metabolite of loratadine. Under the terms of the agreement, Sepracor has exclusively licensed its DCL rights to Schering, which expects to develop and market the DCL product worldwide. Schering will pay Sepracor an upfront license fee of $5,000,000 and royalties on DCL sales, if any, beginning at first product launch. Any such royalties paid to Sepracor will escalate over time and upon the achievement of sales volume and other milestones. As of December 31, 1997, the agreement was still pending clearance under the Hart Scott Rodino Act. In January 1998, Sepracor and Schering were notified that no objection would be raised under the Hart Scott Rodino Act with respect to the license agreement. Shortly thereafter, Sepracor received the $5,000,000 upfront license payment from Schering and recorded the payment as license revenue in the first quarter of 1998. The upfront license fee will be offset against future royalty payments. On February 4, 1998, Sepracor signed a collaboration and license agreement with Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, relating to the development and marketing of norastemizole, a third generation nonsedating antihistamine. Under the terms of the agreement, the companies will jointly fund the development of norastemizole, and Janssen has an option to acquire certain rights regarding the product in the U.S. and abroad. When exercised, Janssen and Sepracor will equally share the costs and profits associated with the further development, marketing and sales of norastemizole in the U.S. Sepracor will also retain the right to co-promote the product in the U.S. Alternatively, Sepracor can elect to receive royalties, if any, on Janssen sales of norastemizole in the U.S., in the event it decides not to co-promote the product. Outside of the U.S., Janssen has the right to develop and market norastemizole, and Sepracor will earn royalties on product sales, if any. In addition, Janssen has worldwide OTC rights to norastemizole. Cost of products sold, as a percentage of product sales, was 57% in 1997, 49% in 1996 and 73% in 1995. Cost of products sold decreased in 1996 as compared with 1995 primarily as a result of the elimination of sales of Biopass S.A. ("Biopass") products, a wholly owned subsidiary of BioSepra, which was sold in July 1995. To a lesser extent, cost of products sold decreased in 1996 compared to 1995 as a result of overall reductions in manufacturing costs at BioSepra. The increase in 1997 from 1996 was primarily due to product mix changes and fluctuations in timing of production-scale customer orders of BioSepra. In addition, the increase is also attributable to the transition of BioSepra resources from product development to production support, in association with the commercialization of new media and instrument products. A payment of $469,000 was made to a third party in connection with the HMRI milestone payment and is included in cost of products sold in 1997. Research and development expenses were $43,055,000 in 1997, $35,828,000 in 1996 and $21,707,000 in 1995. Research and development spending was primarily focused on preclinical and clinical trials in Sepracor's pharmaceutical program and on discovery initiatives at Versicor. The increase in 1996 compared to 1995 was due to the costs associated with the progression of Sepracor's drug candidates into later and more costly stages of development. In 1996, levalbuterol and (S)-ketoprofen progressed into Phase III clinical trials, and norastemizole progressed into Phase II clinical trials, and the Company initiated Phase I clinical trials on (S)oxybutynin and preclinical trials on (R,R)-formoterol. In addition, costs increased in 1996 compared to 1995 due to the full-scale operation of discovery capabilities at Versicor. Costs increased in 1997 as compared to 1996 as levalbuterol Phase III clinical trials were completed, a new drug application ("NDA") was submitted for levalbuterol to the Food and Drug Administration ("FDA"), Phase III clinical trials began for norastemizole, and

Phase I clinical trials were initiated for (R,R)-formoterol. Selling, general and administrative expenses were $15,594,000, $15,245,000 and $19,037,000, in 1997, 1996 and 1995, respectively. The decrease in expenses in 1996 as compared to 1995 was primarily due to the hiring of certain management personnel at Sepracor and BioSepra in 1995, increased legal expenses in 1995, related to the recently settled lawsuits filed by and against PerSeptive, and increased marketing expenses for HemaSure's LeukoNet Pre-Storage Leukoreduction Filtration System ("Leukonet"). In addition, in 1996, HemaSure ceased being consolidated in the results of Sepracor and BioSepra began to realize the benefits of a cost-reduction program implemented in June 1995. The increase in 1997 as compared with 1996 resulted primarily from market research costs incurred by Sepracor in determining the positioning of Sepracor's levalbuterol product in the market and costs related to infrastructure development for a direct sales force, offset by savings from personnel reductions at BioSepra. The Company expects selling, general and administrative expenses to increase in 1998 as the Company accelerates the establishment of its direct sales force. Subject to FDA approval of the Company's NDA, Sepracor is currently planning to commence sales of the nebulized form of levalbuterol in late 1998. In December 1997, BioSepra implemented a cost-reduction program that included the discontinuance of a product line and a reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process segments of the biopharmaceutical and genomics market. In conjunction 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) with the cost-reduction program BioSepra also wrote down intangible assets to their net realizable value. In total, BioSepra recorded restructuring and impairment charges totaling $4,179,000 in the fourth quarter of 1997. Of this amount, $3,328,000 represents the write down of goodwill to its net realizable value, $690,000 represents the write down of inventory and fixed assets associated with the discontinued product line and $161,000 represents severance and benefits related to the reduction in workforce in the U.S. BioSepra terminated seven employees consisting of marketing/sales, finance and administrative personnel. BioSepra expects to pay all of the severance and related benefits in 1998. In June 1995, BioSepra announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process development and process segments of the biopharm aceutical market. In connection with this program in July 1995, BioSepra completed the sale of Biopass. As part of the cost-reduction program, BioSepra recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount, $1,180,000 represents severance and benefits related to the reduction in workforce in the U.S. and France and $2,964,000 related to impairment of intangibles and loss on assets to net realizable value. BioSepra has completed its reduction in workforce related to this cost-reduction program resulting in the termination of 55 employees consisting of research and development, administrative, production and marketing/sales personnel. BioSepra paid $140,000 and $1,025,000 of the costs relating to the employee reduction as of December 31, 1996 and 1995, respectively, and the remaining severance and medical payments were paid in 1997. In July 1995, BioSepra sold Biopass while retaining the chromatography column technology that it obtained when it acquired Biopass. The results of Biopass operations through July 19, 1995 have been included in the consolidated results of operations for the year ended December 31, 1995. The loss of $2,964,000 on the sale of Biopass was recorded in restructuring and impairment costs in the results of operations in 1995. In 1996, BioSepra wrote-off the remaining unamortized portion of certain purchased technology of approximately $741,000. Legal expenses related to patents were $1,660,000, $1,067,000 and $1,374,000 for 1997, 1996 and 1995, respectively. The decrease in 1996 compared to 1995 was due to chiral patent costs being transferred to ChiRex, beginning in March 1996. The increase in 1997 compared with 1996 was due to maintenance fees associated with the increased volume of patent filings and costs incurred in defending patent interference claims made against the Company in 1997. Equity in loss of investees was $2,755,000, $17,539,000 and $808,000 for 1997, 1996 and 1995, respectively. The equity in loss of investees consists of the Company's portion of the net loss of HemaSure, ChiRex (through March 31, 1997) and Versicor (beginning December 10, 1997). The increase in 1996 as compared to 1995 was due to one-time write-offs of $11,076,000 from ChiRex's initial public offering and resulting transactions (Sepracor's portion of this one-time write-off was $3,544,000). Included in HemaSure's results was $24,748,000 relating to the operations and discontinuation of HemaSure's blood plasma business (Sepracor's portion of this was $9,157,000). The decrease in 1997 compared to 1996 was primarily related to the absence of any one-time write-offs, ChiRex having net income for the period in 1997 during which Sepracor maintained an interest and recording of HemaSure losses for only 11 months of 1997 as the investment was written down to zero. Interest income was $5,766,000, $6,713,000 and $3,228,000 for 1997, 1996, and 1995, respectively. The increase in 1996 was primarily due to a larger average cash balance available for investment, while the decrease in 1997 is principally the result of a lower average cash balance available for investment. Interest expense was $5,976,000, $6,140,000 and $2,077,000 in 1997, 1996 and 1995, respectively. The increase in interest expense in 1996 compared to 1995 were due to the $80,880,000 subordinated convertible debenture offering completed in November and December of 1995. The decrease in 1997 was a result of reduced borrowings by BioSepra and more favorable interest rates on the remaining borrowings. Net other income (expense) was $547,000, $(107,000), $(1,171,000) for 1997, 1996 and 1995, respectively. The decrease in expense in 1996 was primarily due to the one-time write-off of approximately $800,000 of

certain deferred financing costs by Sepracor related to SepraChem in 1995. Income in 1997 related to the receipt of a Canadian tax refund and favorable foreign exchange transactions associated with BioSepra. Minority interests in subsidiaries resulted in a reduction of consolidated net loss of $1,369,000, $846,000, and $7,881,000 for 1997, 1996 and 1995, respectively. The decrease in 1996 compared to 1995 resulted from smaller losses at BioSepra and from HemaSure no longer being consolidated into the results of operations of Sepracor. The increase in 1997 compared to 1996 related to larger losses at BioSepra, offset by a reduction in the percentage of minority interest, as Sepracor's ownership increased to 64% in June 1996. OTHER The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not believe that the adoption will have a material effect on results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. Sepracor is in the process of evaluating the impact of the new 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) standard on the presentation of the financial statements and the disclosure therein. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents plus marketable securities of Sepracor and its subsidiaries, including BioSepra, totaled $92,560,000 at December 31, 1997, compared to $103,650,000 at December 31, 1996. Cash and cash equivalents plus marketable securities of Sepracor, excluding BioSepra, at December 31, 1997 were $90,044,000. The net cash used in operating activities for the twelve months ended December 31, 1997 was $43,763,000. The net cash used in operating activities includes a net loss of $26,123,000 adjusted by non-cash charges of $11,561,000. Non-cash charges include a restructuring and impairment charge of $4,018,000 relating to BioSepra. This was offset by the gain on sale of ChiRex of $30,069,000 and the minority interest in subsidiary portion of the net loss of $1,369,000. The accounts payable and accrued expense balances increased a total of $5,470,000 from the December 31, 1996 balances, primarily due to increased research and development accruals at Sepracor. The deferred revenue decreased a total of $3,620,000 due to BioSepra's recognition of license revenue relating to the Beckman contract. In 1994, Sepracor, BioSepra and HemaSure entered into an equipment leasing arrangement that provides for a total of up to $2,000,000 of financing to Sepracor and its subsidiaries for the purpose of financing capital equipment in the United States. All outstanding amounts are collateralized by the assets so financed and are guaranteed by Sepracor. At December 31, 1997, there was $355,000 outstanding under this credit facility relating to Sepracor and BioSepra, of which $205,000 represented Sepracor's portion. At December 31, 1997, Sepracor had guaranteed $624,000 of outstanding bank borrowings of BioSepra S.A., BioSepra's wholly owned French subsidiary. In 1994, Sepracor's wholly owned subsidiary, Sepracor Canada Limited, entered into two credit agreements with two Canadian provincial and federal business development agencies for approximately $2,960,000 in term debt, of which $2,590,000 is at an annual interest rate of 9.25% and $370,000 is interest free. As of December 31, 1997, Sepracor Canada Limited had received approximately $2,960,000 of such term debt, of which $2,295,000 was outstanding. In 1995 and in 1997, Versicor entered into Convertible Subordinated Note Agreements ("the Note Agreements") with Sepracor. Under these Note Agreements, Sepracor agreed to loan to Versicor amounts as required for operating purposes. The amounts outstanding under the 1995 note accrued interest at the prime rate plus 1/2% not to exceed 9.5%. The amounts outstanding under the 1997 note accrued interest at the prime rate minus 1/4%, adjusted under certain circumstances. The Note Agreements were convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. On December 9, 1997, Sepracor converted an aggregate of $9,530,000 of the foregoing Note Agreements into 12,166,667 shares of Versicor Series B Preferred Stock (1,095,000 shares on a common equivalent basis after giving effect to a 9-for-1 reverse common stock split declared by Versicor in December 1997). On December 31, 1997, Versicor repaid Sepracor the remaining $6,034,000 due under the Note Agreements. In 1996, Sepracor, BioSepra and Versicor entered into a revolving credit agreement with a commercial bank that provides for borrowing of up to an aggregate of $10,000,000 (the "Revolving Credit Agreement"), pursuant to which BioSepra and Versicor could borrow up to $3,000,000 each. All borrowings are collateralized by certain assets of the companies. On December 30, 1997, the Revolving Credit Agreement was amended to remove Versicor as a party thereto. The Revolving Credit Agreement contains covenants relating to minimum tangible capital base, minimum cash or cash equivalents, minimum liquidity ratio and maximum leverage for Sepracor and BioSepra. Sepracor is a guarantor of all outstanding borrowings. At December 31, 1997, there were no amounts outstanding under this agreement. The annual interest rate on such borrowings is at the lower of the prime rate or LIBOR plus 175 basis points.

On December 30, 1997, Sepracor entered into a put agreement with a commercial bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of Versicor, a former wholly owned subsidiary, in the event of a default by Versicor under its loan agreement with the bank. In the event that the put right is exercised by the bank, the bank will assign its security interest in the fixed assets of Versicor to Sepracor. On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4% Debentures are convertible into Sepracor common stock, at the option of the holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at 6 1/4% payable semi-annually, commencing on August 15, 1998. The 6 1/4% Debentures are not redeemable by the Company prior to February 18, 2001. The Company may be required to repurchase the 6 1/4% Debentures at the option of the holders in certain circumstances. As part of the sale of the 6 1/4% Debentures, Sepracor incurred approximately $5,915,000 of offering costs, which will be recorded as other assets and amortized over seven years, the term of the 6 1/4% Debentures. The net proceeds to the Company after offering costs was $183,560,000. The Company intends to use the proceeds from the sale of the 6 1/4% Debentures for the establishment of the Company's respiratory sales force, marketing of certain ICEs, ongoing preclinical and clinical trials, funding of other research and development programs, and working capital and other general corporate purposes. On March 26, 1998, Sepracor and Beckman terminated their Stock Purchase Agreement under which Beckman acquired 312,500 shares of Sepracor Series B Redeemable Preferred Stock. Sepracor paid Beckman the original purchase price of the stock plus accrued dividends totalling $6,850,000. As a result of this termination, subsequent to year-end, Sepracor has reclassed its convertible redeemable preferred stock as a current liability at December 31, 1997. In addition, BioSepra and Beckman amended their distribution agreement whereby BioSepra granted a non-exclusive right to manufacture instruments to Beckman, 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) removed its obligation to manufacture instruments for Beckman, and sold the discontinued instrument product inventory to Beckman for $250,000. LEGAL PROCEEDINGS In July 1997, the United States Patent and Trademark Office (the "PTO") informed Sepracor that it had declared an interference between Sepracor's previously issued method-of-use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and HMRI's method-ofuse patent application on the anti-histaminic effects of fexofenadine on hepatically impaired patents. The primary objective of a patent interference, which can only be declared by the PTO, is to determine the first to invent any overlapping subject matter claimed by more than one party. In the course of an interference, the parties typically present evidence relating to their inventive activities as to the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient inventive date, and, therefore, is entitled to a patent claiming the overlapping subject matter. If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. In December 1997, The Company and its subsidiary, BioSepra, settled their long standing patent lawsuit with PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra. Under the terms of the settlement, PerSeptive received an unspecified amount and BioSepra obtained a limited, non-exclusive license under PerSeptive's Perfusion Chromatography R patents to make, use and sell its HyperD R product line free of claims of infringements by PerSeptive. HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged that HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon three patents held by Pall. On October 14, 1996, in connection with the first action concerning U.S. Patent No. 5,451,321 (the "'321 patent"), HemaSure filed for summary judgment of noninfringement. Pall filed a cross motion for summary judgment of infringement at the same time. In October 1997, the U.S. District Court of the Eastern District of New York granted in part Pall's summary judgment motion relating to the '321 patent. The court has not yet ruled on the validity of Pall's '321 patent claims, which HemaSure has asserted are invalid and unenforceable. The court now will need to review and determine the validity of this patent prior to any further action. No date has been set for these proceedings. With respect to the second action concerning U.S. Patent Nos. 4,340,479 (the "'479 patent") and 4,952,572 (the "'572 patent"), HemaSure has answered the complaint stating that it does not infringe any claim of the asserted patents. Further, HemaSure has counterclaimed for declaratory judgment of invalidity, noninfringement and unenforceability of the '572 patent, and a declaratory judgment of noninfringement of the '479 patent, as a result of a license. HemaSure believes, based on advice of its patent counsel, that a properly informed court should conclude that the manufacture, use and/or sale by HemaSure or its customers of the present LeukoNet product does not infringe any valid enforceable claim of the three asserted Pall patents. However, there can be no assurance that HemaSure will prevail in the pending litigations, and an adverse outcome in a patent infringement action would have a material adverse effect on HemaSures's future business and operations. FACTORS AFFECTING FUTURE OPERATING RESULTS Certain of the information contained in this Annual Report, including information with respect to the safety, efficacy and potential benefits of the Company's Improved Chemical Entities ("ICE(TM)s") under development and the scope of patent protection with respect to these products and information with respect to the other plans and strategy for the Company's business and the business of the subsidiaries and certain affiliates of the Company, consists of forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include the following: Since substantially all of Sepracor's ICEs are at the early stages of development, there can be no assurance that

these drugs will have improved characteristics that provide greater benefits or fewer side effects than the corresponding parent drugs or that research efforts undertaken by Sepracor will lead to the discovery of future drugs with such improved characteristics. All of the drugs under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and an additional commitment of resources prior to their successful development and commercialization. Sepracor has limited experience in conducting human clinical trials and in manufacturing pharmaceutical products and has no experience in marketing such products. Proprietary rights relating to the products of Sepracor will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. Sepracor has filed patent applications covering compositions containing, and methods of using, single isomer or active-metabolite forms of various compounds for specific applications. The ability to commercialize successfully any ICE will depend to a significant degree upon the ability to obtain and maintain use patents of sufficient scope to prevent third parties from developing similar or competitive products. Most of the ICEs for which Sepracor has obtained use patents or filed applications therefor are claimed by composition of matter or other patents or patent applications held by third parties. In each such case, unless subject to an existing license agreement, the ICE may not be commercialized until the expiration of corresponding third party composition-of-matter or other patents. There can be no assurance that any pending patent applications relating to the products of Sepracor will result in patents being issued or that any such patents will afford protection against competitors with similar technology. There may be pending or issued third-party patents relating to the product of Sepracor and Sepracor may need to acquire licenses to, or to contest the validity of, any such patents. It is likely that significant funds would be required to defend any claim that Sepracor 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) infringes a third-party patent, and any such claim could adversely affect sales of the challenged product of Sepracor until the claim is resolved. There can be no assurance that any license required under any such patent would be made available. Certain of the technology that may be used in the products of Sepracor is not covered by any patent or patent application. In the absence of patent protection, the business of Sepracor may be adversely affected by competitors who independently develop substantially equivalent technology. In July 1997, the PTO informed Sepracor that it had declared an interference between Sepracor's previously issued use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and the use patent application of HMRI on the anti-histaminic effects of fexofenadine on hepatically impaired patients. The primary objective of a patent interference, which can only be declared by the PTO, is to determine which party was the first to invent any overlapping subject matter claimed by more than one party. In the course of an interference, the parties typically present evidence relating to their invention of the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient date of invention, and, therefore, is entitled to a patent claiming the overlapping subject matter. If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. Sepracor and HMRI have agreed to resolve the interference by arbitration. Selection of the arbitrator and initiation of the arbitration proceeding is expected to occur in the first half of 1998. While it is possible that the arbitrator's decision may be rendered during 1998, there can be no assurance that the arbitrator's decision will be rendered at that time. Once rendered, the arbitrator's decision must be submitted to the PTO for final approval. The interference is in its early stages and the Company is unable to predict its outcome. The marketing and sale of pharmaceutical products developed by Sepracor or its development partners will require FDA approvals as well as similar approvals in foreign countries. To obtain such approvals, the safety and efficacy of such products must be demonstrated through clinical trials. There can be no assurance that the results of such clinical trials will be consistent with the results obtained in preclinical studies or that the results obtained in later phases of clinical trials will be consistent with those obtained in earlier phases. There also can be no assurance that any such products will be shown to be safe and efficacious or that regulatory approval for any such products will be obtained on a timely basis, if at all. The clinical trial and regulatory approval process can take a number of years and require the expenditure of substantial resources. With respect to certain of the Company's ICEs, the Company has been able to shorten the regulatory approval process of its ICEs by relying on preclinical and clinical toxicology data already on file with the FDA with respect to the parent drug. Although Sepracor has to date been successful in employing this strategy in connection with the approval process of certain of its proposed products, there can be no assurance that the FDA will permit the Company to utilize this strategy in the future. Accordingly, the Company may be required to expend significant resources to complete such preclinical and clinical studies for its other ICEs, thereby significantly delaying the regulatory approval process. The failure of the Company to obtain regulatory approval on a timely basis and unanticipated significant expenditures on preclinical and clinical studies could adversely affect the financial condition of the Company. While the Company expects FDA approval of its NDA for the nebulized form of levalbuterol in late 1998, there can be no assurance that the FDA will approve such NDA by such date, if at all. The Company currently has very limited sales and marketing experience. If the Company is successful in developing and obtaining regulatory approval for its products under development, it expects to license certain products to large pharmaceutical companies and market and sell certain other products through its direct specialty sales forces or through other arrangements, including co-promotion arrangements. In anticipation of expected FDA approval of the nebulized form of levalbuterol later this year, the Company is beginning to establish a direct sales force to market the inhalation solution of levalbuterol. Further, as the Company begins to enter into co-promotion arrangements or market and sell additional products directly, the Company will need to significantly expand its sales force. It is expected that the Company will incur significant expense in establishing its direct sales force. The ability of the Company to realize significant revenues from its direct marketing and sales activities is dependent on its ability to attract and retain qualified sales personnel in the pharmaceutical industry. There can be no assurance, however, that the Company will be able to attract and retain such qualified sales personnel, that it will successfully expand its marketing and direct sales force in the future on a timely basis, that

the cost of establishing such marketing or sales force will not exceed any product revenues, that its sales and marketing efforts will be successful, or that the need to comply with FDA limits on drug product marketing, including limits on claims of comparative safety or efficacy, will not inhibit the effectiveness of such marketing. In addition, the Company will need to enter into co-promotion arrangements with third parties where its own direct sales force is neither well situated nor large enough to achieve maximum penetration in the market. There can be no assurance that the Company will be successful in entering into any such arrangements or that the terms of any such arrangements will be favorable to the Company. Sepracor's ability to commercialize certain drugs that it develops is likely to depend in significant part on its ability to enter into collaborative agreements with pharmaceutical companies to fund all or part of the costs to complete the development of such drugs and to manufacture and/or market such drugs. To date, the Company has entered into three such collaborative agreements. The Company has licensed its U.S. patent rights to Allegra (fexofenadine) to HMRI and is entitled to receive royalties on all U.S. sales of Allegra when the patent on the parent drug expires. The Company, however, is currently party to an interference involving Allegra which, if decided adversely to the Company, could result in the loss of all or substantially all of the royalties to which the Company is entitled under the license agreement on future sales of Allegra. The Company has also licensed its worldwide patent 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) rights in DCL to Schering-Plough, pursuant to which the Company is entitled to receive royalties from ScheringPlough upon the initial sale of the product. The Company has entered into an agreement with Janssen with respect to the joint development and co-promotion of norastemizole. In each of these collaborative arrangements and, to the extent the Company enters into additional collaborative arrangements, the Company is dependent upon the efforts of the collaboration partners and there can be no assurance that such efforts will be successful. If any collaborators were to breach or terminate their agreements with the Company or fail to perform their obligations thereunder in a timely manner, the development and commercialization of the products could be delayed or terminated. Any such delay or termination could have a material, adverse effect on the Company's financial condition and results of operation. Sepracor's failure or inability to perform certain of its obligations under a collaborative agreement could result in a reduction or loss of the benefits to which Sepracor is otherwise entitled under such agreement. There can be no assurance that Sepracor will be able to enter into any such agreements for ICEs in the future or that such collaborative agreements, if any, will be entered into on terms favorable to the Company. The Company currently operates a current Good Manufacturing Practices ("cGMP") compliant manufacturing plant which the Company believes has sufficient capacity to support the production of its drugs in quantities required for its clinical trials. While the Company believes it has the capability to scale up its manufacturing processes and manufacture sufficient quantities of certain of the products which may be approved for sale, without additional expansion, the Company will not have the capability to manufacture in sufficient quantities all of the products which may be approved for sale. Accordingly, the Company may be required to expend additional resources to expand its current facility, construct an additional facility or contract the production of these drugs to third party manufacturers. There can be no assurance that the Company will have the resources to expand its existing or develop additional facilities or contract with manufacturers to produce its products in commercial quantities or that any contract with third party manufacturers will be on favorable terms to the Company. There can be no assurance that the Company will succeed in scaling up its manufacturing processes or maintaining cGMP compliance. Failure in either respect can lead to refusal by the FDA to approve marketing applications. Failure to maintain cGMP compliance may also be the basis for action by the FDA to withdraw approvals that have been granted and for other regulatory action. The testing, marketing and sale of human health care products entails an inherent risk of product liability and there can be no assurance that product liability claims will not be asserted against Sepracor. Sepracor and its subsidiaries maintain limited product liability insurance coverage for both the clinical trials and commercialization of its products. There can be no assurance that Sepracor will be able to obtain further product liability insurance on acceptable terms, if at all, or that any current insurance subsequently obtained will provide adequate coverage against all potential claims. The Company will require substantial additional funds for its research and product development programs, operating expenses, the pursuit of regulatory approvals and expansion of its production, sales and marketing capabilities. Adequate funds for these purposes, whether through equity or debt financing, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or terms acceptable to the Company. Insufficient funds could require the Company to delay, scale back or eliminate certain of its research and product development programs or to license to third parties to commercialize products or technologies that the Company would otherwise develop or commercialize itself. While the Company believes that its available cash balances will be sufficient to meet its capital requirements into 2000, the Company may need to raise additional funds to support its long term product development and commercialization programs. There can be no assurance that such capital will be available on favorable terms, if at all. The Company's cash requirements may vary materially from those now planned because of results of research and development, results of product testing, relationships with customers, changes in focus and direction of the Company's research and development programs, competitive and technological advances, patent developments, the FDA regulatory process, the capital requirements of BioSepra and Sepracor Canada Limited, and other factors. The Company is currently evaluating the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather

than the year 2000, which could result in miscalculation or system failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in the future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. Other factors that may affect the Company's future operating results include the Company's fluctuations in quarterly operating results, its ability to meet its debt service requirements and to compete successfully in the market. Factors that may affect the future operating results of Sepracor include the ability of BioSepra to obtain additional financing, the dependence on BioSepra sales of HyperD media, which was introduced in 1993, and BioSepra's ability to sell its products to customers at the early stage of their product development cycles. Factors that may affect the future operating results of Sepracor include the ability of HemaSure to develop commercially viable products and HemaSure's limited number of customers. Because of the foregoing factors, past financial results should not be relied upon as an indication of future performance. The Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and it expects that its results of operations may fluctuate from period to period in the future. 23

SUPPLEMENTAL STOCKHOLDER INFORMATION PRICE RANGE OF COMMON STOCK The Common Stock of Sepracor Inc. is traded on the Nasdaq National Market under the symbol SEPR. Prior to September 20, 1991, the Company's Common Stock was not publicly traded. On March 13, 1998, the closing price of the Company's Common Stock, as reported on the Nasdaq National Market, was $39 13/16 per share. The following table sets forth for the periods indicated the high and low sales prices per share of the Common Stock as reported by the Nasdaq National Market.
1997 HIGH LOW --------------------------------------------------------------------------------FIRST QUARTER 27 1/8 16 SECOND QUARTER 27 1/8 18 THIRD QUARTER 42 3/4 19 FOURTH QUARTER 42 3/4 28 3/8 1996 High Low --------------------------------------------------------------------------------First Quarter 20 1/8 14 Second Quarter 16 1/4 11 1/8 Third Quarter 16 1/8 10 1/4 Fourth Quarter 17 1/8 13 3/4

On March 13, 1998, Sepracor had approximately 479 stockholders of record. DIVIDEND POLICY Sepracor has never paid cash dividends on its Common Stock. The Company currently intends to reinvest its earnings, if any, for use in the business and does not expect to pay cash dividends in the foreseeable future. TRANSFER AGENT AND REGISTRAR Questions regarding accounts, address changes, stock transfer and lost certificates should be directed to: BankBoston, N.A. c/o Boston EquiServe, L.P. P.O. Box 8040 Boston, MA 02266-8040 Phone: (781) 575-3120 FORM 10-K A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 is available without charge upon written request to: Investor Relations Sepracor Inc. 111 Locke Drive Marlborough, MA 01752 24

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SEPRACOR INC.: We have audited the accompanying consolidated balance sheets of Sepracor Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Sepracor's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 and 1996 financial statements of BioSepra Inc., a majority-owned subsidiary, whose statements constitute 12% and 16% of total assets and 87% and 95% of total revenues of the related 1997 and 1996 consolidated totals, respectively. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sepracor Inc. as of December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P. Boston, Massachusetts

February 19, 1998, except as to the information in Note W for which the date is March 26, 1998. 25

SEPRACOR INC. CONSOLIDATED BALANCE SHEETS
December 31 (in thousands, except par value amounts) 1997 --------------------------------------------------------------------------------------------------------ASSETS Current assets: Cash and cash equivalents (Note B) $ 82,579 $ Marketable securities (Note B) 9,981 Accounts receivable (Note E) 2,415 Inventories (Note F) 2,722 Other assets 1,543 -----------------Total current assets 99,240 -----------------Property and equipment, net (Note G) 15,126 Investment in affiliates (Note D) 3,971 Excess of investment over net assets acquired, net (Notes B, H and T) 5,288 Other assets (Note L) 4,882 -----------------Total assets 128,507 -----------------LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,018 $ Accrued expenses (Note I) 17,670 Deferred revenue (Note B and J) 21 Notes payable and current portion of capital lease obligation and long-term debt (Notes K and M) 861 Convertible redeemable preferred stock (Notes O and W) 6,700 -----------------Total current liabilities 29,270 -----------------Long-term debt and capital lease obligation (Notes K and M) 3,388 Convertible subordinated debentures (Note L) 80,880 -----------------Total liabilities 113,538 -----------------Convertible redeemable preferred stock (Notes O and W) -Minority interest (Note C) 2,937 Commitments and contingencies (Notes M and N) Stockholders' equity (Notes C, D, L, O and P) Common stock, $.10 par value, authorized 40,000 in 1997 and 1996, issued and outstanding 27,853 in 1997 and 27,271 in 1996 2,785 Additional paid-in capital 222,504 Unearned compensation, net (Note O) (94) Accumulated deficit (213,028) ( Equity adjustments (135) -----------------Total stockholders' equity 12,032 -----------------Total liabilities and stockholders' equity $ 128,507 $ ------------------

The accompanying notes are an integral part of the consolidated financial statements. 26

SEPRACOR INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (in thousands, except per share amounts) 1997 1996 --------------------------------------------------------------------------------------------------------Revenues: Product sales $ 9,636 $ 13,784 Collaborative research and development 58 25 License fees and royalties (Note R) 5,643 1,232 ----------------------------Total revenues 15,337 15,041 ----------------------------Costs and expenses: Cost of products sold 5,992 6,784 Research and development 43,055 35,828 Selling, general and administrative 15,594 15,245 Legal expense related to patents 1,660 1,067 Restructuring and impairment charges (Note H) 4,179 -----------------------------Total costs and expenses 70,480 58,924 ----------------------------Loss from operations (55,143) (43,883) ----------------------------Other income (expense): Equity in investee losses (Note D) (2,755) (17,539) Interest income 5,766 6,713 Interest expense (5,976) (6,140) Gain on sale of ChiRex Inc. 30,069 -Other income (expense) 547 (107) ----------------------------Net loss before minority interests (27,492) (60,956) Minority interests in subsidiaries (Note C) 1,369 846 ----------------------------Net loss $(26,123) $(60,110) ----------------------------Net loss applicable to common shares (Note B) $(26,723) $(60,710) ----------------------------Basic and diluted net loss per common share (Note B) $ (0.97) $ (2.25) ----------------------------Basic and diluted weighted average number of common shares outstanding (Note B) 27,599 27,032

The accompanying notes are an integral part of the consolidated financial statements. 27

SEPRACOR INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Year ended December 31, 1997, 1996 and 1995 (in thousands) Shares Amount Shares Am --------------------------------------------------------------------------------------------------------Balance at December 31, 1994 Issuance of common stock to employees under stock plans Gain on issuance of subsidiary's stock Issuance of common stock in public follow-on offering and warrant exercises Issuance of common stock for acquisition Issuance of common stock from conversion of subordinated convertible notes Issuance of common stock from conversion of preferred stock Accrued dividends from preferred stock Net loss Equity adjustments Balance at December 31, 1995 Issuance of common stock to employees under stock plans Accrued dividends from preferred stock Unearned compensation, net Net loss Equity adjustments Balance at December 31, 1996 Issuance of common stock to employees under stock plans Unearned compensation, net Accrued dividends from preferred stock Gain on issuance of subsidiary's stock Net loss Equity adjustments Balance at December 31, 1997 79 $ 79 18,681 $1 --------------------------------------430

5,620 102 1,189 (79) (79) 794

----------------------------------------26,816 $2 --------------------------------------455

----------------------------------------27,271 $2 --------------------------------------582

---------------------------------------$-$27,853 $2 ---------------------------------------

Unearned Accumulated Equit Year ended December 31, 1997, 1996 and 1995 (in thousands) Compensation Deficit Adjustm --------------------------------------------------------------------------------------------------------Balance at December 31, 1994 Issuance of common stock to employees under stock plans Gain on issuance of subsidiary's stock Issuance of common stock in public follow-on offering and warrant exercises Issuance of common stock for acquisition Issuance of common stock from conversion of subordinated convertible notes Issuance of common stock from conversion of preferred stock Accrued dividends from preferred stock Net loss Equity adjustments Balance at December 31, 1995 Issuance of common stock to employees under stock plans Accrued dividends from preferred stock Unearned compensation, net Net loss Equity adjustments Balance at December 31, 1996 $ -$ (93,383) $(12 ----------------------------------------

(33,412) 65 ----------------------------------------(126,795) 52 ----------------------------------------

$(234) (60,110) (12 ---------------------------------------(234) (186,905) 40

---------------------------------------Issuance of common stock to employees under stock plans Unearned compensation, net Accrued dividends from preferred stock Gain on issuance of subsidiary's stock Net loss Equity adjustments Balance at December 31, 1997

140

(26,123) (54 ---------------------------------------$ (94) $(213,028) $(13 ----------------------------------------

The accompanying notes are an integral part of the consolidated financial statements. 28

SEPRACOR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (in thousands) 1997 --------------------------------------------------------------------------------------------------------Cash flows from operating activities: Net loss $ (26,123) $ ( Adjustments to reconcile net loss to net cash used in operating activities: Minority interests in subsidiaries (1,369) Depreciation and amortization 4,614 Provision for doubtful accounts 150 Equity in investee losses 2,755 Loss on disposal of property and equipment 24 Restructuring and impairment charges 4,018 Gain on sale of equity investee (30,069) Changes in operating assets and liabilities, net of effects of acquired business: Accounts receivable 383 Inventories (46) Other current assets 50 Accounts payable (136) Accrued expenses 5,606 Deferred revenue (3,620) ------------------Net cash used in operating activities (43,763) ( ------------------Cash flows from investing activities: Purchases of marketable securities (60,961) ( Sales and maturities of marketable securities 71,285 Additions to property and equipment (2,653) ( Proceeds from sale of equipment 7 Investment in subsidiary -Investment in affiliate (4,046) Net proceeds from sale of equity investee 30,625 Proceeds from affiliate's repayment of long-term note 6,034 (Increase) decrease in other assets 449 ------------------Net cash provided by (used in) investing activities 40,740 ( ------------------Cash flows from financing activities: Net proceeds from issuance of stock 3,203 Proceeds from sale of convertible subordinated debentures -Borrowings under long-term debt 174 Repayments of long-term debt (962) Repayments under line of credit agreements (11) ------------------Net cash provided by (used in) financing activities 2,404 ------------------Effect of exchange rate changes on cash and cash equivalents (146) ------------------Net increase (decrease) in cash and cash equivalents (765) ( Cash and cash equivalents at beginning of year 83,344 1 ------------------Cash and cash equivalents at end of year 82,579 $ ------------------Supplemental schedule of cash flow information: Cash paid during the year for interest $ 5,980 $ Capital lease obligations incurred $ -$ -------------------

The accompanying notes are an integral part of the consolidated financial statements. 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A - NATURE OF THE BUSINESS Sepracor Inc. was incorporated in 1984 to research, develop and commercialize products for the synthesis, separation and purification of pharmaceutical and biopharmaceutical compounds. Specifically, Sepracor is developing improved versions of top-selling drugs called ICE(TM) Pharmaceuticals (Improved Chemical Entities). Sepracor is focusing on advancing its pharmaceutical programs and strengthening its patent positions for these ICE pharmaceuticals. Sepracor's 100% owned subsidiary, Sepracor Canada Ltd., supplies clinical material to Sepracor through its manufacturing facility in Windsor, Nova Scotia which commenced operations in February 1995. Sepracor's 64% owned subsidiary, BioSepra Inc., with operations in France and the U.S., is committed to supplying high-quality, reliable bioprocessing media and equipment to the biotechnology industry (See Note H). Sepracor's 37% owned subsidiary, HemaSure Inc., is dedicated to making blood safer through blood filtration devices. Sepracor's 22% owned subsidiary, Versicor Inc., has initiated a program in combinatorial chemistry. This emerging field involves the creation of diverse chemical libraries, consisting of three-dimensional, space filling chiral molecules. Sepracor and its subsidiaries are subject to risks common to companies in the industry including, but not limited to, development by Sepracor or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and compliance with government regulations. B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: Consolidated financial statements include the accounts of Sepracor and all of its wholly and majority owned subsidiaries. All material intercompany transactions have been eliminated. Investments in affiliated companies which are 50% owned or less are accounted for using the equity method. Versicor had been a consolidated entity until December 10, 1997 and was included in Sepracor's consolidated financial statements for the years ended December 31, 1996 and December 31, 1995. Versicor's financial results were consolidated for the period January 1, 1997 through December 10, 1997. See Notes C and D for further discussion. The Company accounts for the sale of subsidiary stock in different manners, depending on the life-cycle of the entity. The Company will offset any gains or losses against additional paid-in capital for early development stage subsidiaries. For later stage subsidiaries, the Company records gains or losses as other income or expense. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the following: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the dates of the financial statements and (3) the reported amounts of the revenues and expenses during the reporting periods. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCIES: The assets and liabilities of Sepracor's international subsidiaries are translated into U.S. dollars using current exchange rates. Statement of operations amounts are translated at average exchange rates prevailing during the period. The resulting translation adjustment is recorded in the equity adjustments account in stockholders' equity. Foreign exchange transaction gains and losses are included in other income (expense). CASH AND CASH EQUIVALENTS: Sepracor considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. As of December 31, 1997 and 1996, cash equivalents primarily consist of $1,165,000 and $4,511,000 in repurchase agreements, $61,011,000 and $70,215,000 in high quality corporate and government commercial paper and $19,530,000 and $8,403,000 of money market instruments which invest primarily in U.S. Treasury securities, respectively. CONCENTRATION OF CREDIT RISK: The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions. Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of the cash and cash equivalents. The Company places its cash, temporary cash investments and marketable securities with high credit

quality financial institutions. Financial instruments that subject the Company to credit risk consist primarily of trade accounts receivable. Customers with amounts due to the Company that represent greater than 10% of the accounts receivable balance are as follows:
Year Ended December 31: 1997 1996 -------------------------------------------------Customer A 16% 25% Customer B -15% Customer C 11% -Customer D --Customer E 24% --

Revenues from significant customers are as follows:
Year Ended December 31: 1997 1996 1995 --------------------------------------------------------------Customer A 33% 24% -Customer B -12% -Customer C 10% --Customer D 12% --Customer E ----

For financial information by geographic area see Note V. MARKETABLE SECURITIES: Sepracor has classified its marketable securities as "available for sale". Marketable securities include government securities and corporate commercial paper, maturing in less than a year, which can be readily purchased or sold using established markets. Marketable securities are stated at fair value. Net realized gains and losses on security transactions are determined on the 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) specific identification cost basis. The market value of Sepracor's marketable securities at December 31, 1997 and 1996, was not materially different from cost. Marketable securities consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------Government Security $ -$ 5,000 Corporate commercial paper 9,981 15,306 -------------------------------$9,981 $20,306 ================================

There were no gross realized gains or losses on the sale of marketable securities for the years ended December 31, 1997, 1996 and 1995, respectively. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Costs of major additions and betterments are capitalized; maintenance and repairs which do not improve or extend the life of the respective assets are charged to operations. On disposal, the related cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. All laboratory, manufacturing and office equipment have estimated useful lives of three to ten years. The building has an estimated useful life of thirty years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining term of the lease. SOFTWARE DEVELOPMENT COSTS: In accordance with the provision of Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalized $199,000 of software costs in 1995. These costs are being amortized over the expected number of units to be shipped. Amortization of $157,000, $311,000 and $165,000 was charged to cost of sales in 1997, 1996 and 1995, respectively. There were no capitalizable software costs in 1997 and 1996. INTANGIBLE ASSETS: The excess of investment over net assets acquired is amortized using the straight-line method over 20 years. Accumulated amortization was $7,476,000 and $3,510,000 at December 31, 1997 and 1996, respectively. The Company evaluates the possible impairment of goodwill at each reporting period based on the undiscounted projected cash flows of the related unit. Sepracor capitalizes all significant costs associated with the successful filing of a patent application. Patent costs are amortized over their estimated useful lives, not to exceed 17 years. Deferred finance costs relating to expenses incurred to complete the convertible subordinated debenture offering, completed in 1995, are amortized over seven years. Long-lived assets are reviewed for impairment by comparing the fair value of the assets with their carrying amount. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Accordingly, the Company evaluates the possible impairment of goodwill and other assets at each reporting period based on the undiscounted projected cash flows of the related asset. REVENUE RECOGNITION: Revenues from product sales are recognized when goods are shipped or installation is complete. Revenues for contracted services and research and development contracts are recorded based on effort incurred or milestones achieved in accordance with the terms of the contract. Deferred revenues represent progress payments received from customers pursuant to contract revenues not yet recorded. For construction contracts for bioprocessing equipment, a downpayment of up to one-third of the approximate value of the equipment contracts is required prior to beginning work on the contract. INCOME TAXES: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,

deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BASIC AND DILUTED NET LOSS PER COMMON SHARE: The Company adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share", which modifies the way in which earnings per share ("EPS") is calculated and disclosed in the quarter ended December 31, 1997. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based upon the weighted-average number of common shares outstanding during the period plus the additional weighted-average common equivalent shares during the period. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive. Common equivalent shares result from the assumed conversion of preferred stock and the assumed exercises 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. At December 31, 1997, had the result not been antidilutive, the Company would have shown 34,137,001 shares as the diluted weighted average number of shares outstanding. Included in the 1997 and 1996 basic and diluted net loss applicable to common shares is $600,000 of dividends relating to Series B Redeemable Exchangeable Preferred Stock (See Note O). OTHER: The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income"("SFAS 130") which requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not expect this standard to have a material effect on the results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. Sepracor is in the process of evaluating the impact of the new standard on 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the presentation of the financial statements and the disclosure therein. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. C - SEPRACOR SUBSIDIARIES In 1993, Sepracor formed two wholly-owned subsidiaries, BioSepra and HemaSure. Sepracor transferred to BioSepra its chromatography business, including all of the outstanding shares of Sepracor S.A., a French company. Sepracor transferred to HemaSure its technology relating to the manufacture, use and sale of its membrane filter products and medical devices for the separation and purification of blood, blood products and blood components. In March 1994, BioSepra and HemaSure each completed its initial public offering. In November 1994, SepraChem, Inc. ("SepraChem") was established as a wholly-owned subsidiary of Sepracor. In January 1995, in exchange for 7,999,999 common shares, Sepracor transferred to SepraChem the pharmaceutical fine chemical manufacturing business. In May 1995, Versicor was formed as a subsidiary of Sepracor. In October 1995, Versicor sold 485,000 shares of common stock to certain stockholders, 1,600,000 shares of common stock to Sepracor and 400,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") to Sepracor. The Preferred Stock was convertible, at the option of Sepracor, into common on a one-for-one basis. In June 1995, Sepracor purchased New England Pharmaceuticals ("NEP"). NEP was a manufacturer of a breath activated inhaler for asthma patients and has patents relating to this technology. The acquisition was accounted for under the purchase method of accounting. In June 1996, NEP was merged into Sepracor. In October 1995, Versicor entered into a Convertible Subordinated Note Agreement ("Note") with Sepracor. Under this Note, Sepracor agreed to loan to Versicor until October 2, 1998, up to an aggregate of $4,700,000. The Note accrued interest at prime plus 1/2% not to exceed 9.5%. The Note was convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. The amount outstanding was $0 and $5,066,000 at December 31, 1997 and December 31, 1996, respectively. Total interest expense charged to Versicor under this agreement was $60,000, $349,000 and $17,000 in 1997, 1996 and 1995, respectively. In 1996, Versicor also entered into a loan agreement with Sepracor. Under this agreement Sepracor agreed to loan to Versicor up to an aggregate of $7,500,000. The loan accrued interest equal to the prime rate minus 1/4, adjusted under certain circumstances. The total amount outstanding under this loan agreement was $0 and $2,705,000 at December 31, 1997 and December 31, 1996, respectively. Total interest expense charged to Versicor under this agreement was $120,000 and $68,000 in 1997 and 1996, respectively. As of June 23, 1997, this agreement was amended to provide that the accumulated principal and interest payments due to Sepracor, was convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock, by dividing the amount outstanding, including principal and interest, by $0.7833. In December 1997, Versicor received private equity financing of approximately $22,000,000. In exchange for the funding, Versicor issued Series C Preferred Stock. As part of the transaction, Sepracor exercised its conversion option on the Versicor Convertible Subordinated Notes in the amount of $9,530,000. The remaining $6,034,000 outstanding under the Notes was repaid to Sepracor by the end of 1997. Sepracor recognized a gain of approximately $5,688,000 on the transaction which was recorded as an increase to additional paid-in capital. At December 31, 1997, Sepracor had an investment in Versicor of $3,971,000 and there were no amounts outstanding under either Note. Sepracor's ownership as of December 31, 1997 was approximately 22%, thereby making Versicor an affiliate and reportable under the equity method. (See Note D) In January 1996, BioSepra signed a Promissory Note for $350,000, or so much of such sum as shall have been advanced by Sepracor (the "Promissory Note"). This amount is payable over sixty installments and does not bear interest. BioSepra used the funds for leasehold improvements in its new office space. As of December 31, 1997, BioSepra had received $350,000 under the Promissory Note and $245,000 remained outstanding. In March 1996, Sepracor loaned BioSepra $3,500,000. In addition, Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997 (the "loans"). Interest on the loans was at prime plus 3/4%. The loans

including any interest thereon, were convertible into the shares of BioSepra common stock, at the option of Sepracor at any time prior to payment. On June 10, 1996, Sepracor converted the outstanding principal amount of $5,500,000 plus accrued interest of $47,639 into 1,369,788 shares of BioSepra common stock. As a result of the conversion Sepracor owns approximately 64% of BioSepra. D - SEPRACOR AFFILIATES In September 1995, HemaSure completed the sale of 2,500,000 shares of its common stock, pursuant to an underwritten public offering. As a result of the sale, Sepracor's ownership of the outstanding shares of common stock of HemaSure was reduced from approximately 55% to approximately 37%. Effective September 27, 1995, Sepracor no longer consolidates HemaSure's financial statements and accounts for the investment in HemaSure using the equity method. The sale resulted in a gain of approximately $15,235,000, which was recorded as an increase to additional paid-in capital. Since the sale, Sepracor recorded $2,927,000, $15,021,000 and $808,000 of equity investee losses in 1997, 1996 and 1995, respectively. HemaSure's loss in 1996 included $24,748,000 relating to its one-time operating loss and loss on disposal of its discontinued blood plasma business. (Sepracor's portion of this was $9,157,000). At December 31, 1997, Sepracor's investment in HemaSure was zero. In March 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that is a combination of Sterling Organics Limited, and the chiral chemistry business of Sepracor, completed an initial public offering of common stock. ChiRex sold 6,675,000 shares at $13 per share. In exchange for the contribution of SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a result Sepracor owned approximately 32% of ChiRex. Sepracor accounted for this transaction as a non-monetary exchange of assets and, therefore, no gain or loss was recorded as a result of this transaction. Since 32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 11, 1996, Sepracor carried its investment in ChiRex using the equity method of accounting and, accordingly, recorded $383,000 and $2,518,000 as its share of ChiRex's losses for the years ended December 31, 1997 (through March 31) and December 31, 1996, respectively. Included in ChiRex's 1996 results were one-time write-offs of $11,076,000 (Sepracor's portion of this was $3,544,000) from ChiRex's initial public offering and resulting transactions. In March 1997, the Securities and Exchange Commission declared effective a registration statement for the offering to the public of the 3,489,301 shares of ChiRex common stock held by Sepracor. On March 31, 1997, Sepracor received net proceeds of approximately $31,125,000. As a result of this transaction, Sepracor recognized a gain of $30,069,000, which was recorded as other income. In December 1997, upon the completion of the private equity financing, Versicor, a former subsidiary, became an affiliate of Sepracor and accordingly, Sepracor recorded $75,000 as its share of Versicor's losses for the year ended December 31,1997. E - ACCOUNTS RECEIVABLE Sepracor's trade receivables primarily represent amounts due to BioSepra from companies and research institutions in the United States, Europe and Japan engaged in the research, development, or production of pharmaceutical and biopharmaceutical products. BioSepra performs ongoing credit evaluations of its customers and generally does not require collateral. The allowance for doubtful accounts was $369,000 and $233,000 at December 31, 1997 and 1996, respectively. F - INVENTORIES Inventories consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------Raw materials $ 600 $1,155 Work in progress 129 310 Finished goods 1,993 2,016 --------------------$2,722 $3,481 ---------------------

G - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
(in thousands) 1997 1996 -----------------------------------------------------------------------------Land $ 74 $ 74 Building 1,993 1,932 Laboratory and manufacturing equipment 10,407 11,233 Office equipment 4,450 4,844 Leasehold improvements 5,411 5,493 --------------------------22,335 23,576 Accumulated depreciation and amortization (7,761) (6,724) --------------------------14,574 16,852 Construction in progress 552 193 --------------------------$ 15,126 $ 17,045 ---------------------------

Depreciation expense was $3,129,000, $2,189,000 and $1,477,000 for the years ended December 31, 1997, 1996 and 1995, respectively. H - RESTRUCTURING AND IMPAIRMENT CHARGES

In December 1997, BioSepra recorded restructuring and impairment charges totaling $4,179,000. Of this amount, $851,000 relates to a cost-reduction program and $3,328,000 relates to the writedown of intangible assets to their net realizable value. The purpose of the cost-reduction program was to enable BioSepra to focus on the process segments of the biopharmaceutical and genomics market. The program involved the discontinuance of the instrument product line and a reduction in the number of employees. As part of the cost-reduction program, $690,000 represents the write down of inventory and fixed assets associated with the discontinued product line and $161,000 represents severance and benefits related to the reduction in workforce in the U.S. BioSepra terminated seven employees consisting of marketing/sales, finance and administrative personnel. BioSepra expects to pay all of the severance and benefits associated with this workforce reduction in the first half of 1998. There can be no assurances that this program will not result in the loss of customers or temporary sales or production disruptions that could have a materially adverse effect on BioSepra's business, financial condition or results of operations. In June 1995, BioSepra announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process development and process segments of the biopharmaceutical market. In connection with this program in July 1995, BioSepra completed the sale of Biopass S.A. ("Biopass"), one of BioSepra's French subsidiaries (see Note Q). As part of the cost-reduction program, BioSepra recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount, $1,180,000 represents severance and medical benefits related to the reduction in workforce in the U.S. and France and $2,964,000 relates to impairment of intangibles and loss on 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assets to net realizable value. BioSepra has completed its reduction in workforce related to this cost-reduction program resulting in the termination of 55 employees consisting of research and development, administrative, production and marketing/sales personnel. BioSepra had paid all of the costs, relating to the employee reductions made as part of the 1995 restructuring, as of December 31, 1997. I - ACCRUED EXPENSES Included in accrued expenses is $9,754,000 and $5,828,000 of accrued research and development expenses and $1,427,000 and $1,000,000 of accrued compensation as of December 1997 and 1996, respectively. J - DEFERRED REVENUE In March 1995, Sepracor and BioSepra, entered into separate agreements with Beckman Instruments, Inc. ("Beckman"). Beckman entered into a joint distribution and development agreement with BioSepra, and Beckman entered into an agreement with Sepracor to purchase certain preferred stock of Sepracor. The distribution agreement was extended in July 1996, allowing Beckman to market on a worldwide exclusive basis for a period of three years certain HyperD chromatographic columns, and provides for the development (in accordance with certain milestones) and manufacture by BioSepra of chromatographic systems for Beckman. In 1997, the agreement was amended, due to the settlement of the PerSeptive lawsuit (see Note N), eliminating BioSepra's obligation to repay to Beckman part of such payments made by Beckman under the agreement if BioSepra failed to meet such milestones or if BioSepra terminates Beckman's right to use and sell licensed products, including HyperD media, because a court finds that any such licensed products infringe any third-party patents. As a result of the amendment, BioSepra recognized $2,700,000 of license fee revenue in December 1997, rather than over the next three years. Under the agreement, Beckman made payments of $1,400,000 and $3,500,000 in 1996 and 1995, respectively. BioSepra recognized $3,600,000, $900,000 and $400,000, of revenue under the agreement in 1997, 1996 and 1995, respectively and $3,600,000 was recorded as deferred revenue as of December 31, 1996. There was no deferred revenue under this agreement as of December 31, 1997. See Note W for subsequent event. K - NOTES PAYABLE TO BANK AND LONG-TERM DEBT Notes payable and long-term debt consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------------------PIBOR plus .08% French Franc Loan Payable in quarterly installments through 2000 $ 624 $ 1,012 PIBOR plus 1.8%, French Franc Loan Payable in quarterly installments through 2001 Variable rate, 6.45% - 6.57%, French Franc Line of Credit Variable rate, 4.89% - 5.08%, French Franc Line of Credit 8.05% French Franc Term Loan, payable in monthly installments through 1997 Loan from Nova Scotia Business Development Corporation ("NSBDC") bearing interest at 9.25% until May 31, 2000 and thereafter at 9.5%, repayable in 120 consecutive monthly payments of $21 principal plus interest with a final payment of $20 in June 2005 Loan from Atlantic Canada Opportunities Agency, noninterest bearing, repayable in 60 equal installments commencing March 15, 1998 Government grant from Nova Scotia Department of Economic Development Obligations under Capital Lease Obligations (See Note M)

138

--

1

--

--

13

--

7

1,925

2,183

370

370

816

992

375 614 -------------------------

Less current portion Total

4,249 5,191 (861) (804) ------------------------$ 3,388 $ 4,387 -------------------------

At December 31, 1997, BioSepra's wholly-owned French subsidiary ("BioSepra S.A.") had two available credit facilities aggregating 3,000,000 French Francs from two French commercial banks, of which $1,000 and $13,000 was outstanding at December 31, 1997 and 1996, respectively. The amount available under the 4.89% - 5.08% credit facility, which is payable on demand, is guaranteed by Sepracor. Sepracor also guarantees a certain French Franc loan held by BioSepra S.A. The amount outstanding under this loan was $624,000 and $1,012,000 as of December 31, 1997 and 1996, respectively. The interest rate on this loan at December 31, 1997 and 1996 was 4.50% and 4.23%, respectively. In December 1996, Sepracor, BioSepra and Versicor entered into a revolving credit agreement with a commercial bank that provides for borrowing of up to $10,000,000. This agreement was amended in 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 1997 to remove Versicor as a party thereto. BioSepra can borrow up to $3,000,000. All borrowings are collateralized by certain assets of the companies. The credit agreement contains covenants relating to minimum tangible capital base, minimum cash or cash equivalents, minimum liquidity ratio and maximum leverage for Sepracor and BioSepra. Sepracor is a guarantor of all outstanding borrowings. At December 31, 1997, there was no amount outstanding under this agreement. The annual interest rate on such borrowings is the lower of the prime rate or LIBOR plus 1.75%. In December 1996, Versicor entered into a term loan agreement with a commercial bank that provided for borrowing of up to $3,000,000 for the purpose of financing capital equipment purchases. No term loan could be less than $500,000 and should be payable in sixteen equal quarterly installments commencing on January 1, 1998 with the final payment of the balance on December 31, 2001 or such earlier date that the balance shall have been reduced to zero. The annual interest rate on such borrowings was at the lower of the prime rate or the bank's Fixed Quoted Rate plus 1/2%. This agreement was terminated in December 1997 and replaced with two term loans, one for $4,034,000 and another for $2,000,000. Sepracor entered into a put agreement with the commercial bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of Versicor, in the event of a default by Versicor under its loan agreement with the commercial bank. In the event that the put right is exercised by the bank, the bank will assign its security interest in the fixed assets of Versicor to Sepracor. Sepracor guarantees the loan from NSBDC. The government grant received by Sepracor Canada Limited may be repayable if Sepracor Canada Limited fails to meet certain conditions of the agreement. The government assistance is recorded as debt and is amortized on the same basis as the depreciation of the related capital assets. Minimum annual principal repayment of long-term debt, excluding capital leases, in each of the next five years are as follows: 1998-$603,000, 1999-$623,000, 2000-$501,000, 2001-$343,000, 2002-$332,000. L - CONVERTIBLE SUBORDINATED DEBENTURES In November and December, 1995, Sepracor issued $80,880,000 of Convertible Subordinated Debentures (the "Debentures"). The Debentures bear interest at 7% payable semi-annually, commencing on June 1, 1996, and are due on December 1, 2002. The Debentures are convertible into shares of Common Stock of the Company at $19.68 per share. The Debentures are not redeemable by the Company until December 1, 1998. As part of the sale of the Debentures, Sepracor incurred approximately $2,788,000 of offering costs. These costs are classified in other assets and are being amortized over the life of the Debentures, which is seven years. On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4% Debentures are convertible into Sepracor Common Stock, at the option of the holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at 6 1/4% payable semi-annually, commencing on August 15, 1998. The 6 1/4% Debentures are not redeemable by the Company prior to February 18, 2001. The Company may be required to repurchase the 6 1/4% Debentures at the option of the holders in certain circumstances. As part of the sale of the 6 1/4% Debentures, Sepracor incurred approximately $5,915,000 of offering costs, which will be recorded as other assets and amortized over seven years, the term of the 6 1/4% Debentures. The net proceeds to the Company after offering costs was $183,560,000. The Company intends to use the proceeds from the sale of the 6 1/4% Debentures for the establishment of the Company's respiratory sales force, marketing of certain ICEs, ongoing preclinical and clinical trials, funding of other research and development programs, and working capital and other general corporate purposes. M - COMMITMENTS In 1994, Sepracor, HemaSure and BioSepra entered into an equipment leasing arrangement that provides for a total of $2,000,000 for the purpose of financing the purchase of capital equipment in the United States. All outstanding amounts are collateralized by the assets so financed and BioSepra's portion is guaranteed by Sepracor. There was a total of $355,000 and $565,000, relating to Sepracor and BioSepra, outstanding under this agreement at December 31, 1997 and 1996, respectively. Future minimum lease payments under all noncancelable leases in effect at December 31, 1997, are as follows: (in thousands)

Year Operating Leases Capital Leases -------------------------------------------------------------------------------------1998 $1,017 $294 1999 865 118 2000 736 -2001 735 -2002 766 -Thereafter 3,634 ------------------------------Total minimum lease payments $7,753 $412 Less amount representing interest (37) -----------------------------Present value of minimum lease payments $375 ------------------------------

Future minimum lease payments under operating leases relate to Sepracor's and BioSepra's principal office, laboratory and production facilities. The lease terms provide options to extend the leases. The leases require Sepracor to pay its allocated share of taxes and operating costs in addition to the annual base rent payments. Rental expense under these and other leases amounted to $1,687,000, $1,240,000 and $1,003,000 for the years ended December 31, 1997, 1996 and 1995, respectively. N - LITIGATION In July 1997, the United States Patent and Trademark Office (the "PTO") informed Sepracor that it had declared an interference between Sepracor's previously issued method-of-use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and the method-of-use patent application held by Hoechst Marion Roussel Inc. ("HMRI") on the anti-histaminic effects of fexofenadine on hepatically impaired patents. The primary objective of a patent interference, which can only be declared by the PTO, is to determine the first to invent any overlapping subject matter claimed by more 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) than one party. In the course of an interference, the parties typically present evidence relating to their inventive activities as to the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient inventive date, and, therefore, is entitled to a patent claiming the overlapping subject matter. (See Note R for further discussion.) If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. In December 1997, the Company and its subsidiary, BioSepra, settled their longstanding patent lawsuit with PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra. Under the terms of the settlement, PerSeptive received an unspecified amount and BioSepra obtained a limited, non-exclusive license under PerSeptive's Perfusion Chromatography R patents to make, use and sell its HyperD R product line free of claims of infringements by PerSeptive. HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged that HemaSure's manufacture, use and/or sale of the LeukoNet PreStorage Leukoreduction Filtration System product infringes upon three patents held by Pall. On October 14, 1996, in connection with the first action concerning U.S.Patent No. 5,451,321 (the "'321 patent"), HemaSure filed for summary judgment of noninfringement. Pall filed a cross motion for summary judgment of infringement at the same time. In October 1997, the U.S. District Court for the Eastern District of New York granted in part Pall's summary judgment motion relating to the '321 patent. The court has not yet ruled on the validity of Pall's '321 patent claims, which HemaSure has asserted are invalid and unenforceable. The court now will need to review and determine the validity of this patent prior to any further action. No date has been set for these proceedings. With respect to the second action concerning U.S. Patent Nos. 4,340,479 (the "'479 patent") and 4,952,572 (the "'572 patent"), HemaSure has answered the complaint stating that it does not infringe any claim of the asserted patents. Further, HemaSure has counterclaimed for declaratory judgment of invalidity, noninfringement and unenforceability of the '572 patent, and a declaratory judgment of noninfringement of the '479 patent, as a result of a license. HemaSure believes, based on advice of its patent counsel, that a properly informed court should conclude that the manufacture, use and/or sale by HemaSure or its customers of the present LeukoNet product does not infringe any valid enforceable claim of the three asserted Pall patents. However, there can be no assurance that HemaSure will prevail in the pending actions, and an adverse outcome in a patent infringement action would have a material adverse effect on HemaSure's future business and operations. O - STOCKHOLDERS' EQUITY In October 1995, all 79,365 outstanding shares of Series A Convertible Preferred Stock were converted into 793,650 shares of Sepracor's Common Stock. In March 1995, Beckman acquired 312,500 shares of Sepracor's Series B Redeemable Exchangeable Preferred Stock for $5,000,000. This issue is exchangeable into a portion of Sepracor's holdings of BioSepra common stock, representing approximately 4% of BioSepra's shares outstanding, in return for certain rights granted to Beckman under a change of control of BioSepra and is redeemable after the year 2000 based upon certain other events. The holders of Series B Redeemable Exchangeable Preferred Stock are entitled to receive, when, and if declared by the Board of Directors, an annual cash dividend of $1.92 per share. Such dividends shall accrue daily and are cumulative from the date of issuance. The dividends are payable at the mandatory redemption date of February 2000. As of December 31, 1997, Sepracor had accrued $1,700,000 of dividends payable. See Note W for subsequent event. In August 1995, Sepracor received approximately $62,336,000 of net proceeds from the sale of 4,600,000 shares of its Common Stock in a follow-on public offering.

In May 1996, the stockholders of Sepracor approved an amendment to Sepracor's Restated Certificate of Incorporation increasing from 35,000,000 to 40,000,000 the number of authorized shares of Common Stock. In 1996, Sepracor issued stock options to certain consultants. As a result, $248,000 was initially recorded as unearned compensation. In 1997, an adjustment of $107,000 was made for cancelled options and $28,000 and $14,000 were recorded in related amortization in 1997 and 1996, respectively. P - STOCK PLANS AND WARRANTS STOCK PLANS: The Company has two stock-based compensation plans, which are described below. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based or fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted disclosure provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and related interpretations in accounting for its plans. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates, as calculated in accordance with SFAS 123, the Company's net loss and basic and 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) diluted loss per share for the years ended December 31, 1997 and 1996 would have been increased to the pro forma amounts indicated below:
1997 1996 NET BASIC AND DILUTED Net Basic and Diluted (in thousands) LOSS LOSS PER SHARE Loss Loss Per Share ----------------------------------------------------------------------------------------As Reported $(26,723) $(0.97) $(60,710) $(2.25) Pro forma $(30,745) $(1.11) $(63,398) $(2.35)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts, since SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are not anticipated. The fair value of each stock option is estimated on the date of grant using Black-Scholes option-pricing model with the following weighted average assumptions: an expected life of 7 years, expected volatility of 60%, a riskfree interest rate of 5.0% to 7.8% and no dividends. The 1985 Stock Option Plan (the "Plan") permits Sepracor to grant shares of common stock under incentive stock options ("ISOs") and nonstatutory stock options ("NSOs"). The Plan provides for the granting of ISOs to officers and key employees of Sepracor and NSOs to officers, key employees, consultants and directors of Sepracor. ISOs and NSOs granted under the Plan have a maximum term of ten years from the date of grant and have an exercise price not less than the fair value of the stock on the date of grant and vest over five years. In 1991, the Board adopted the 1991 Restated Stock Option Plan which amended and restated the 1985 Stock Option Plan. In May 1996, the stockholders approved an amendment to the Plan increasing the number of shares of common stock, which may be granted to 5,000,000. Stock option activity related to this plan is summarized below. In January 1995, Sepracor adopted a Stock Option Exchange Program. Upon employee consent, the program provides for the grant to each employee a new stock option in exchange for the cancellation of the old stock option. The new stock option, granted at fair market value at date of issuance, will become exercisable for a number of shares of common stock equal to the number of shares covered by the old stock option. The 1991 Directors' Plan provides for the granting of NSOs to directors of Sepracor who are not officers or employees of Sepracor. The options granted under the Directors' Plan have a maximum term of ten years from date of grant and have an exercise price of not less than the fair market value of the stock on the date of grant and vest over five years. In May 1996, the shareholders approved an amendment to the Directors' Plan increasing the number of shares of common stock, which may be granted to 275,000. On October 1997, the Board of Directors approved the Company's 1997 Stock Option Plan. The 1997 Stock Option Plan permits Sepracor to grant ISOs and NSOs to purchase up to 500,000 shares of common stock to employees and consultants of the Company. Executive officers are not entitled to receive stock options under the 1997 Stock Option Plan. ISOs and NSOs granted under the Plan have a maximum term of ten years from the date of grant and ISOs may not be granted at an exercise price less than fair market value. The following tables summarize information about stock options outstanding at December 31, 1997 (in thousands, except per share amounts):
Options Exercisable Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Per Share Outstanding Life Price Exercisable Price --------------------------------------------------------------------------------------------------------$ 1.50 - 3.50 27 2.52 $ 2.75 27 $ 2.75 5.00 - 5.00 365 6.57 5.00 200 5.00 5.25 - 5.75 351 6.96 5.71 190 5.70 Options Outstanding

6.00 - 6.56 379 6.59 6.12 202 6.07 6.63 - 12.63 506 7.15 10.08 206 9.03 14.13 - 14.13 99 8.09 14.13 22 14.13 14.62 - 14.62 736 7.79 14.62 292 14.62 14.75 - 22.50 371 8.84 17.65 101 15.40 24.13 - 24.13 56 9.37 24.13 --24.25 - 41.00 595 9.51 24.37 ----------------------------------------------------------------------------------------------------------$ 1.50 - 41.00 3,485 7.75 $13.16 1,240 $ 9.18 ---------------------------------------------------------------------------------------------------------

1996 1995 AVERAGE Average PRICE PER Price Per NUMBER SHARE Number Share Number --------------------------------------------------------------------------------------------------------Balance at January 1 3,277 $ 9.55 3,225 $ 7.77 2,468 Granted 757 24.10 651 13.77 1,760 Exercised (433) 6.00 (429) 3.88 (340) Cancelled (116) 9.84 (170) 6.37 (663) --------------------------------------------------------------------------------------------------------Balance at December 31 3,485 $13.16 3,277 $ 9.55 3,225 --------------------------------------------------------------------------------------------------------Options exercisable at December 31 1,240 1,088 948 Weighted average fair value of options granted during the year

1997

$15.88

$ 9.46

$ 6.99

There were 537,000 options available for future grant as of December 31, 1997. 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1996, the shareholders approved the 1996 Employee Stock Purchase Plan ("1996 Plan"), which succeeded the 1994 Employee Stock Purchase Plan. Under the 1996 plan, an aggregate of 120,000 shares of common stock maybe purchased by employees at 85% of market value on the first or last day of each six month offering period, whichever is lower, through accumulation of payroll deductions ranging from 1% to 10% of compensation as defined, subject to certain limitations. Options were exercised to purchase 31,423, 23,977, and 39,820 shares for a total of $556,111, $296,016, and $229,506, during the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, there were 86,844 shares of authorized but unissued common stock reserved for future issuance under the 1996 plan. STOCK WARRANTS: In 1991, Sepracor issued warrants to purchase 200,000 shares of common stock at $10.00 per share, all of which were exercised in 1995. The warrants were exercised in a cashless transaction in August 1995 with the issuance of 48,340 shares of common stock. In connection with a subordinated debt agreement, Sepracor issued warrants to purchase 30,140 shares of common stock at a price of $1 per share. Warrants to purchase 10,520 shares are outstanding at December 31, 1997. The warrants may be exercised at any time until 2001 and are callable by Sepracor and redeemable at certain times or events. In 1994, in connection with the issuance of the Series A Convertible Preferred Stock, Sepracor issued warrants to purchase 1,021,650 shares of common stock at prices of between $6.30 and $12.00 per share. The warrants expire on September 30, 2004, subject to accelerated expiration in certain events. In July 1995, Sepracor received approximately $6,335,000 from the exercise of these warrants to purchase 971,650 shares of common stock with exercise prices of $6.30 and $7.50 per share. At December 31, 1997, warrants to purchase 23,000 shares remain outstanding, all of which are exercisable at $6.30 per share. Q - 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 bases. Deferred tax assets and liabilities are measured using enacted tax rates. A valuation reserve is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, a valuation reserve has been established for the full amount of the deferred tax asset. Sepracor's statutory and effective tax rates were 34% and 0%, respectively, for the years 1997, 1996 and 1995. The effective tax rate was 0% due net operating losses and nonrecognition of any deferred tax asset. At December 31, 1997, Sepracor had federal and state tax net operating loss carryforwards ("NOL") of approximately $115,000,000 and $75,000,000, which will expire through 2012 and 2002, respectively. Based upon the Internal Revenue Code and changes in company ownership, utilization of the NOL will be subject to an annual limitation. Sepracor also had a NOL from its operation in France of approximately $13,000,000. Approximately $12,000,000 of this NOL will expire in 2000; the remainder may be carried forward indefinitely. Sepracor also had a NOL from its operation in Canada of approximately $3,600,000 which may be carried forward indefinitely. At December 31, 1997, Sepracor had federal and state research and experimentation credit carryforwards of approximately $3,900,000 and $2,900,000, respectively, which will expire through the year 2012. Sepracor also had Canadian research and experimentation credits of $1,100,000 which will expire through 2007. The components of Sepracor's net deferred taxes were as follows at December 31:
(in thousands) 1997 1996 -----------------------------------------------------------------------------Assets NOL Carryforwards $ 50,213 $ 50,596 Reserves 226 306 Tax Credit Carryforward 7,989 5,287 Patent 489 389 Accrued Expenses 5,434 3,735 Research and development capitalization 9,827 9,217 Equity in loss of investees 7,638 7,981 Other 1,605 2,657

-----------------------------------------------------------------------------Liabilities Basis difference of subsidiaries (13,628) (12,005) Property and Equipment -(237) Valuation allowance $(69,793) $(67,926) -----------------------------------------------------------------------------Net deferred taxes $ -$ -------------------------------------------------------------------------------

R - AGREEMENTS In December 1997, Sepracor signed a licensing agreement with Schering-Plough Corporation ("Schering") giving Schering exclusive worldwide rights to Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active metabolite of loratadine. Under the terms of the agreement, Sepracor has exclusively licensed its DCL rights to Schering, which expects to develop and market the DCL product worldwide. Schering will pay Sepracor an upfront license fee of $5,000,000 and royalties on DCL sales, if any, beginning at first product launch. Any such royalties paid to Sepracor would escalate over time and upon the achievement of sales volume and other milestones. As of December 31, 1997, the agreement was still pending clearance under the Hart Scott Rodino Act. In January 1998, Sepracor and Schering were notified that no objection would be raised under the Hart Scott Rodino Act with respect to their license agreement. Shortly thereafter, Sepracor received the $5,000,000 upfront license payment from Schering and recorded the payment as license revenue in the first quarter of 1998. The upfront license fee will be offset against future royalty payments. On February 4, 1998, Sepracor signed a collaboration and license agreement with Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, relating to the development and mar38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) keting of norastemizole, a third generation nonsedating antihistamine. Under the terms of the agreement, the companies will jointly fund the development of norastemizole, and Janssen has an option to acquire certain rights regarding the product in the U.S. and abroad. When exercised, Janssen and Sepracor will equally share the costs and profits associated with the further development, marketing and sales of norastemizole in the United States. Sepracor will also retain the right to co-promote the product in the U.S. Alternatively, Sepracor can elect to receive royalties, if any, on Janssen sales of norastemizole in the U.S. in the event it decides not to co-promote the product. Outside of the U.S., Janssen has the right to develop and market norastemizole, and Sepracor will earn royalties on product sales, if any. In addition, Janssen has worldwide OTC rights to norastemizole. In June 1993, Sepracor licensed to MMD (now Hoescht Marion Roussel Inc.) its U.S. patent application covering the use of terfenadine carboxylate, a metabolite of terfenadine ("Seldane"), to be developed by MMD. Under this agreement, Sepracor recorded $3,750,000 as license fee revenue in 1994, for the issuance of a patent covering the use of terfenadine carboxylate. The agreement calls for future license fees of up to $3,750,000 subject to certain other milestones and royalties on sales if and when they occur. As of December 31, 1997, Sepracor had received the first milestone payment of $1,875,000 and recorded $469,000 in sub-license expense payable to a third party for the year ended December 31, 1997. See Note N for discussion of patent interference. In 1992, Sepracor licensed to Sterling Healthcare, Inc. Sepracor's use-patent application and related technology for the single isomer of a non-steroidal anti-inflammatory drug. Under the terms of the agreement, Sepracor received research and development funding and license fees. In 1995, Sepracor recognized $650,000 related to achievement of a specific benchmark in the agreement. In December 1995, this agreement was terminated with no remaining obligations outstanding. S - EMPLOYEES' SAVINGS PLAN Sepracor has a 401(K) savings plan (the "401K Plan") for all domestic employees. Under the provisions of the 401K Plan, employees may voluntarily contribute up to 15% of their compensation up to the statutory limit. In addition, Sepracor can make a matching contribution at its discretion. Sepracor matched 50% of the first $2,000 contributed by employees up to $1,000 maximum per employee during 1996. In June 1997, this match was raised to 50% of the first $3,000. This match amounted to $119,000 and $49,000 in 1997 and 1996, respectively. There were no Company matches in 1995. T - DISPOSAL OF BIOPASS In July 1995, BioSepra sold Biopass for $1,300,000, payable in quarterly installments of $100,000 from September 30, 1995 through June 30, 1996 and $150,000 beginning on September 30, 1996 through December 31, 1997. The full value of the sale price was reserved pending the buyer's payment and was recognized as payments were received. In 1995, one payment of $100,000 was received. No payments were received in 1996 or 1997. As part of the sale agreement BioSepra retained the chromatography column technology that it assumed when it acquired Biopass. In 1996, BioSepra wrote-off the remaining unamortized portion of this purchased technology of approximately $741,000. The sales contract also provided for a renewable royalty free technology license in which the buyer may develop, manufacture and sell products incorporating the technology retained by BioSepra. During the period the buyer is required to make installment payments, BioSepra is the exclusive seller of chromatography columns and accessories and had committed to at least $1,000,000 in orders per year, provided minimum gross margins are met. In January 1996, the commitment to purchase chromatography columns and accessories was terminated by the Company due to the inability of the purchaser to meet certain commitments. The results of Biopass' operations through July 1995 have been included in the consolidated results. The revenues, loss from operations and net loss for Biopass for 1995 are $1,878,000, $(1,208,000) and $(44,000), respectively. The loss of $2,964,000, on the disposal, was recorded as restructuring and impairment charges in the statement of operations (see Note H). This loss equals the net liabilities transferred in the sale; the net liabilities are excluded from the Company's consolidated balance sheet for 1995. U - SUMMARIZED FINANCIAL INFORMATION The following is the summarized financial information for Versicor, HemaSure and ChiRex:

1997 1996 (in thousands) VERSICOR HEMASURE ChiRex HemaSure -------------------------------------------------------------------------------Current assets $19,610 $ 9,097 $40,853 $ 18,263 Non-current assets 7,300 1,510 89,953 2,297 Current liabilities 1,308 3,026 25,405 3,419 Non-current liabilities 6,034 9,048 15,333 9,212 Net sales Gross profit (loss) Net income (loss) --$(6,203) 2,357 (1,326) $(9,884) 74,615 18,107 $(8,309) 779 (3,006) $(40,598)

Summarized financial information for ChiRex is not presented in 1997, as Sepracor sold its investment on March 31, 1997 (see Footnote D). V - SEGMENT INFORMATION Sepracor, through BioSepra, develops, manufactures and markets processes and products for the synthesis, separation and purification of pharmaceutical and biopharmaceutical compounds. BioSepra operates exclusively in the separations business, which Sepracor considers to be one business segment. Financial information by geographic area is as follows for the periods indicated: 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands) 1997 1996 1995 -------------------------------------------------------------------------------Revenues United States: Unaffiliated customers $ 9,810 $ 11,651 $ 8,883 Transfer to other geographic areas (16) 3,050 1,195 -----------------------------------Total 9,794 14,701 10,078 -----------------------------------Europe: Unaffiliated customers Transfer to other geographic areas Total Eliminations and adjustments Total Revenues

5,527 6,187 7,324 1,571 2,999 1,703 -----------------------------------7,098 9,186 9,027 -----------------------------------(1,555) (8,846) (2,898) -----------------------------------$ 15,337 $15,041 $ 16,207 ------------------------------------

Operating Loss United States Europe Eliminations and adjustments Total Operating Loss

$(55,666) $(45,638) $(33,865) 942 1,752 (6,049) (419) 3 (551) -----------------------------------$(55,143) $(43,883) $(40,465) ------------------------------------

Total Assets United States Europe Canada Eliminations and adjustments Total Assets

$203,806 $165,871 $292,236 5,802 6,343 6,713 7,427 7,088 7,744 (88,528) (32,613) (103,980) -----------------------------------$128,507 $146,689 $202,713 ------------------------------------

Of the $9,810,000, $11,651,000 and $8,883,000 U.S. sales to unaffiliated customers for the years ended December 31, 1997, 1996 and 1995, respectively, $168,000, $630,000, and $1,822,000, respectively, were export sales to the Far East. W - SUBSEQUENT EVENT On March 26, 1998, Sepracor and Beckman terminated their Stock Purchase Agreement under which Beckman acquired 312,500 shares of Sepracor Series B Redeemable Exchangeable Preferred Stock. Sepracor paid Beckman the original purchase price of the stock plus accrued dividends totalling $6,850,000. As a result of this termination subsequent to year-end, Sepracor has reclassed its convertible redeemable preferred stock as a current liability at December 31, 1997. In addition, BioSepra and Beckman amended their distribution agreement whereby BioSepra granted a non-exclusive right to manufacture instruments to Beckman, removed its obligation to manufacture instruments for Beckman, and sold the discontinued instrument product inventory to Beckman for $250,000. ANNUAL MEETING INFORMATION The Annual Meeting of Shareholders will be held at 9:00 a.m. on May 27, 1998 at the offices of Hale and Dorr, Sixty State Street, Boston, MA. COMMON STOCK The Common Stock of Sepracor Inc. is traded on the Nasdaq Stock Market under the symbol SEPR. GENERAL COUNSEL

Hale and Dorr, Boston, MA PATENT COUNSEL Pennie & Edmonds, New York, NY INDEPENDENT ACCOUNTANTS Coopers & Lybrand LLP, Boston, MA CORPORATE HEADQUARTERS Sepracor Inc. 111 Locke Drive Marlborough, MA 01752 Telephone: (508) 481-6700 Facsimile: (508) 357-7499 Sepracor and ICE are trademarks of Sepracor Inc. HemaSure, LeukoNet, and SteriPath are trademarks of HemaSure Inc. BioSepra is a trademark, and Hyper D and ProSys are registered trademarks of BioSepra Inc. Ventolin, Zofran and Serevent are registered trademarks of Glaxo Group Limited. Proventil and Claritin are registered trademarks of Schering Corporation. Foradil is a registered trademark of Ciba-Geigy Corporation. Atock is a trademark of Yamanouchi, Inc. Hismanal is a registered trademark of Janssen Pharmaceutica N.V. Seldane is a registered trademark of Merrell Dow Pharmaceuticals, Inc. Ditropan is a registered trademark of Marion Merrell Dow. Allegra is a registered trademark of Merrell Pharmaceuticals. Cardura is a registered trademark of Pfizer Inc. Orudis is a registered trademark of Rhone-Poulenc Rorer, S.A. Actron is a trademark of Bayer Corporation. Prozac is a registered trademark of Eli Lilly and Company. Propulsid and Sporanox are registered trademarks of Johnson & Johnson. Toradol is a registered trademark of Syntex USA. Levaquin is a trademark of Daiichi Pharmaceutical Company LTD. POROS is a registered trademark of PerSeptive BioSystems, Inc. Prilosec is a registered trademark of Astra Aktiebolag. Prevacid is a registered trademark of TAP Holdings Inc. Imovane is a registered trademark of Rhone-Poulenc Sante. Meridia is a registered trademark of Knoll Pharmaceutical Company. Zyban is a trademark of Glaxo Group Limited. Ambien is a registered trademark of Synthelabo. Paxil is a trademark of Smithkline Beecham Corp. Zoloft is a registered trademark of Pfizer Inc. Wellbutrin is a registered trademark of Glaxo Wellcome Inc. Oxis is a trademark and Turbuhaler is a registered trademark of Akiebolaget Astra. Pantozol is a trademark of Byk Gulden Lomberg Chemische Fabrik GMBH. 40

DIRECTORS James G. Andress Former Chairman, Beecham Pharmaceuticals, Former President and COO, Sterling Drug Inc. Timothy J. Barberich President and Chief Executive Officer, Sepracor Inc. Digby W. Barrios Former President and CEO, Boehringer Ingelheim Corporation Robert J. Cresci Managing Director, Pecks Management Partners Ltd. Robert F. Johnston Managing Director, Johnston Associates Keith Mansford, Ph.D. Former Chairman, R&D, SmithKline Beecham plc James F. Mrazek Former Vice President and General Manager, Healthcare Division of Johnson & Johnson Products Inc. Alan A. Steigrod Former Executive Vice President, Glaxo Holdings plc

OFFICERS Timothy J. Barberich President and Chief Executive Office David S. Barlow Executive Vice President and Preside David P. Southwell Executive Vice President; Chief Fina Secretary James R. Hauske, Ph.D. Senior Vice President, Discovery Douglas E. Reedich, Ph.D., J.D. Chief Patent Counsel Paul D. Rubin, M.D. Senior Vice President, Drug Developm Robert F. Scumaci Senior Vice President, Finance & Adm and Treasurer Stephen A. Wald Vice President, Chemical R&D

[PICTURE OF DIRECTORS/OFFICERS] Pictured left to right, front row: Paul D. Rubin, M.D., Timothy J. Barberich and David S. Barlow. Middle row: James R. Hauske, Ph.D. and David P. Southwell. Back row: Robert F. Scumaci, Stephen A. Wald and Douglas E. Reedich, Ph.D. Design: MediaConcepts Corporation

EXHIBIT 13 [SEPRACOR LOGO] Sepracor Inc., 111 Locke Drive, Marlborough, Massachusetts 01752

Feeling Better [FEELING BETTER PHOTO] Is Our Business [IS OUR BUSINESS PHOTO] 1997 Annual Report [SEPRACOR LOGO]

SEPRACOR is a specialty pharmaceutical company that develops and commercializes potentially improved versions of widely-prescribed drugs. Referred to as Improved Chemical Entities ("ICEs"), Sepracor's ICE(TM) Pharmaceuticals are being developed as proprietary, single-isomer or active-metabolite versions of these leading drugs. ICE Pharmaceuticals are designed to offer meaningful improvements in patient outcome through reduced side effects, increased therapeutic efficacy, or improved dosage forms. In some cases, our ICE Pharmaceuticals may provide an opportunity for additional indications. - Sepracor plans to market its ICE Pharmaceuticals directly where its specialty sales force can significantly penetrate target markets. For drugs and markets requiring substantial field sales support and extensive marketing resources, Sepracor seeks co-promotion, codevelopment, and licensing arrangements with [SEPRACOR PRODUCT CHART]
SEPRACOR PRODUCT Parent Drug CHEMISTRY FEXOFENADINE ALLEGRA(R) - Seldane(R) LEVALBUTEROL - Ventolin(R) /Proventil(R) NORASTEMIZOLE - Hismanal(R) (R,R)-FORMOTEROL - Foradil(R)/Atock(R) (S)-OXYBUTYNIN - Ditropan(R) (S)-FLUOXETINE - Prozac(R) (R)-KETOPROFEN - Orudis(R)/Actron(R) DESCARBOETHOXYLORATADINE - Claritin(R) (S)-DOXAZOSIN - Cardura(R) (2R, 4S)-ITRACONAZOLE - Sporanox(R) (R)-KETOROLAC - Toradol(R) (R)-BUPROPION - Zyban(TM) (-)-CERTIRIZINE - Zyrtec(R) (R)-FLUOXETINE - Prozac(R) (S)-LANSOPRAZOLE - Prevacid(R) NORCISAPRIDE - Propulsid(R) (R)-ONDANSETRON - Zofran(R) (-)-PANTOPRAZOLE - Pantozol(TM) (S)-SIBUTRAMINE - Meridia(R) (S)-ZOPICLONE - Imovane(R) PRECLINICAL PHASE I/II PHASE III NDA REVIEW TA LA

leading pharmaceutical companies. These partners provide the development and marketing resources to expand market penetration. - In 1993, Sepracor licensed its U.S. patents covering fexofenadine to Hoechst Marion Roussel, Inc. ("HMRI"), which developed and launched the drug. Marketed as Allegra(R) by HMRI, the drug is indicated for allergic conditions, but avoids the cardiovascular side effects associated with its parent drug, terfenadine (Seldane(R)). - Currently, Sepracor's New Drug Application (NDA) for levalbuterol HCl inhalation solution, the single-isomer version of the widely-sold bronchodilator, racemic albuterol, is being reviewed by the FDA. Racemic albuterol is marketed as Ventolin(R) by Glaxo-Wellcome and as Proventil(R) by ScheringPlough. -Sepracor recently completed a large-scale clinical trial for norastemizole, an active-metabolite of astemizole, marketed as Hismanal(R) by Johnson & Johnson. This study included 750 patients, and was conducted in 30 U.S. sites. Phase I and Phase II clinical trials indicate that norastemizole is a potentially safe and efficacious non-sedating antihistamine. - Sepracor has six ICE Pharmaceuticals in human clinical trials and thirteen additional active-metabolite or single-isomer drugs are undergoing preclinical investigation. [BACKGROUND PHOTO]

TO OUR SHAREHOLDERS: Nineteen ninety-seven was a year of considerable accomplishments for Sepracor. Our Annual Report describes the Company's progress in building a leading specialty pharmaceutical company based on our strategy of developing and commercializing ICETM Pharmaceuticals. ICEs are potentially improved single-isomer or active-metabolite versions of existing drugs. The estimated worldwide sales of the parent compounds of Sepracor's product pipeline exceeded $12 billion in 1997. - SEPRACOR ACHIEVED SIGNIFICANT CLINICAL AND COMMERCIAL MILESTONES IN 1997. A New Drug Application for levalbuterol was submitted to the U.S. Food and Drug Administration. We also completed a 750-patient, Phase II/III study for norastemizole, a potential third generation nonsedating antihistamine. In addition, we initiated clinical trials of both our long-acting beta agonist (R,R)-formoterol, for the treatment of asthma, and our urinary incontinence compound, (S)-oxybutynin. - WE HAVE SUBSTANTIALLY INCREASED THE VALUE OF OUR ANTIHISTAMINE PORTFOLIO THROUGH TWO MAJOR CORPORATE COLLABORATIONS IN 1997 AND EARLY 1998. Sepracor signed a licensing agreement in the fourth quarter of 1997 with Schering-Plough Corporation for the development of DCL, an active metabolite of the leading antihistamine Claritin(R). Pursuant to that agreement, Sepracor will be entitled to receive royalties beginning upon product launch. Under this agreement, Schering-Plough is developing DCL and intends to market the product worldwide. This potentially more potent antihistamine may serve as a new platform for extending the lifecycle of the Claritin (R) franchise. In addition, in the first quarter of 1998, we announced a collaboration with Janssen Pharmaceutica, N.V., a wholly-owned subsidiary of Johnson & Johnson, for the development and marketing of norastemizole. THIS YEAR, WE HAVE SEEN A CONTINUED VALIDATION OF SEPRACOR'S ICE PHARMACEUTICAL STRATEGY. While Sepracor is leading the emerging industry trend to develop singleisomer or active-metabolite versions of existing compounds, major pharmaceutical companies have also validated this strategy. For example, Johnson & Johnson successfully launched Levaquin(R), the single-isomer of the quinolone antibiotic ofloxacin, which has a broader spectrum of activity than its parent drug. SEPRACOR SALES FORCE GROWTH [SEPRACOR SALES FORCE GROWTH CHART] PLANNED ICE PHARMACEUTICAL INTRODUCTION SCHEDULE AND SEPRACOR RESPIRATORY SALES FORCE BUILD
SEPRACOR SALES FORCE

200

Levalbuterol Dry Powder Inhaler Norastemizole Norastemizole with Decongestant

(R,R)-fo

150 Levalbuterol Sustained Release 100 Levalbuterol Oral Levalbuterol Nebule YEAR 1998

Levalbuterol Metered Dose Inhaler

0

1999

2000

2001

2002

2

Marketed by Daiichi, this new anti-infective is already one of the largest pharmaceutical products in Japan. Astra announced its intention to develop the single-isomer version of Prilosec(R), the world's largest selling drug in 1997, which may offer improved efficacy. In addition, Hoechst Marion Roussel successfully completed its market conversion of the Seldane(R) franchise to Allegra(R), which does not exhibit the cardiovascular side effects associated with the parent drug. - OUR ICE PHARMACEUTICALS ARE NOW PROGRESSING FROM THE CLINICAL TRIAL PHASE TO FDA REVIEW, AND FINALLY, TO THE MARKETPLACE. The Company's strategy for commercializing its ICE Pharmaceuticals includes licensing agreements, co-promotion collaborations with major pharmaceutical companies, and direct marketing through one or more specialty sales forces. - Levalbuterol, under review by the FDA, would be the first drug to be sold by our respiratory sales force. Sepracor plans to launch levalbuterol in the second half of 1998. In the future, Sepracor plans to introduce other drugs to be sold by the Company's respiratory sales force, such as norastemizole and (R,R)-formoterol. Sepracor's agreement with Janssen illustrates our co-promotion strategy. In February 1998, the companies announced an agreement for the joint development and marketing of norastemizole. Sepracor has retained the right to co-promote the product in the United States. - OUR DRUG DISCOVERY EFFORTS ALSO HAVE BEGUN TO SHOW RESULTS. We are combining Sepracor's combinatorial chemistry and high-throughput screening expertise with known biological and new genomic-identified drug targets. Sepracor has discovered lead compounds that when further developed, could complement our ICE Pharmaceutical pipeline in the years to come. - Sepracor's consolidated cash position has never been stronger. For the year ended December 31, 1997, the Company had $92.6 million in consolidated cash and marketable securities. In February 1998, Sepracor completed a $189 million offering of convertible subordinated debentures. With approximately $275 million in cash and marketable securities following our recent financing, Sepracor is well positioned to continue developing and marketing its respiratory product line. In addition to these products, we are initiating development of several candidates in the fields of psychiatry/neurology and urology/gastroenterology. - We congratulate Sepracor's shareholders, partners, and employees on an excellent year. We look forward to sharing Sepracor's clinical and commercial successes with you throughout the coming year. [PHOTO of Timothy J. Barberich] Sincerely,
/s/ Timothy J. Barberich Timothy J. Barberich

President and Chief Executive Officer 3

Sepracor's ICE(TM) Strategy CHIRAL CHEMISTRY FORMS THE BASIS OF OUR ICE(TM)STRATEGY. Chiral molecules exist in mirror-image forms called optical isomers. Often only one optical isomer of the pair in a chiral drug is responsible for the drug's efficacy. The other may be inert or may cause undesirable side effects. Many established drugs on the market today are racemic mixtures with equal amounts of two isomers, an (R)-isomer and an (S)-isomer. The United States Food and Drug Administration's 1992 published stereoisomer policy guidelines have encouraged the development of optically pure drugs by suggesting that drug makers submit analyses on the pharmacological activities of each isomer of a new racemic drug candidate. [MOLECULE GRAPHIC] 4

SEPRACOR'S ICE(TM) PHARMACEUTICALS HAVE THE POTENTIAL TO BE PURER, SAFER, OR MORE POTENT VERSIONS OF THEIR PARENT DRUG COMPOUNDS. Since the parent drugs have well-known efficacy and safety profiles, ICE Pharmaceuticals generally can be developed significantly faster, at lower cost, and with decreased regulatory risk than new chemical entities. In addition, established franchises of the parent compounds, combined with long-term patent protection, provide a strong indicator of the market potential for ICE Pharmaceuticals. - SINGLE-ISOMER ICE PHARMACEUTICALS. Racemic drugs exist in mirror-image forms called isomers, designated as (R) and (S). Often only one isomer of a racemic drug is therapeutically active. The other isomer may be inert or may cause undesirable side effects. Racemic albuterol, a widely-prescribed asthma bronchodilator, consists of equal amounts of two isomers, (R)-albuterol and (S)albuterol. - Sepracor's development of the single-isomer version of racemic albuterol illustrates the potential benefits of purification. Based on preclinical and clinical research, Sepracor has demonstrated that racemic albuterol's therapeutic effect resides exclusively in the (R)-isomer. Scientific data have suggested the (S)-isomer may cause detrimental airway hyperreactivity. Sepracor is developing levalbuterol ((R)-albuterol) as a pure and potentially more efficacious single-isomer version of the racemic bronchodilator. - ACTIVE-METABOLITE ICE PHARMACEUTICALS. An active metabolite is a therapeutically active compound produced when a drug is metabolized in the body. Most drugs administered to treat diseases are transformed (metabolized) within the body into a variety of related forms (metabolites), some of which have therapeutic activity. - For example, fexofenadine is an active metabolite of the former best-selling nonsedating antihistamine Seldane(R) (terfenadine). Toxic levels of terfenadine can accumulate in the body when certain other medications interfere with its metabolism. Fexofenadine is marketed as Allegra(R) by HMRI under a patent licensing agreement with Sepracor. Allegra does not exhibit the rare but serious cardiac toxicity associated with its parent drug. - The following pages in this report discuss the clinical and commercial progress of Sepracor's ICE Pharmaceuticals. 5

Respiratory Therapy [DOG WALK PHOTO] Allergy ICE PHARMACEUTICALS FOR ALLERGY
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate FEXOFENADINE (ALLEGRA(R)) nonsedating antihistamine with reduced cardiovascular side effects NORASTEMIZOLE nonsedating antihistamine with improved potency, rapid onset, longer duration, reduced cardiovascular side effects DESCARBOETHOXYLORATADINE (DCL) nonsedating antihistamine with improved potency (-)-CERTIRIZINE antihistamine without sedation PARENT DRUG Current Marketer Seldane(R) HMRI EXPECTED INDICATION Allergy DEVELOPMENT STAGE Launched

HISMANAL(R) J & J

Allergy

Phase II/III

CLARITIN(R) Schering-Plough

Allergy

Preclinical

ZYRTEC(R) Pfizer/UCB

Allergy

Preclinical

1997 WORLDWIDE SALES TO TREAT ALLERGIES WERE APPROXIMATELY $3 BILLION* [PIE CHART] ALLEGRA(R) (SELDANE(R)) $400 MILLION HISMANAL(R) $150 MILLION CLARITIN(R) $1.7 BILLION ZYRTEC(R) $550 MILLION * INCLUDES RELATED BRANDS 6

OVER 40 MILLION AMERICANS SUFFER FROM SEASONAL ALLERGIC RHINITIS (HAY FEVER), AN ALLERGY TO AIRBORNE POLLENS. Symptoms include runny nose, watery eyes, and scratchy throat. Nonsedating antihistamines, such as Claritin(R) and Allegra(R), provide relief to allergy sufferers without causing drowsiness. Worldwide sales of nonsedating antihistamines were approximately $3 billion in 1997. Sales are forecasted to double to $6 billion in the next five years. - ALLEGRA...IMPROVED SELDANE(R) WITHOUT CARDIOTOXICITY. In 1993, Sepracor licensed its U.S. patents covering fexofenadine to HMRI, which developed the drug and launched it in late 1996 as Allegra, a nonsedating antihistamine. While Sepracor is entitled to receive royalty payments upon the expected expiration in 2001 of HMRI's composition-of-matter patent covering fexofenadine, the right to receive royalties is subject to successful resolution of a pending patent interference action. (See Sepracor Inc. Notes to Consolidated Financial Statements, N-Litigation). NORASTEMIZOLE...A POTENTIALLY SAFER AND MORE POTENT THIRD GENERATION NONSEDATING ANTIHISTAMINE. Janssen Pharmaceutica N.V.'s product, Hismanal(R) (astemizole), has a "black box" warning in its product labeling alerting physicians to serious cardiac side effects and the drug-drug interactions. In February 1998, Sepracor and Janssen, a wholly-owned subsidiary of Johnson & Johnson, announced an agreement under which the companies will jointly fund the development of Sepracor's ICE Pharmaceutical, norastemizole, one of the major metabolites of Hismanal. This development and commercialization agreement gives Janssen an option to acquire certain rights in the U.S. and abroad. Sepracor retains the right to co-promote norastemizole in the U.S. Sepracor's first 750-patient, 30-center, Phase III seasonal allergic rhinitis clinical trial has been completed. - DCL... METABOLITE OF CLARITIN WITH THE POTENTIAL FOR GREATER POTENCY. Loratadine, marketed by Schering Corporation as Claritin, is the world's largest-selling nonsedating antihistamine. Claritan sales rose 50% in 1997 to total $1.7 billion worlwide. Loratadine's active metabolite, DCL (descarboethoxyloratadine), has been shown in preclinical studies to offer the potential for greater potency than other commercial antihistamines. - In December 1997, Sepracor and Schering-Plough entered into an agreement which gives Schering-Plough exclusive worldwide rights to Sepracor's patents covering DCL. Under this agreement, Schering-Plough is developing DCL and intends to market the product worldwide. Based on its potential as a more potent antihistamine, DCL could serve as a platform for the evolution of the Claritin franchise. Sepracor is entitled to royalty payments upon the initial sale of the product. 7

Respiratory Therapy [KID IN POOL PHOTO] Asthma ICE PHARMACEUTICALS FOR ASTHMA
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate LEVALBUTEROL bronchodilator with improved safety and efficacy PARENT DRUG Current Marketer VENTOLIN(R)/ PROVENTIL(R) Glaxo-Wellcome, Schering-Plough and generics FORADIL(R)/ ATOCK(R) Novartis/ Yamanouchi EXPECTED INDICATION Asthma DEVELOPMENT STAGE NDA filed

(R,R) - FORMOTEROL bronchodilator with rapid onset and longer duration

Asthma

Phase I/II

1997 WORLDWIDE SALES OF SHORT-ACTING AND LONG-ACTING BRONCHODILATORS FOR ASTHMA THERAPY WERE $2.5 BILLION [PIE CHART] LONG-ACTING BRONCHODILATORS (SEREVENT(R)/ FORADIL(R)/Atock(R)) $.7 BILLION SHORT-ACTING BRONCHODILATORS (VENTOLIN(R)/Proventil(R)) AND OTHERS $1.8 BILLION 8

ASTHMA AFFECTS ABOUT 15 MILLION AMERICANS, INCLUDING 5 MILLION CHILDREN. THE INCIDENCE OF ASTHMA IS INCREASING IN AMERICA. People are twice as likely to suffer from asthma as compared to 1980. Approximately 5,000 deaths occur as a result of asthma in the U.S. each year. Bronchodilators are the primary treatment for acute and chronic asthma attacks and are necessary complements to other asthma therapies, such as steroids or leukotriene antagonists. Short-acting and long-acting bronchodilators prescribed for the treatment of asthma had worldwide sales of over $2.5 billion in 1997. Sepracor's levalbuterol is a single-isomer form of the current market-leading bronchodilator, racemic albuterol. In 1997, racemic albuterol sales exceeded $1.4 billion. - In addition to levalbuterol, Sepracor is developing (R,R)formoterol as a long-acting bronchodilator. This ICE Pharmaceutical is being investigated to determine onset and duration of action as a prophylactic asthma therapy. - LEVALBUTEROL...ADVANCING ASTHMA THERAPY THROUGH PURER MEDICINE. On July 1, 1997, Sepracor announced that it had submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for levalbuterol HCl nebulizer solution. The NDA submission came approximately two years after the drug entered U.S. clinical trials, confirming Sepracor's ability to rapidly develop its ICE Pharmaceuticals. If the FDA approves the NDA, Sepracor plans to launch levalbuterol using its own specialty respiratory sales force during the second half of 1998. - In addition to the nebulized dosage form, Sepracor will be initiating clinical trials with several other formulations and pulmonary drug delivery systems for levalbuterol, including syrup, controlled release tablet, metered-dose inhaler, and dry-powder inhaler versions. - (R,R)-FORMOTEROL ...POTENTIAL FOR RAPID ONSET OF ACTION COUPLED WITH LONG DURATION OF THERAPY. Sepracor is studying (R,R)formoterol, a single-isomer ICE Pharmaceutical, for the dual benefits of rapid onset of action and long duration of therapy. Worldwide sales of long-acting bronchodilators exceeded $700 million in 1997 (Norvartis' Foradil(R), Yamanouchi's Atock(R), Astra's Oxis(TM) Turbuhaler(R), and Glaxo-Wellcome's Serevent(R)). - As Sepracor continues to strengthen and expand its commercial capabilities, the Company is building a specialty respiratory sales force to market the portfolio of respiratory drugs under development. The sales force will sell directly to high-prescribing respiratory specialists, pediatricians, and primary care physicians in leading hospitals and clinics in the U.S. 9

Urology/ Gastroenterology [BACKPACKING PHOTO] ICE PHARMACEUTICALS FOR UROLOGICAL DISORDERS AND GASTROENTEROLOGY
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate (S) - OXYBUTYNIN reduced anticholinergic side effects including dry mouth, restlessness, nausea and palpitations (S) - DOXAZOSIN reduced orthostatic hypotension and improved potency NORCISAPRIDE improved potency without the adverse side effect of cardiac toxicity (S) - LANSOPRAZOLE improved dosing consistency and efficacy (-) - PANTOPRAZOLE GERD treatment with more consistent Byk/AHP plasma levels that may lead to better efficacy and safety PARENT DRUG Current Marketer DITROPAN(R) HMRI EXPECTED INDICATION STAGE Urinary Incontinence DEVELOPMENT

Phase I/II

CARDURA(R) Pfizer

Benign Prostatic Hyperplasia (BPH)

Preclinical

PROPULSID(R) J & J

Emesis (nausea, vomiting) Gastroesophageal Reflux Disease (GERD) Gastroesophageal Reflux Disease (GERD)

Preclinical

PREVACID(R) TAP Pharmaceuticals PANTOZOL(TM)

Preclinical

Preclinical

1997 WORLDWIDE SALES FOR URINARY INCONTINENCE PRODUCTS, ADULT DIAPERS AND DEVICES WERE $2.1 BILLION [PIE CHART] DITROPAN(R)* $134 MILLION DIAPERS AND DEVICES $2 BILLION * INCLUDES RELATED BRANDS 10

URINARY INCONTINENCE (UI) AFFECTS A BROAD RANGE OF ADULTS. THE CONDITION AFFECTS APPROXIMATELY 10 MILLION WOMEN AND 3 MILLION MEN IN THE UNITED STATES, with estimated annual treatment costs of $16 billion. The incidence of urinary incontinence increases progressively with age; approximately 15-30% of older adults have experienced problems with bladder control. Additionally, more than 50% of nursing home residents have been diagnosed with UI. - Drug therapy is rarely used to treat urinary incontinence due to the severe side effects of the existing compounds. A majority of patients use adult diapers or incontinence devices. U.S. sales of these alternatives exceed $2 billion annually. Ditropan(R) (racemic oxybutynin), the most widely used drug to treat urinary incontinence, is associated with unpleasant side effects including dry mouth, nausea, restlessness, and heart palpitations. As a result, pharmaceutical products capture only about 5% of the domestic UI market. - (S)-OXYBUTYNIN...A POTENTIAL TREATMENT FOR URINARY INCONTINENCE WITHOUT THE UNPLEASANT SIDE EFFECTS OF DITROPAN. Sepracor is developing (S)-oxybutynin as a treatment primarily for urge urinary incontinence, a disorder characterized by sudden and involuntary bladder contractions. Racemic oxybutynin is marketed as Ditropan by HMRI. While Ditropan is effective in blocking contractions, it is linked to undesirable anticholinergic side effects that limit the drug's usefulness. - Phase II clinical trials of (S)-oxybutynin are underway. The clinical trials are designed to investigate the drug's efficacy as well as its tolerability. - (S)-DOXAZOSIN...A POTENTIAL BPH TREATMENT WITH DECREASED ORTHOSTATIC HYPOTENSION COMPARED TO CARDURA(R). Sepracor is developing its proprietary (S)-doxazosin as a potentially improved single-isomer version of Cardura, Pfizer's treatment for benign prostatic hyperplasia (BPH). A primary side effect of treatment with alpha-blockers is orthostatic hypotension, which is a lowering of blood pressure that can cause severe dizziness and fainting. This side effect often requires prescribing physicians to titrate to effective dose levels, which necessitates multiple visits to the physician's office. - Sepracor's preclinical studies indicate that (S)-doxazosin may combine a significantly lower incidence of orthostatic hypotension with greater potency than the racemic parent drug. - Other Sepracor ICE Pharmaceuticals under development for the treatment of gastrointestinal and urological disorders include: norcisapride as anantiemetic to treat nausea and vomiting; (S)-lansoprazole and pantoprazole as treatments for gastroesophageal reflux disease (GERD). 11

Psychiatry/Neurology ICE PHARMACEUTICALS FOR PSYCHIATRY AND NEUROLOGY [HAPPY LADY PHOTO]
ICE PHARMACEUTICALS Potential Benefit of Sepracor Candidate (R) - FLUOXETINE increase in flexibility in treating depression (S) - FLUOXETINE prevention of migraine headaches (S) - ZOPICLONE reduced anticholinergic side effects including dry mouth (S) - SIBUTRAMINE reduced anticholinergic side effects Knoll including dry mouth and constipation Pharmaceutical (R) - BUPROPION reduced incidence of seizures, dry mouth and insomnia PARENT DRUG Current Marketer PROZAC(R) Eli Lilly EXPECTED INDICATION Depression DEVELOPMENT STAGE Preclinical

PROZAC(R) Eli Lilly IMOVANE(R) Rhone-Poulenc Rorer MERIDIA(R)

Migraine

Phase I/II

Sleep Disorder

Preclinical

Obesity

Preclinical

ZYBAN(TM) Glaxo-Wellcome

Smoking Cessation

Preclinical

1997 WORLDWIDE SALES FOR THE SSRI MARKET WERE $6.5 BILLION, WHICH DOMINATED THE ANTIDEPRESSANT MARKET* [PIE CHART] PROZAC(R) $2.6 BILLION PAXIL(TM) $1.4 BILLION WELLBUTRIN(R) $.3 BILLION OTHER $.8 BILLION ZOLOFT(R) $1.4 BILLION * INCLUDES RELATED BRANDS 12

DEPRESSION IS A PSYCHIATRIC DISORDER THAT AFFECTS APPROXIMATELY 17 MILLION PEOPLE IN THE UNITED STATES ANNUALLY. Selective Serotonin Reuptake Inhibitors (SSRIs), such as racemic fluoxetine, are prescribed as first-line therapy for the treatment of depression. In 1997, worldwide sales of SSRIs reached $6.5 billion. In addition to SSRIs, other central nervous system (CNS) drugs are available to treat conditions such as sleep disorders, obesity, and smoking cessation. - (R)FLUOXETINE...POTENTIALLY INCREASED FLEXIBILITY IN THE TREATMENT OF DEPRESSION. Racemic fluoxetine is marketed as the antidepressant Prozac(R) by Eli Lilly & Co. Sepracor is conducting preclinical studies of the (R)-isomer of fluoxetine to treat depression. The Company is planning to initiate fullscale clinical trials during 1998. The use of (R)-fluoxetine may provide greater treatment flexibility by reducing the half-life, which would lead to an expedited washout period and the ability to switch drug therapies more rapidly. The single-isomer version of the drug may also increase the suitability of fluoxetine to treat the elderly, as well as other patient groups that have difficulty metabolizing certain drugs. - (S)-ZOPICLONE...A POTENTIAL TREATMENT FOR SLEEP DISORDERS WITH REDUCED ANTICHOLINERGIC SIDE EFFECTS. Sleep disorders affect 56 million people in the U.S. Zopiclone is marketed as Imovane(R) in Europe by RhonePoulenc Rorer Inc. Imovane is a non-benzodiazepine, short-acting hypnotic sedative for the treatment of sleep disorders. In 1997, worldwide sales of Imovane were approximately $144 million. Imovane was not developed for the U.S. market, which is served primarily by zolpidem tartrate, marketed as Ambien(R) by Searle. Ambien is a rapid onset, non-benzodiazepine hypnotic. U.S. sales of Ambien in 1997 were approximately $500 million. Preclinical studies show that the use of (S)-zopliclone has the potential to reduce anticholinergic side effects, particularly dry mouth. -(S)-SIBUTRAMINE...SINGLE-ISOMER FORM OF MERIDIA(R). Knoll Pharmaceutical Co., a division of BASF AG, markets racemic sibutramine as Meridia for the treatment of obesity. Sepracor has initiated an exploratory program to determine whether (S)-sibutramine may reduce anticholinergic side effects associated with Meridia. - Other ICE Pharmaceuticals in preclinical development for treatment of central nervous system disorders or for pain management include: (S)-fluoxetine for migraine prophylaxis; norcisapride as an anti-anxiety drug; (R)-ketoprofen and (R)-ketorolac for pain management; and (R)-bupropion for smoking cessation. 13

Drug Discovery SEPRACOR'S NEW CHEMICAL ENTITIES SEPRACOR LEAD COMPOUND DISEASE

[LAB PHOTO]

RECEPTOR/ENZYME Adenosine A2A A3 Phosphatase P1B Opiate mm kappa Glucocorticoid Estrogen Infectious Disease narrow spectrum, resistant gram-positive infection

SEP - 89,068 SEP - 42,960

Pain, Anxiety Asthma

SEP - 121,788

Diabetes, Cancer

SEP - 130,551 SEP - 130,169 SEP - 119,249 SEP - 119,244 SEP - 132,613 SEP - 119,255

Pain, Respiratory

Inflammation Osteoporosis, Cancer Bacterial Infection

THE DRUG DISCOVERY PROCESS [FLOW CHART] COMBINATORIAL CHEMISTRY MANY COMPOUNDS FUNCTIONAL GENOMICS DISEASE TARGETS BIOINFORMATICS COMPUTER CONTROL HIGH-THROUGHPUT SCREENING "HITS" LEAD COMPOUNDS PRECLINICAL AND CLINICAL TRIALS 14

SEPRACOR'S DISCOVERY STRATEGY IS CLOSELY ALIGNED WITH THE ICE PHARMACEUTICAL STRATEGY. BOTH PROGRAMS FOCUS ON RELATED THERAPEUTIC AREAS, such as inflammation, pain, and urological diseases. While the ICE Pharmaceutical strategy potentially improves existing drugs, the Discovery approach creates new chemical entities, which may lead to breakthrough compounds. By focusing drug discovery efforts on synthetic, medicinal, and combinatorial chemistries, Sepracor has developed a proprietary and highly diverse corporate file of small, drug-like molecules with potential therapeutic advantages over compounds currently used for treatment. - COMBINATORIAL CHEMISTRY TECHNIQUES ARE USED TO PRODUCE LIBRARIES OF NOVEL COMPOUNDS FOR SCREENING. For both known biological and new genomic-identified drug targets, relevant assays are designed and implemented in high-throughput screening formats. Sepracor's unique method of leveraging combinatorial chemistry combined with high-throughput screening provides for competitive advantages in the drug discovery arena. The Company's propriety chemistry allows Sepracor to create specifically shaped molecules that will target receptors in a highly precise manner. This process is generating more selective and potent lead compounds, which complement Sepracor's current therapeutic focus. - Sepracor's collaborative relationships with select biotechnology partners give the Company access to proprietary molecular targets that are within Sepracor's therapeutic areas of interest and are suitable for high-throughput screening formats. The relationship between high-throughput screening and combinatorial chemistry dramatically shortens the time to discover lead compounds and develop drug candidates. - THE POTENCY, SELECTIVITY, AND STRUCTURE OF A LEAD COMPOUND, COMBINED WITH ITS PHYSICAL PROPERTIES AND BIOAVAILABILITY, INCREASE THE PROBABILITY THAT THE SUBSTANCE WILL BECOME A DRUG. When a lead is discovered, focused libraries are designed and synthesized utilizing directed combinatorial chemistry techniques. Using this technology, Sepracor has generated a number of lead compounds in less than one year. For example, Sepracor has identified SEP-132,613 as a promising lead anti-infective compound with "in vitro" potency against a wide range of resistant organisms. Sepracor has also identified SEP-42,960 and SEP-89,068 as unique, druglike molecules with "in vitro" activity against the adenosine receptor subtypes. Other lead compounds that have shown high potency and selectivity against the opiate receptor subtypes "in vitro" are SEP-130,551 and SEP130,169. - IN THE FUTURE, SEPRACOR EXPECTS THESE DRUG DISCOVERY ACTIVITIES TO COMPLEMENT THE COMPANY'S ICE PHARMACEUTICAL PIPELINE. 15

SEPRACOR INC. SELECTED FINANCIAL DATA
Year Ended December 31, (in thousands, except per share data) 1997 1996 1995 --------------------------------------------------------------------------------------------------------STATEMENT OF OPERATIONS DATA: Revenues: Product sales $ 9,636 $ 13,784 $ 14,271 Collaborative research and development 58 25 1,036 License fees and royalties 5,643 1,232 900 ----------------------------------------Total revenues 15,337 15,041 16,207 ----------------------------------------Costs and expenses: Cost of products sold 5,992 6,784 10,410 Research and development 43,055 35,828 21,707 Purchase of in-process research and development (1) ---Selling, general, administrative and patent costs 17,254 16,312 20,411 Restructuring and impairment charges (2) 4,179 -4,144 ----------------------------------------Total costs and expenses 70,480 58,924 56,672 ----------------------------------------Loss from operations (55,143) (43,883) (40,465) ----------------------------------------Other income (expense): Equity in investee losses (3) (2,755) (17,539) (808) Interest income 5,766 6,713 3,228 Interest expense (5,976) (6,140) (2,077) Gain on Sale of ChiRex, Inc. 30,069 --Other (4) 547 (107) (1,171) ----------------------------------------Net loss before minority interests (27,492) (60,956) (41,293) Minority interests in subsidiaries 1,369 846 7,881 ----------------------------------------Net loss $(26,123) $(60,110) $(33,412) ----------------------------------------Net loss applicable to common shares (5) $(26,723) $(60,710) $(33,412) ----------------------------------------Basic and diluted net loss per common share $ (0.97) $ (2.25) $ (1.54) Basic and diluted weighted average number of common shares outstanding 27,599 27,032 21,637 BALANCE SHEET DATA (IN THOUSANDS): Cash and marketable securities Total assets Long-term debt Stockholders' equity

$ 92,560 128,507 84,268 12,032

$103,650 146,689 85,267 30,392

$143,250 202,713 85,818 89,227

(1) Represents a charge in connection with an acquisition by BioSepra Inc. (2) Represents restructuring and impairment charges taken by BioSepra in December 1997 and June 1995. See Footnote H - Notes to Consolidated Financial Statements. (3) 1996 figures reflect a net loss for ChiRex and HemaSure that includes one-time charges taken in connection with ChiRex's initial public offering and related transactions and HemaSure's loss from discontinued operations, respectively. See Footnote D - Notes to Consolidated Financial Statements. (4) Includes a write-off of approximately $800,000 relating to certain deferred finance charges taken in September 1995. (5) Includes $600,000 in preferred stock dividends. See Footnote B - Notes to Consolidated Financial Statements. 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The consolidated financial statements include the accounts of Sepracor Inc. and its majority and wholly-owned subsidiaries, including BioSepra Inc. ("BioSepra"), Sepracor Canada Limited, HemaSure Inc. ("HemaSure") (from January 1994 to September 1995), SepraChem Inc. (from January 1996 to March 1996), New England Pharmaceuticals, Inc. (from June 1995 to June 1996 when it was merged into Sepracor), and Versicor (from May 1995 to December 1997). In September 1995, HemaSure completed the sale of 2,500,000 shares of its common stock, $.01 par value per share, pursuant to an underwritten public offering. As a result of the sale, the Company's ownership of the outstanding shares of common stock of HemaSure was reduced from approximately 55% to approximately 37%. Effective September 27, 1995, the Company no longer consolidates HemaSure's financial statements and accounts for the Company's investment in HemaSure using the equity method. The sale resulted in a gain of approximately $15,235,000, which was recorded as an increase to Sepracor's additional paid-in capital. At December 31, 1997, the Company's investment in HemaSure was recorded to zero. In March 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that is a combination of Sterling Organics Limited, a United Kingdom fine chemical manufacturer, and the chiral chemistry business of Sepracor, which was conducted through its subsidiary SepraChem, completed an initial public offering of common stock. ChiRex sold 6,675,000 shares of its common stock at $13 per share. In exchange for the contribution of SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a result Sepracor owned approximately 32% of ChiRex. Sepracor accounted for this transaction as a non monetary exchange of assets and, therefore, no gain or loss was recorded as a result of this transaction. From March 11, 1996 until March 31, 1997, Sepracor carried its investment in ChiRex using the equity method of accounting and, accordingly, recorded $2,518,000 as its share of ChiRex's losses for the year ended December 31, 1996 and $383,000 as its share of ChiRex's income for the quarter ended March 31, 1997. On March 31, 1997, Sepracor received net proceeds of approximately $31,125,000 from the public sale of all of its shares of ChiRex common stock. As a result of this transaction, Sepracor recognized a gain of $30,069,000, which was recorded as other income. In March 1996, Sepracor loaned BioSepra $3,500,000. In addition, Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997 (the "loans"). Interest on the loans was prime plus 3/4%. The loans, including any interest thereon, were convertible into shares of BioSepra stock, at the option of Sepracor at any time prior to payment. On June 10, 1996, BioSepra borrowed the additional $2,000,000 and Sepracor converted the outstanding principal amount of $5,500,000 plus accrued interest of $47,639 into 1,369,788 shares of BioSepra common stock. As a result of the conversion, Sepracor owns approximately 64% of BioSepra. Versicor was formed in May 1995 to develop novel drug candidates principally for the treatment of infectious diseases. In 1995, Versicor entered into a Convertible Subordinated Note Agreement ("the Note Agreement") with Sepracor. Under this Note Agreement, Sepracor agreed to loan to Versicor until October 2, 1998, up to an aggregate of $4,700,000. Amounts outstanding accrued interest at the prime rate plus 1/2% not to exceed 9.5%. Amounts outstanding were convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. In 1996, Versicor entered into a loan agreement with Sepracor. Under this agreement, Sepracor agreed to loan to Versicor until October 2, 1998 up to an aggregate of $7,500,000. As of June 23, 1997, this agreement was amended to provide that principal and interest payments due to Sepracor, would be convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock, by dividing the amount outstanding, including principal and interest, by $0.7833. The loan accrued interest equal to the prime rate minus 1/4%, adjusted under certain circumstances. On December 10, 1997, Versicor completed a private equity financing for approximately $22,000,000 and issued Series C Preferred Stock. As part of the transaction, Sepracor exercised its conversion option on the

Versicor Convertible Subordinated Notes (the "Notes") in the amount of $9,530,000. The remaining $6,034,000, which was outstanding under the Notes at the time, was repaid to Sepracor before the end of 1997. Sepracor recognized a gain of approximately $5,688,000 on the transaction, which was recorded as an increase to additional paid-in capital. At December 31, 1997, Sepracor had an investment in Versicor of $3,971,000 and there were no amounts outstanding under the Notes. Sepracor's ownership as of December 31, 1997 was approximately 22%, thereby making Versicor an affiliate and reportable under the equity method. Sepracor recorded $75,000 as its share of Versicor losses for the period December 10 though December 31, 1997. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 REVENUE Product sales were $9,636,000 in 1997, $13,784,000 in 1996 and $14,271,000 in 1995. Product sales are primarily attributable to BioSepra's sales of bioprocessing media, supplies and equipment. The decrease in revenue from 1995 to 1996 was primarily due to only consolidating the results of SepraChem through March 11, 1996. The decrease in revenue from 1996 to 1997 is attributable to fluctuations in the timing of large production scale media orders and to the absence of one-time stocking orders from a major distributor of research instruments, which occurred in 1996. In addition, the Company believes that the sales of HyperD media have historically been adversely affected by the now settled patent litigation with PerSeptive Biosystems Inc. BioSepra's future success is dependent, in part, on its ability to generate increased sales of its HyperD media products and research devices. Collaborative research and development revenues were $58,000, $25,000 and $1,036,000, in 1997, 1996 and 1995, respectively. The decrease from 1995 to 1996 was primarily related to a milestone 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) payment recorded in 1995 from Bayer Corporation. This contract was subsequently terminated by Bayer. License fees and royalties were $5,643,000 in 1997, $1,232,000 in 1996 and $900,000 in 1995. The increase from 1995 to 1996 was due to revenue recognized by BioSepra under an agreement with Beckman Instruments Inc. ("Beckman") in 1996. The increase from 1996 to 1997 was due to a $1,875,000 milestone payment from Hoechst Marion Roussel Inc. ("HMRI") under the patent license agreement on terfenadine carboxylate, marketed by HMRI as AllegraTM, and $3,600,000 recognized by BioSepra under the agreement with Beckman, that was revised in December 1997. The increases in 1996 and 1997 were offset by decreases in royalties received by Tanabe Seiyake Co. Ltd. ("Tanabe") relating to Tanabe's licensing and use of Sepracor's technology in the manufacture of the chiral intermediate of diltiazem: $168,000 in 1997, $333,000 in 1996 and $675,000 in 1995. Beginning in March 1996, Sepracor splits the royalty revenue from Tanabe with ChiRex on a 50/50 basis. In December 1997, Sepracor signed a licensing agreement with Schering-Plough Corporation ("Schering") giving Schering exclusive worldwide rights to Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active metabolite of loratadine. Under the terms of the agreement, Sepracor has exclusively licensed its DCL rights to Schering, which expects to develop and market the DCL product worldwide. Schering will pay Sepracor an upfront license fee of $5,000,000 and royalties on DCL sales, if any, beginning at first product launch. Any such royalties paid to Sepracor will escalate over time and upon the achievement of sales volume and other milestones. As of December 31, 1997, the agreement was still pending clearance under the Hart Scott Rodino Act. In January 1998, Sepracor and Schering were notified that no objection would be raised under the Hart Scott Rodino Act with respect to the license agreement. Shortly thereafter, Sepracor received the $5,000,000 upfront license payment from Schering and recorded the payment as license revenue in the first quarter of 1998. The upfront license fee will be offset against future royalty payments. On February 4, 1998, Sepracor signed a collaboration and license agreement with Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, relating to the development and marketing of norastemizole, a third generation nonsedating antihistamine. Under the terms of the agreement, the companies will jointly fund the development of norastemizole, and Janssen has an option to acquire certain rights regarding the product in the U.S. and abroad. When exercised, Janssen and Sepracor will equally share the costs and profits associated with the further development, marketing and sales of norastemizole in the U.S. Sepracor will also retain the right to co-promote the product in the U.S. Alternatively, Sepracor can elect to receive royalties, if any, on Janssen sales of norastemizole in the U.S., in the event it decides not to co-promote the product. Outside of the U.S., Janssen has the right to develop and market norastemizole, and Sepracor will earn royalties on product sales, if any. In addition, Janssen has worldwide OTC rights to norastemizole. Cost of products sold, as a percentage of product sales, was 57% in 1997, 49% in 1996 and 73% in 1995. Cost of products sold decreased in 1996 as compared with 1995 primarily as a result of the elimination of sales of Biopass S.A. ("Biopass") products, a wholly owned subsidiary of BioSepra, which was sold in July 1995. To a lesser extent, cost of products sold decreased in 1996 compared to 1995 as a result of overall reductions in manufacturing costs at BioSepra. The increase in 1997 from 1996 was primarily due to product mix changes and fluctuations in timing of production-scale customer orders of BioSepra. In addition, the increase is also attributable to the transition of BioSepra resources from product development to production support, in association with the commercialization of new media and instrument products. A payment of $469,000 was made to a third party in connection with the HMRI milestone payment and is included in cost of products sold in 1997. Research and development expenses were $43,055,000 in 1997, $35,828,000 in 1996 and $21,707,000 in 1995. Research and development spending was primarily focused on preclinical and clinical trials in Sepracor's pharmaceutical program and on discovery initiatives at Versicor. The increase in 1996 compared to 1995 was due to the costs associated with the progression of Sepracor's drug candidates into later and more costly stages of development. In 1996, levalbuterol and (S)-ketoprofen progressed into Phase III clinical trials, and norastemizole progressed into Phase II clinical trials, and the Company initiated Phase I clinical trials on (S)oxybutynin and preclinical trials on (R,R)-formoterol. In addition, costs increased in 1996 compared to 1995 due to the full-scale operation of discovery capabilities at Versicor. Costs increased in 1997 as compared to 1996 as levalbuterol Phase III clinical trials were completed, a new drug application ("NDA") was submitted for levalbuterol to the Food and Drug Administration ("FDA"), Phase III clinical trials began for norastemizole, and

Phase I clinical trials were initiated for (R,R)-formoterol. Selling, general and administrative expenses were $15,594,000, $15,245,000 and $19,037,000, in 1997, 1996 and 1995, respectively. The decrease in expenses in 1996 as compared to 1995 was primarily due to the hiring of certain management personnel at Sepracor and BioSepra in 1995, increased legal expenses in 1995, related to the recently settled lawsuits filed by and against PerSeptive, and increased marketing expenses for HemaSure's LeukoNet Pre-Storage Leukoreduction Filtration System ("Leukonet"). In addition, in 1996, HemaSure ceased being consolidated in the results of Sepracor and BioSepra began to realize the benefits of a cost-reduction program implemented in June 1995. The increase in 1997 as compared with 1996 resulted primarily from market research costs incurred by Sepracor in determining the positioning of Sepracor's levalbuterol product in the market and costs related to infrastructure development for a direct sales force, offset by savings from personnel reductions at BioSepra. The Company expects selling, general and administrative expenses to increase in 1998 as the Company accelerates the establishment of its direct sales force. Subject to FDA approval of the Company's NDA, Sepracor is currently planning to commence sales of the nebulized form of levalbuterol in late 1998. In December 1997, BioSepra implemented a cost-reduction program that included the discontinuance of a product line and a reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process segments of the biopharmaceutical and genomics market. In conjunction 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) with the cost-reduction program BioSepra also wrote down intangible assets to their net realizable value. In total, BioSepra recorded restructuring and impairment charges totaling $4,179,000 in the fourth quarter of 1997. Of this amount, $3,328,000 represents the write down of goodwill to its net realizable value, $690,000 represents the write down of inventory and fixed assets associated with the discontinued product line and $161,000 represents severance and benefits related to the reduction in workforce in the U.S. BioSepra terminated seven employees consisting of marketing/sales, finance and administrative personnel. BioSepra expects to pay all of the severance and related benefits in 1998. In June 1995, BioSepra announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process development and process segments of the biopharm aceutical market. In connection with this program in July 1995, BioSepra completed the sale of Biopass. As part of the cost-reduction program, BioSepra recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount, $1,180,000 represents severance and benefits related to the reduction in workforce in the U.S. and France and $2,964,000 related to impairment of intangibles and loss on assets to net realizable value. BioSepra has completed its reduction in workforce related to this cost-reduction program resulting in the termination of 55 employees consisting of research and development, administrative, production and marketing/sales personnel. BioSepra paid $140,000 and $1,025,000 of the costs relating to the employee reduction as of December 31, 1996 and 1995, respectively, and the remaining severance and medical payments were paid in 1997. In July 1995, BioSepra sold Biopass while retaining the chromatography column technology that it obtained when it acquired Biopass. The results of Biopass operations through July 19, 1995 have been included in the consolidated results of operations for the year ended December 31, 1995. The loss of $2,964,000 on the sale of Biopass was recorded in restructuring and impairment costs in the results of operations in 1995. In 1996, BioSepra wrote-off the remaining unamortized portion of certain purchased technology of approximately $741,000. Legal expenses related to patents were $1,660,000, $1,067,000 and $1,374,000 for 1997, 1996 and 1995, respectively. The decrease in 1996 compared to 1995 was due to chiral patent costs being transferred to ChiRex, beginning in March 1996. The increase in 1997 compared with 1996 was due to maintenance fees associated with the increased volume of patent filings and costs incurred in defending patent interference claims made against the Company in 1997. Equity in loss of investees was $2,755,000, $17,539,000 and $808,000 for 1997, 1996 and 1995, respectively. The equity in loss of investees consists of the Company's portion of the net loss of HemaSure, ChiRex (through March 31, 1997) and Versicor (beginning December 10, 1997). The increase in 1996 as compared to 1995 was due to one-time write-offs of $11,076,000 from ChiRex's initial public offering and resulting transactions (Sepracor's portion of this one-time write-off was $3,544,000). Included in HemaSure's results was $24,748,000 relating to the operations and discontinuation of HemaSure's blood plasma business (Sepracor's portion of this was $9,157,000). The decrease in 1997 compared to 1996 was primarily related to the absence of any one-time write-offs, ChiRex having net income for the period in 1997 during which Sepracor maintained an interest and recording of HemaSure losses for only 11 months of 1997 as the investment was written down to zero. Interest income was $5,766,000, $6,713,000 and $3,228,000 for 1997, 1996, and 1995, respectively. The increase in 1996 was primarily due to a larger average cash balance available for investment, while the decrease in 1997 is principally the result of a lower average cash balance available for investment. Interest expense was $5,976,000, $6,140,000 and $2,077,000 in 1997, 1996 and 1995, respectively. The increase in interest expense in 1996 compared to 1995 were due to the $80,880,000 subordinated convertible debenture offering completed in November and December of 1995. The decrease in 1997 was a result of reduced borrowings by BioSepra and more favorable interest rates on the remaining borrowings. Net other income (expense) was $547,000, $(107,000), $(1,171,000) for 1997, 1996 and 1995, respectively. The decrease in expense in 1996 was primarily due to the one-time write-off of approximately $800,000 of

certain deferred financing costs by Sepracor related to SepraChem in 1995. Income in 1997 related to the receipt of a Canadian tax refund and favorable foreign exchange transactions associated with BioSepra. Minority interests in subsidiaries resulted in a reduction of consolidated net loss of $1,369,000, $846,000, and $7,881,000 for 1997, 1996 and 1995, respectively. The decrease in 1996 compared to 1995 resulted from smaller losses at BioSepra and from HemaSure no longer being consolidated into the results of operations of Sepracor. The increase in 1997 compared to 1996 related to larger losses at BioSepra, offset by a reduction in the percentage of minority interest, as Sepracor's ownership increased to 64% in June 1996. OTHER The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not believe that the adoption will have a material effect on results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. Sepracor is in the process of evaluating the impact of the new 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) standard on the presentation of the financial statements and the disclosure therein. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents plus marketable securities of Sepracor and its subsidiaries, including BioSepra, totaled $92,560,000 at December 31, 1997, compared to $103,650,000 at December 31, 1996. Cash and cash equivalents plus marketable securities of Sepracor, excluding BioSepra, at December 31, 1997 were $90,044,000. The net cash used in operating activities for the twelve months ended December 31, 1997 was $43,763,000. The net cash used in operating activities includes a net loss of $26,123,000 adjusted by non-cash charges of $11,561,000. Non-cash charges include a restructuring and impairment charge of $4,018,000 relating to BioSepra. This was offset by the gain on sale of ChiRex of $30,069,000 and the minority interest in subsidiary portion of the net loss of $1,369,000. The accounts payable and accrued expense balances increased a total of $5,470,000 from the December 31, 1996 balances, primarily due to increased research and development accruals at Sepracor. The deferred revenue decreased a total of $3,620,000 due to BioSepra's recognition of license revenue relating to the Beckman contract. In 1994, Sepracor, BioSepra and HemaSure entered into an equipment leasing arrangement that provides for a total of up to $2,000,000 of financing to Sepracor and its subsidiaries for the purpose of financing capital equipment in the United States. All outstanding amounts are collateralized by the assets so financed and are guaranteed by Sepracor. At December 31, 1997, there was $355,000 outstanding under this credit facility relating to Sepracor and BioSepra, of which $205,000 represented Sepracor's portion. At December 31, 1997, Sepracor had guaranteed $624,000 of outstanding bank borrowings of BioSepra S.A., BioSepra's wholly owned French subsidiary. In 1994, Sepracor's wholly owned subsidiary, Sepracor Canada Limited, entered into two credit agreements with two Canadian provincial and federal business development agencies for approximately $2,960,000 in term debt, of which $2,590,000 is at an annual interest rate of 9.25% and $370,000 is interest free. As of December 31, 1997, Sepracor Canada Limited had received approximately $2,960,000 of such term debt, of which $2,295,000 was outstanding. In 1995 and in 1997, Versicor entered into Convertible Subordinated Note Agreements ("the Note Agreements") with Sepracor. Under these Note Agreements, Sepracor agreed to loan to Versicor amounts as required for operating purposes. The amounts outstanding under the 1995 note accrued interest at the prime rate plus 1/2% not to exceed 9.5%. The amounts outstanding under the 1997 note accrued interest at the prime rate minus 1/4%, adjusted under certain circumstances. The Note Agreements were convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. On December 9, 1997, Sepracor converted an aggregate of $9,530,000 of the foregoing Note Agreements into 12,166,667 shares of Versicor Series B Preferred Stock (1,095,000 shares on a common equivalent basis after giving effect to a 9-for-1 reverse common stock split declared by Versicor in December 1997). On December 31, 1997, Versicor repaid Sepracor the remaining $6,034,000 due under the Note Agreements. In 1996, Sepracor, BioSepra and Versicor entered into a revolving credit agreement with a commercial bank that provides for borrowing of up to an aggregate of $10,000,000 (the "Revolving Credit Agreement"), pursuant to which BioSepra and Versicor could borrow up to $3,000,000 each. All borrowings are collateralized by certain assets of the companies. On December 30, 1997, the Revolving Credit Agreement was amended to remove Versicor as a party thereto. The Revolving Credit Agreement contains covenants relating to minimum tangible capital base, minimum cash or cash equivalents, minimum liquidity ratio and maximum leverage for Sepracor and BioSepra. Sepracor is a guarantor of all outstanding borrowings. At December 31, 1997, there were no amounts outstanding under this agreement. The annual interest rate on such borrowings is at the lower of the prime rate or LIBOR plus 175 basis points.

On December 30, 1997, Sepracor entered into a put agreement with a commercial bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of Versicor, a former wholly owned subsidiary, in the event of a default by Versicor under its loan agreement with the bank. In the event that the put right is exercised by the bank, the bank will assign its security interest in the fixed assets of Versicor to Sepracor. On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4% Debentures are convertible into Sepracor common stock, at the option of the holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at 6 1/4% payable semi-annually, commencing on August 15, 1998. The 6 1/4% Debentures are not redeemable by the Company prior to February 18, 2001. The Company may be required to repurchase the 6 1/4% Debentures at the option of the holders in certain circumstances. As part of the sale of the 6 1/4% Debentures, Sepracor incurred approximately $5,915,000 of offering costs, which will be recorded as other assets and amortized over seven years, the term of the 6 1/4% Debentures. The net proceeds to the Company after offering costs was $183,560,000. The Company intends to use the proceeds from the sale of the 6 1/4% Debentures for the establishment of the Company's respiratory sales force, marketing of certain ICEs, ongoing preclinical and clinical trials, funding of other research and development programs, and working capital and other general corporate purposes. On March 26, 1998, Sepracor and Beckman terminated their Stock Purchase Agreement under which Beckman acquired 312,500 shares of Sepracor Series B Redeemable Preferred Stock. Sepracor paid Beckman the original purchase price of the stock plus accrued dividends totalling $6,850,000. As a result of this termination, subsequent to year-end, Sepracor has reclassed its convertible redeemable preferred stock as a current liability at December 31, 1997. In addition, BioSepra and Beckman amended their distribution agreement whereby BioSepra granted a non-exclusive right to manufacture instruments to Beckman, 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) removed its obligation to manufacture instruments for Beckman, and sold the discontinued instrument product inventory to Beckman for $250,000. LEGAL PROCEEDINGS In July 1997, the United States Patent and Trademark Office (the "PTO") informed Sepracor that it had declared an interference between Sepracor's previously issued method-of-use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and HMRI's method-ofuse patent application on the anti-histaminic effects of fexofenadine on hepatically impaired patents. The primary objective of a patent interference, which can only be declared by the PTO, is to determine the first to invent any overlapping subject matter claimed by more than one party. In the course of an interference, the parties typically present evidence relating to their inventive activities as to the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient inventive date, and, therefore, is entitled to a patent claiming the overlapping subject matter. If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. In December 1997, The Company and its subsidiary, BioSepra, settled their long standing patent lawsuit with PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra. Under the terms of the settlement, PerSeptive received an unspecified amount and BioSepra obtained a limited, non-exclusive license under PerSeptive's Perfusion Chromatography R patents to make, use and sell its HyperD R product line free of claims of infringements by PerSeptive. HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged that HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon three patents held by Pall. On October 14, 1996, in connection with the first action concerning U.S. Patent No. 5,451,321 (the "'321 patent"), HemaSure filed for summary judgment of noninfringement. Pall filed a cross motion for summary judgment of infringement at the same time. In October 1997, the U.S. District Court of the Eastern District of New York granted in part Pall's summary judgment motion relating to the '321 patent. The court has not yet ruled on the validity of Pall's '321 patent claims, which HemaSure has asserted are invalid and unenforceable. The court now will need to review and determine the validity of this patent prior to any further action. No date has been set for these proceedings. With respect to the second action concerning U.S. Patent Nos. 4,340,479 (the "'479 patent") and 4,952,572 (the "'572 patent"), HemaSure has answered the complaint stating that it does not infringe any claim of the asserted patents. Further, HemaSure has counterclaimed for declaratory judgment of invalidity, noninfringement and unenforceability of the '572 patent, and a declaratory judgment of noninfringement of the '479 patent, as a result of a license. HemaSure believes, based on advice of its patent counsel, that a properly informed court should conclude that the manufacture, use and/or sale by HemaSure or its customers of the present LeukoNet product does not infringe any valid enforceable claim of the three asserted Pall patents. However, there can be no assurance that HemaSure will prevail in the pending litigations, and an adverse outcome in a patent infringement action would have a material adverse effect on HemaSures's future business and operations. FACTORS AFFECTING FUTURE OPERATING RESULTS Certain of the information contained in this Annual Report, including information with respect to the safety, efficacy and potential benefits of the Company's Improved Chemical Entities ("ICE(TM)s") under development and the scope of patent protection with respect to these products and information with respect to the other plans and strategy for the Company's business and the business of the subsidiaries and certain affiliates of the Company, consists of forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include the following: Since substantially all of Sepracor's ICEs are at the early stages of development, there can be no assurance that

these drugs will have improved characteristics that provide greater benefits or fewer side effects than the corresponding parent drugs or that research efforts undertaken by Sepracor will lead to the discovery of future drugs with such improved characteristics. All of the drugs under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and an additional commitment of resources prior to their successful development and commercialization. Sepracor has limited experience in conducting human clinical trials and in manufacturing pharmaceutical products and has no experience in marketing such products. Proprietary rights relating to the products of Sepracor will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. Sepracor has filed patent applications covering compositions containing, and methods of using, single isomer or active-metabolite forms of various compounds for specific applications. The ability to commercialize successfully any ICE will depend to a significant degree upon the ability to obtain and maintain use patents of sufficient scope to prevent third parties from developing similar or competitive products. Most of the ICEs for which Sepracor has obtained use patents or filed applications therefor are claimed by composition of matter or other patents or patent applications held by third parties. In each such case, unless subject to an existing license agreement, the ICE may not be commercialized until the expiration of corresponding third party composition-of-matter or other patents. There can be no assurance that any pending patent applications relating to the products of Sepracor will result in patents being issued or that any such patents will afford protection against competitors with similar technology. There may be pending or issued third-party patents relating to the product of Sepracor and Sepracor may need to acquire licenses to, or to contest the validity of, any such patents. It is likely that significant funds would be required to defend any claim that Sepracor 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) infringes a third-party patent, and any such claim could adversely affect sales of the challenged product of Sepracor until the claim is resolved. There can be no assurance that any license required under any such patent would be made available. Certain of the technology that may be used in the products of Sepracor is not covered by any patent or patent application. In the absence of patent protection, the business of Sepracor may be adversely affected by competitors who independently develop substantially equivalent technology. In July 1997, the PTO informed Sepracor that it had declared an interference between Sepracor's previously issued use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and the use patent application of HMRI on the anti-histaminic effects of fexofenadine on hepatically impaired patients. The primary objective of a patent interference, which can only be declared by the PTO, is to determine which party was the first to invent any overlapping subject matter claimed by more than one party. In the course of an interference, the parties typically present evidence relating to their invention of the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient date of invention, and, therefore, is entitled to a patent claiming the overlapping subject matter. If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. Sepracor and HMRI have agreed to resolve the interference by arbitration. Selection of the arbitrator and initiation of the arbitration proceeding is expected to occur in the first half of 1998. While it is possible that the arbitrator's decision may be rendered during 1998, there can be no assurance that the arbitrator's decision will be rendered at that time. Once rendered, the arbitrator's decision must be submitted to the PTO for final approval. The interference is in its early stages and the Company is unable to predict its outcome. The marketing and sale of pharmaceutical products developed by Sepracor or its development partners will require FDA approvals as well as similar approvals in foreign countries. To obtain such approvals, the safety and efficacy of such products must be demonstrated through clinical trials. There can be no assurance that the results of such clinical trials will be consistent with the results obtained in preclinical studies or that the results obtained in later phases of clinical trials will be consistent with those obtained in earlier phases. There also can be no assurance that any such products will be shown to be safe and efficacious or that regulatory approval for any such products will be obtained on a timely basis, if at all. The clinical trial and regulatory approval process can take a number of years and require the expenditure of substantial resources. With respect to certain of the Company's ICEs, the Company has been able to shorten the regulatory approval process of its ICEs by relying on preclinical and clinical toxicology data already on file with the FDA with respect to the parent drug. Although Sepracor has to date been successful in employing this strategy in connection with the approval process of certain of its proposed products, there can be no assurance that the FDA will permit the Company to utilize this strategy in the future. Accordingly, the Company may be required to expend significant resources to complete such preclinical and clinical studies for its other ICEs, thereby significantly delaying the regulatory approval process. The failure of the Company to obtain regulatory approval on a timely basis and unanticipated significant expenditures on preclinical and clinical studies could adversely affect the financial condition of the Company. While the Company expects FDA approval of its NDA for the nebulized form of levalbuterol in late 1998, there can be no assurance that the FDA will approve such NDA by such date, if at all. The Company currently has very limited sales and marketing experience. If the Company is successful in developing and obtaining regulatory approval for its products under development, it expects to license certain products to large pharmaceutical companies and market and sell certain other products through its direct specialty sales forces or through other arrangements, including co-promotion arrangements. In anticipation of expected FDA approval of the nebulized form of levalbuterol later this year, the Company is beginning to establish a direct sales force to market the inhalation solution of levalbuterol. Further, as the Company begins to enter into co-promotion arrangements or market and sell additional products directly, the Company will need to significantly expand its sales force. It is expected that the Company will incur significant expense in establishing its direct sales force. The ability of the Company to realize significant revenues from its direct marketing and sales activities is dependent on its ability to attract and retain qualified sales personnel in the pharmaceutical industry. There can be no assurance, however, that the Company will be able to attract and retain such qualified sales personnel, that it will successfully expand its marketing and direct sales force in the future on a timely basis, that

the cost of establishing such marketing or sales force will not exceed any product revenues, that its sales and marketing efforts will be successful, or that the need to comply with FDA limits on drug product marketing, including limits on claims of comparative safety or efficacy, will not inhibit the effectiveness of such marketing. In addition, the Company will need to enter into co-promotion arrangements with third parties where its own direct sales force is neither well situated nor large enough to achieve maximum penetration in the market. There can be no assurance that the Company will be successful in entering into any such arrangements or that the terms of any such arrangements will be favorable to the Company. Sepracor's ability to commercialize certain drugs that it develops is likely to depend in significant part on its ability to enter into collaborative agreements with pharmaceutical companies to fund all or part of the costs to complete the development of such drugs and to manufacture and/or market such drugs. To date, the Company has entered into three such collaborative agreements. The Company has licensed its U.S. patent rights to Allegra (fexofenadine) to HMRI and is entitled to receive royalties on all U.S. sales of Allegra when the patent on the parent drug expires. The Company, however, is currently party to an interference involving Allegra which, if decided adversely to the Company, could result in the loss of all or substantially all of the royalties to which the Company is entitled under the license agreement on future sales of Allegra. The Company has also licensed its worldwide patent 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) rights in DCL to Schering-Plough, pursuant to which the Company is entitled to receive royalties from ScheringPlough upon the initial sale of the product. The Company has entered into an agreement with Janssen with respect to the joint development and co-promotion of norastemizole. In each of these collaborative arrangements and, to the extent the Company enters into additional collaborative arrangements, the Company is dependent upon the efforts of the collaboration partners and there can be no assurance that such efforts will be successful. If any collaborators were to breach or terminate their agreements with the Company or fail to perform their obligations thereunder in a timely manner, the development and commercialization of the products could be delayed or terminated. Any such delay or termination could have a material, adverse effect on the Company's financial condition and results of operation. Sepracor's failure or inability to perform certain of its obligations under a collaborative agreement could result in a reduction or loss of the benefits to which Sepracor is otherwise entitled under such agreement. There can be no assurance that Sepracor will be able to enter into any such agreements for ICEs in the future or that such collaborative agreements, if any, will be entered into on terms favorable to the Company. The Company currently operates a current Good Manufacturing Practices ("cGMP") compliant manufacturing plant which the Company believes has sufficient capacity to support the production of its drugs in quantities required for its clinical trials. While the Company believes it has the capability to scale up its manufacturing processes and manufacture sufficient quantities of certain of the products which may be approved for sale, without additional expansion, the Company will not have the capability to manufacture in sufficient quantities all of the products which may be approved for sale. Accordingly, the Company may be required to expend additional resources to expand its current facility, construct an additional facility or contract the production of these drugs to third party manufacturers. There can be no assurance that the Company will have the resources to expand its existing or develop additional facilities or contract with manufacturers to produce its products in commercial quantities or that any contract with third party manufacturers will be on favorable terms to the Company. There can be no assurance that the Company will succeed in scaling up its manufacturing processes or maintaining cGMP compliance. Failure in either respect can lead to refusal by the FDA to approve marketing applications. Failure to maintain cGMP compliance may also be the basis for action by the FDA to withdraw approvals that have been granted and for other regulatory action. The testing, marketing and sale of human health care products entails an inherent risk of product liability and there can be no assurance that product liability claims will not be asserted against Sepracor. Sepracor and its subsidiaries maintain limited product liability insurance coverage for both the clinical trials and commercialization of its products. There can be no assurance that Sepracor will be able to obtain further product liability insurance on acceptable terms, if at all, or that any current insurance subsequently obtained will provide adequate coverage against all potential claims. The Company will require substantial additional funds for its research and product development programs, operating expenses, the pursuit of regulatory approvals and expansion of its production, sales and marketing capabilities. Adequate funds for these purposes, whether through equity or debt financing, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or terms acceptable to the Company. Insufficient funds could require the Company to delay, scale back or eliminate certain of its research and product development programs or to license to third parties to commercialize products or technologies that the Company would otherwise develop or commercialize itself. While the Company believes that its available cash balances will be sufficient to meet its capital requirements into 2000, the Company may need to raise additional funds to support its long term product development and commercialization programs. There can be no assurance that such capital will be available on favorable terms, if at all. The Company's cash requirements may vary materially from those now planned because of results of research and development, results of product testing, relationships with customers, changes in focus and direction of the Company's research and development programs, competitive and technological advances, patent developments, the FDA regulatory process, the capital requirements of BioSepra and Sepracor Canada Limited, and other factors. The Company is currently evaluating the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather

than the year 2000, which could result in miscalculation or system failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in the future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. Other factors that may affect the Company's future operating results include the Company's fluctuations in quarterly operating results, its ability to meet its debt service requirements and to compete successfully in the market. Factors that may affect the future operating results of Sepracor include the ability of BioSepra to obtain additional financing, the dependence on BioSepra sales of HyperD media, which was introduced in 1993, and BioSepra's ability to sell its products to customers at the early stage of their product development cycles. Factors that may affect the future operating results of Sepracor include the ability of HemaSure to develop commercially viable products and HemaSure's limited number of customers. Because of the foregoing factors, past financial results should not be relied upon as an indication of future performance. The Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and it expects that its results of operations may fluctuate from period to period in the future. 23

SUPPLEMENTAL STOCKHOLDER INFORMATION PRICE RANGE OF COMMON STOCK The Common Stock of Sepracor Inc. is traded on the Nasdaq National Market under the symbol SEPR. Prior to September 20, 1991, the Company's Common Stock was not publicly traded. On March 13, 1998, the closing price of the Company's Common Stock, as reported on the Nasdaq National Market, was $39 13/16 per share. The following table sets forth for the periods indicated the high and low sales prices per share of the Common Stock as reported by the Nasdaq National Market.
1997 HIGH LOW --------------------------------------------------------------------------------FIRST QUARTER 27 1/8 16 SECOND QUARTER 27 1/8 18 THIRD QUARTER 42 3/4 19 FOURTH QUARTER 42 3/4 28 3/8 1996 High Low --------------------------------------------------------------------------------First Quarter 20 1/8 14 Second Quarter 16 1/4 11 1/8 Third Quarter 16 1/8 10 1/4 Fourth Quarter 17 1/8 13 3/4

On March 13, 1998, Sepracor had approximately 479 stockholders of record. DIVIDEND POLICY Sepracor has never paid cash dividends on its Common Stock. The Company currently intends to reinvest its earnings, if any, for use in the business and does not expect to pay cash dividends in the foreseeable future. TRANSFER AGENT AND REGISTRAR Questions regarding accounts, address changes, stock transfer and lost certificates should be directed to: BankBoston, N.A. c/o Boston EquiServe, L.P. P.O. Box 8040 Boston, MA 02266-8040 Phone: (781) 575-3120 FORM 10-K A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 is available without charge upon written request to: Investor Relations Sepracor Inc. 111 Locke Drive Marlborough, MA 01752 24

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SEPRACOR INC.: We have audited the accompanying consolidated balance sheets of Sepracor Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Sepracor's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 and 1996 financial statements of BioSepra Inc., a majority-owned subsidiary, whose statements constitute 12% and 16% of total assets and 87% and 95% of total revenues of the related 1997 and 1996 consolidated totals, respectively. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sepracor Inc. as of December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P. Boston, Massachusetts

February 19, 1998, except as to the information in Note W for which the date is March 26, 1998. 25

SEPRACOR INC. CONSOLIDATED BALANCE SHEETS
December 31 (in thousands, except par value amounts) 1997 --------------------------------------------------------------------------------------------------------ASSETS Current assets: Cash and cash equivalents (Note B) $ 82,579 $ Marketable securities (Note B) 9,981 Accounts receivable (Note E) 2,415 Inventories (Note F) 2,722 Other assets 1,543 -----------------Total current assets 99,240 -----------------Property and equipment, net (Note G) 15,126 Investment in affiliates (Note D) 3,971 Excess of investment over net assets acquired, net (Notes B, H and T) 5,288 Other assets (Note L) 4,882 -----------------Total assets 128,507 -----------------LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,018 $ Accrued expenses (Note I) 17,670 Deferred revenue (Note B and J) 21 Notes payable and current portion of capital lease obligation and long-term debt (Notes K and M) 861 Convertible redeemable preferred stock (Notes O and W) 6,700 -----------------Total current liabilities 29,270 -----------------Long-term debt and capital lease obligation (Notes K and M) 3,388 Convertible subordinated debentures (Note L) 80,880 -----------------Total liabilities 113,538 -----------------Convertible redeemable preferred stock (Notes O and W) -Minority interest (Note C) 2,937 Commitments and contingencies (Notes M and N) Stockholders' equity (Notes C, D, L, O and P) Common stock, $.10 par value, authorized 40,000 in 1997 and 1996, issued and outstanding 27,853 in 1997 and 27,271 in 1996 2,785 Additional paid-in capital 222,504 Unearned compensation, net (Note O) (94) Accumulated deficit (213,028) ( Equity adjustments (135) -----------------Total stockholders' equity 12,032 -----------------Total liabilities and stockholders' equity $ 128,507 $ ------------------

The accompanying notes are an integral part of the consolidated financial statements. 26

SEPRACOR INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (in thousands, except per share amounts) 1997 1996 --------------------------------------------------------------------------------------------------------Revenues: Product sales $ 9,636 $ 13,784 Collaborative research and development 58 25 License fees and royalties (Note R) 5,643 1,232 ----------------------------Total revenues 15,337 15,041 ----------------------------Costs and expenses: Cost of products sold 5,992 6,784 Research and development 43,055 35,828 Selling, general and administrative 15,594 15,245 Legal expense related to patents 1,660 1,067 Restructuring and impairment charges (Note H) 4,179 -----------------------------Total costs and expenses 70,480 58,924 ----------------------------Loss from operations (55,143) (43,883) ----------------------------Other income (expense): Equity in investee losses (Note D) (2,755) (17,539) Interest income 5,766 6,713 Interest expense (5,976) (6,140) Gain on sale of ChiRex Inc. 30,069 -Other income (expense) 547 (107) ----------------------------Net loss before minority interests (27,492) (60,956) Minority interests in subsidiaries (Note C) 1,369 846 ----------------------------Net loss $(26,123) $(60,110) ----------------------------Net loss applicable to common shares (Note B) $(26,723) $(60,710) ----------------------------Basic and diluted net loss per common share (Note B) $ (0.97) $ (2.25) ----------------------------Basic and diluted weighted average number of common shares outstanding (Note B) 27,599 27,032

The accompanying notes are an integral part of the consolidated financial statements. 27

SEPRACOR INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Year ended December 31, 1997, 1996 and 1995 (in thousands) Shares Amount Shares Am --------------------------------------------------------------------------------------------------------Balance at December 31, 1994 Issuance of common stock to employees under stock plans Gain on issuance of subsidiary's stock Issuance of common stock in public follow-on offering and warrant exercises Issuance of common stock for acquisition Issuance of common stock from conversion of subordinated convertible notes Issuance of common stock from conversion of preferred stock Accrued dividends from preferred stock Net loss Equity adjustments Balance at December 31, 1995 Issuance of common stock to employees under stock plans Accrued dividends from preferred stock Unearned compensation, net Net loss Equity adjustments Balance at December 31, 1996 Issuance of common stock to employees under stock plans Unearned compensation, net Accrued dividends from preferred stock Gain on issuance of subsidiary's stock Net loss Equity adjustments Balance at December 31, 1997 79 $ 79 18,681 $1 --------------------------------------430

5,620 102 1,189 (79) (79) 794

----------------------------------------26,816 $2 --------------------------------------455

----------------------------------------27,271 $2 --------------------------------------582

---------------------------------------$-$27,853 $2 ---------------------------------------

Unearned Accumulated Equit Year ended December 31, 1997, 1996 and 1995 (in thousands) Compensation Deficit Adjustm --------------------------------------------------------------------------------------------------------Balance at December 31, 1994 Issuance of common stock to employees under stock plans Gain on issuance of subsidiary's stock Issuance of common stock in public follow-on offering and warrant exercises Issuance of common stock for acquisition Issuance of common stock from conversion of subordinated convertible notes Issuance of common stock from conversion of preferred stock Accrued dividends from preferred stock Net loss Equity adjustments Balance at December 31, 1995 Issuance of common stock to employees under stock plans Accrued dividends from preferred stock Unearned compensation, net Net loss Equity adjustments Balance at December 31, 1996 $ -$ (93,383) $(12 ----------------------------------------

(33,412) 65 ----------------------------------------(126,795) 52 ----------------------------------------

$(234) (60,110) (12 ---------------------------------------(234) (186,905) 40

---------------------------------------Issuance of common stock to employees under stock plans Unearned compensation, net Accrued dividends from preferred stock Gain on issuance of subsidiary's stock Net loss Equity adjustments Balance at December 31, 1997

140

(26,123) (54 ---------------------------------------$ (94) $(213,028) $(13 ----------------------------------------

The accompanying notes are an integral part of the consolidated financial statements. 28

SEPRACOR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (in thousands) 1997 --------------------------------------------------------------------------------------------------------Cash flows from operating activities: Net loss $ (26,123) $ ( Adjustments to reconcile net loss to net cash used in operating activities: Minority interests in subsidiaries (1,369) Depreciation and amortization 4,614 Provision for doubtful accounts 150 Equity in investee losses 2,755 Loss on disposal of property and equipment 24 Restructuring and impairment charges 4,018 Gain on sale of equity investee (30,069) Changes in operating assets and liabilities, net of effects of acquired business: Accounts receivable 383 Inventories (46) Other current assets 50 Accounts payable (136) Accrued expenses 5,606 Deferred revenue (3,620) ------------------Net cash used in operating activities (43,763) ( ------------------Cash flows from investing activities: Purchases of marketable securities (60,961) ( Sales and maturities of marketable securities 71,285 Additions to property and equipment (2,653) ( Proceeds from sale of equipment 7 Investment in subsidiary -Investment in affiliate (4,046) Net proceeds from sale of equity investee 30,625 Proceeds from affiliate's repayment of long-term note 6,034 (Increase) decrease in other assets 449 ------------------Net cash provided by (used in) investing activities 40,740 ( ------------------Cash flows from financing activities: Net proceeds from issuance of stock 3,203 Proceeds from sale of convertible subordinated debentures -Borrowings under long-term debt 174 Repayments of long-term debt (962) Repayments under line of credit agreements (11) ------------------Net cash provided by (used in) financing activities 2,404 ------------------Effect of exchange rate changes on cash and cash equivalents (146) ------------------Net increase (decrease) in cash and cash equivalents (765) ( Cash and cash equivalents at beginning of year 83,344 1 ------------------Cash and cash equivalents at end of year 82,579 $ ------------------Supplemental schedule of cash flow information: Cash paid during the year for interest $ 5,980 $ Capital lease obligations incurred $ -$ -------------------

The accompanying notes are an integral part of the consolidated financial statements. 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A - NATURE OF THE BUSINESS Sepracor Inc. was incorporated in 1984 to research, develop and commercialize products for the synthesis, separation and purification of pharmaceutical and biopharmaceutical compounds. Specifically, Sepracor is developing improved versions of top-selling drugs called ICE(TM) Pharmaceuticals (Improved Chemical Entities). Sepracor is focusing on advancing its pharmaceutical programs and strengthening its patent positions for these ICE pharmaceuticals. Sepracor's 100% owned subsidiary, Sepracor Canada Ltd., supplies clinical material to Sepracor through its manufacturing facility in Windsor, Nova Scotia which commenced operations in February 1995. Sepracor's 64% owned subsidiary, BioSepra Inc., with operations in France and the U.S., is committed to supplying high-quality, reliable bioprocessing media and equipment to the biotechnology industry (See Note H). Sepracor's 37% owned subsidiary, HemaSure Inc., is dedicated to making blood safer through blood filtration devices. Sepracor's 22% owned subsidiary, Versicor Inc., has initiated a program in combinatorial chemistry. This emerging field involves the creation of diverse chemical libraries, consisting of three-dimensional, space filling chiral molecules. Sepracor and its subsidiaries are subject to risks common to companies in the industry including, but not limited to, development by Sepracor or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and compliance with government regulations. B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: Consolidated financial statements include the accounts of Sepracor and all of its wholly and majority owned subsidiaries. All material intercompany transactions have been eliminated. Investments in affiliated companies which are 50% owned or less are accounted for using the equity method. Versicor had been a consolidated entity until December 10, 1997 and was included in Sepracor's consolidated financial statements for the years ended December 31, 1996 and December 31, 1995. Versicor's financial results were consolidated for the period January 1, 1997 through December 10, 1997. See Notes C and D for further discussion. The Company accounts for the sale of subsidiary stock in different manners, depending on the life-cycle of the entity. The Company will offset any gains or losses against additional paid-in capital for early development stage subsidiaries. For later stage subsidiaries, the Company records gains or losses as other income or expense. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the following: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the dates of the financial statements and (3) the reported amounts of the revenues and expenses during the reporting periods. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCIES: The assets and liabilities of Sepracor's international subsidiaries are translated into U.S. dollars using current exchange rates. Statement of operations amounts are translated at average exchange rates prevailing during the period. The resulting translation adjustment is recorded in the equity adjustments account in stockholders' equity. Foreign exchange transaction gains and losses are included in other income (expense). CASH AND CASH EQUIVALENTS: Sepracor considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. As of December 31, 1997 and 1996, cash equivalents primarily consist of $1,165,000 and $4,511,000 in repurchase agreements, $61,011,000 and $70,215,000 in high quality corporate and government commercial paper and $19,530,000 and $8,403,000 of money market instruments which invest primarily in U.S. Treasury securities, respectively. CONCENTRATION OF CREDIT RISK: The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions. Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of the cash and cash equivalents. The Company places its cash, temporary cash investments and marketable securities with high credit

quality financial institutions. Financial instruments that subject the Company to credit risk consist primarily of trade accounts receivable. Customers with amounts due to the Company that represent greater than 10% of the accounts receivable balance are as follows:
Year Ended December 31: 1997 1996 -------------------------------------------------Customer A 16% 25% Customer B -15% Customer C 11% -Customer D --Customer E 24% --

Revenues from significant customers are as follows:
Year Ended December 31: 1997 1996 1995 --------------------------------------------------------------Customer A 33% 24% -Customer B -12% -Customer C 10% --Customer D 12% --Customer E ----

For financial information by geographic area see Note V. MARKETABLE SECURITIES: Sepracor has classified its marketable securities as "available for sale". Marketable securities include government securities and corporate commercial paper, maturing in less than a year, which can be readily purchased or sold using established markets. Marketable securities are stated at fair value. Net realized gains and losses on security transactions are determined on the 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) specific identification cost basis. The market value of Sepracor's marketable securities at December 31, 1997 and 1996, was not materially different from cost. Marketable securities consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------Government Security $ -$ 5,000 Corporate commercial paper 9,981 15,306 -------------------------------$9,981 $20,306 ================================

There were no gross realized gains or losses on the sale of marketable securities for the years ended December 31, 1997, 1996 and 1995, respectively. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Costs of major additions and betterments are capitalized; maintenance and repairs which do not improve or extend the life of the respective assets are charged to operations. On disposal, the related cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. All laboratory, manufacturing and office equipment have estimated useful lives of three to ten years. The building has an estimated useful life of thirty years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining term of the lease. SOFTWARE DEVELOPMENT COSTS: In accordance with the provision of Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalized $199,000 of software costs in 1995. These costs are being amortized over the expected number of units to be shipped. Amortization of $157,000, $311,000 and $165,000 was charged to cost of sales in 1997, 1996 and 1995, respectively. There were no capitalizable software costs in 1997 and 1996. INTANGIBLE ASSETS: The excess of investment over net assets acquired is amortized using the straight-line method over 20 years. Accumulated amortization was $7,476,000 and $3,510,000 at December 31, 1997 and 1996, respectively. The Company evaluates the possible impairment of goodwill at each reporting period based on the undiscounted projected cash flows of the related unit. Sepracor capitalizes all significant costs associated with the successful filing of a patent application. Patent costs are amortized over their estimated useful lives, not to exceed 17 years. Deferred finance costs relating to expenses incurred to complete the convertible subordinated debenture offering, completed in 1995, are amortized over seven years. Long-lived assets are reviewed for impairment by comparing the fair value of the assets with their carrying amount. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Accordingly, the Company evaluates the possible impairment of goodwill and other assets at each reporting period based on the undiscounted projected cash flows of the related asset. REVENUE RECOGNITION: Revenues from product sales are recognized when goods are shipped or installation is complete. Revenues for contracted services and research and development contracts are recorded based on effort incurred or milestones achieved in accordance with the terms of the contract. Deferred revenues represent progress payments received from customers pursuant to contract revenues not yet recorded. For construction contracts for bioprocessing equipment, a downpayment of up to one-third of the approximate value of the equipment contracts is required prior to beginning work on the contract. INCOME TAXES: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,

deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BASIC AND DILUTED NET LOSS PER COMMON SHARE: The Company adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share", which modifies the way in which earnings per share ("EPS") is calculated and disclosed in the quarter ended December 31, 1997. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based upon the weighted-average number of common shares outstanding during the period plus the additional weighted-average common equivalent shares during the period. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive. Common equivalent shares result from the assumed conversion of preferred stock and the assumed exercises 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. At December 31, 1997, had the result not been antidilutive, the Company would have shown 34,137,001 shares as the diluted weighted average number of shares outstanding. Included in the 1997 and 1996 basic and diluted net loss applicable to common shares is $600,000 of dividends relating to Series B Redeemable Exchangeable Preferred Stock (See Note O). OTHER: The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income"("SFAS 130") which requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 will become effective for fiscal years beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not expect this standard to have a material effect on the results from operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. Sepracor is in the process of evaluating the impact of the new standard on 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the presentation of the financial statements and the disclosure therein. SFAS 131 will become effective for fiscal years beginning after December 31, 1998. C - SEPRACOR SUBSIDIARIES In 1993, Sepracor formed two wholly-owned subsidiaries, BioSepra and HemaSure. Sepracor transferred to BioSepra its chromatography business, including all of the outstanding shares of Sepracor S.A., a French company. Sepracor transferred to HemaSure its technology relating to the manufacture, use and sale of its membrane filter products and medical devices for the separation and purification of blood, blood products and blood components. In March 1994, BioSepra and HemaSure each completed its initial public offering. In November 1994, SepraChem, Inc. ("SepraChem") was established as a wholly-owned subsidiary of Sepracor. In January 1995, in exchange for 7,999,999 common shares, Sepracor transferred to SepraChem the pharmaceutical fine chemical manufacturing business. In May 1995, Versicor was formed as a subsidiary of Sepracor. In October 1995, Versicor sold 485,000 shares of common stock to certain stockholders, 1,600,000 shares of common stock to Sepracor and 400,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") to Sepracor. The Preferred Stock was convertible, at the option of Sepracor, into common on a one-for-one basis. In June 1995, Sepracor purchased New England Pharmaceuticals ("NEP"). NEP was a manufacturer of a breath activated inhaler for asthma patients and has patents relating to this technology. The acquisition was accounted for under the purchase method of accounting. In June 1996, NEP was merged into Sepracor. In October 1995, Versicor entered into a Convertible Subordinated Note Agreement ("Note") with Sepracor. Under this Note, Sepracor agreed to loan to Versicor until October 2, 1998, up to an aggregate of $4,700,000. The Note accrued interest at prime plus 1/2% not to exceed 9.5%. The Note was convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock by dividing the amount outstanding, including principal and interest, by $0.7833. The amount outstanding was $0 and $5,066,000 at December 31, 1997 and December 31, 1996, respectively. Total interest expense charged to Versicor under this agreement was $60,000, $349,000 and $17,000 in 1997, 1996 and 1995, respectively. In 1996, Versicor also entered into a loan agreement with Sepracor. Under this agreement Sepracor agreed to loan to Versicor up to an aggregate of $7,500,000. The loan accrued interest equal to the prime rate minus 1/4, adjusted under certain circumstances. The total amount outstanding under this loan agreement was $0 and $2,705,000 at December 31, 1997 and December 31, 1996, respectively. Total interest expense charged to Versicor under this agreement was $120,000 and $68,000 in 1997 and 1996, respectively. As of June 23, 1997, this agreement was amended to provide that the accumulated principal and interest payments due to Sepracor, was convertible, at the option of Sepracor, into Versicor Series B Convertible Preferred Stock, by dividing the amount outstanding, including principal and interest, by $0.7833. In December 1997, Versicor received private equity financing of approximately $22,000,000. In exchange for the funding, Versicor issued Series C Preferred Stock. As part of the transaction, Sepracor exercised its conversion option on the Versicor Convertible Subordinated Notes in the amount of $9,530,000. The remaining $6,034,000 outstanding under the Notes was repaid to Sepracor by the end of 1997. Sepracor recognized a gain of approximately $5,688,000 on the transaction which was recorded as an increase to additional paid-in capital. At December 31, 1997, Sepracor had an investment in Versicor of $3,971,000 and there were no amounts outstanding under either Note. Sepracor's ownership as of December 31, 1997 was approximately 22%, thereby making Versicor an affiliate and reportable under the equity method. (See Note D) In January 1996, BioSepra signed a Promissory Note for $350,000, or so much of such sum as shall have been advanced by Sepracor (the "Promissory Note"). This amount is payable over sixty installments and does not bear interest. BioSepra used the funds for leasehold improvements in its new office space. As of December 31, 1997, BioSepra had received $350,000 under the Promissory Note and $245,000 remained outstanding. In March 1996, Sepracor loaned BioSepra $3,500,000. In addition, Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997 (the "loans"). Interest on the loans was at prime plus 3/4%. The loans

including any interest thereon, were convertible into the shares of BioSepra common stock, at the option of Sepracor at any time prior to payment. On June 10, 1996, Sepracor converted the outstanding principal amount of $5,500,000 plus accrued interest of $47,639 into 1,369,788 shares of BioSepra common stock. As a result of the conversion Sepracor owns approximately 64% of BioSepra. D - SEPRACOR AFFILIATES In September 1995, HemaSure completed the sale of 2,500,000 shares of its common stock, pursuant to an underwritten public offering. As a result of the sale, Sepracor's ownership of the outstanding shares of common stock of HemaSure was reduced from approximately 55% to approximately 37%. Effective September 27, 1995, Sepracor no longer consolidates HemaSure's financial statements and accounts for the investment in HemaSure using the equity method. The sale resulted in a gain of approximately $15,235,000, which was recorded as an increase to additional paid-in capital. Since the sale, Sepracor recorded $2,927,000, $15,021,000 and $808,000 of equity investee losses in 1997, 1996 and 1995, respectively. HemaSure's loss in 1996 included $24,748,000 relating to its one-time operating loss and loss on disposal of its discontinued blood plasma business. (Sepracor's portion of this was $9,157,000). At December 31, 1997, Sepracor's investment in HemaSure was zero. In March 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that is a combination of Sterling Organics Limited, and the chiral chemistry business of Sepracor, completed an initial public offering of common stock. ChiRex sold 6,675,000 shares at $13 per share. In exchange for the contribution of SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a result Sepracor owned approximately 32% of ChiRex. Sepracor accounted for this transaction as a non-monetary exchange of assets and, therefore, no gain or loss was recorded as a result of this transaction. Since 32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 11, 1996, Sepracor carried its investment in ChiRex using the equity method of accounting and, accordingly, recorded $383,000 and $2,518,000 as its share of ChiRex's losses for the years ended December 31, 1997 (through March 31) and December 31, 1996, respectively. Included in ChiRex's 1996 results were one-time write-offs of $11,076,000 (Sepracor's portion of this was $3,544,000) from ChiRex's initial public offering and resulting transactions. In March 1997, the Securities and Exchange Commission declared effective a registration statement for the offering to the public of the 3,489,301 shares of ChiRex common stock held by Sepracor. On March 31, 1997, Sepracor received net proceeds of approximately $31,125,000. As a result of this transaction, Sepracor recognized a gain of $30,069,000, which was recorded as other income. In December 1997, upon the completion of the private equity financing, Versicor, a former subsidiary, became an affiliate of Sepracor and accordingly, Sepracor recorded $75,000 as its share of Versicor's losses for the year ended December 31,1997. E - ACCOUNTS RECEIVABLE Sepracor's trade receivables primarily represent amounts due to BioSepra from companies and research institutions in the United States, Europe and Japan engaged in the research, development, or production of pharmaceutical and biopharmaceutical products. BioSepra performs ongoing credit evaluations of its customers and generally does not require collateral. The allowance for doubtful accounts was $369,000 and $233,000 at December 31, 1997 and 1996, respectively. F - INVENTORIES Inventories consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------Raw materials $ 600 $1,155 Work in progress 129 310 Finished goods 1,993 2,016 --------------------$2,722 $3,481 ---------------------

G - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
(in thousands) 1997 1996 -----------------------------------------------------------------------------Land $ 74 $ 74 Building 1,993 1,932 Laboratory and manufacturing equipment 10,407 11,233 Office equipment 4,450 4,844 Leasehold improvements 5,411 5,493 --------------------------22,335 23,576 Accumulated depreciation and amortization (7,761) (6,724) --------------------------14,574 16,852 Construction in progress 552 193 --------------------------$ 15,126 $ 17,045 ---------------------------

Depreciation expense was $3,129,000, $2,189,000 and $1,477,000 for the years ended December 31, 1997, 1996 and 1995, respectively. H - RESTRUCTURING AND IMPAIRMENT CHARGES

In December 1997, BioSepra recorded restructuring and impairment charges totaling $4,179,000. Of this amount, $851,000 relates to a cost-reduction program and $3,328,000 relates to the writedown of intangible assets to their net realizable value. The purpose of the cost-reduction program was to enable BioSepra to focus on the process segments of the biopharmaceutical and genomics market. The program involved the discontinuance of the instrument product line and a reduction in the number of employees. As part of the cost-reduction program, $690,000 represents the write down of inventory and fixed assets associated with the discontinued product line and $161,000 represents severance and benefits related to the reduction in workforce in the U.S. BioSepra terminated seven employees consisting of marketing/sales, finance and administrative personnel. BioSepra expects to pay all of the severance and benefits associated with this workforce reduction in the first half of 1998. There can be no assurances that this program will not result in the loss of customers or temporary sales or production disruptions that could have a materially adverse effect on BioSepra's business, financial condition or results of operations. In June 1995, BioSepra announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable BioSepra to focus on the process development and process segments of the biopharmaceutical market. In connection with this program in July 1995, BioSepra completed the sale of Biopass S.A. ("Biopass"), one of BioSepra's French subsidiaries (see Note Q). As part of the cost-reduction program, BioSepra recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount, $1,180,000 represents severance and medical benefits related to the reduction in workforce in the U.S. and France and $2,964,000 relates to impairment of intangibles and loss on 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assets to net realizable value. BioSepra has completed its reduction in workforce related to this cost-reduction program resulting in the termination of 55 employees consisting of research and development, administrative, production and marketing/sales personnel. BioSepra had paid all of the costs, relating to the employee reductions made as part of the 1995 restructuring, as of December 31, 1997. I - ACCRUED EXPENSES Included in accrued expenses is $9,754,000 and $5,828,000 of accrued research and development expenses and $1,427,000 and $1,000,000 of accrued compensation as of December 1997 and 1996, respectively. J - DEFERRED REVENUE In March 1995, Sepracor and BioSepra, entered into separate agreements with Beckman Instruments, Inc. ("Beckman"). Beckman entered into a joint distribution and development agreement with BioSepra, and Beckman entered into an agreement with Sepracor to purchase certain preferred stock of Sepracor. The distribution agreement was extended in July 1996, allowing Beckman to market on a worldwide exclusive basis for a period of three years certain HyperD chromatographic columns, and provides for the development (in accordance with certain milestones) and manufacture by BioSepra of chromatographic systems for Beckman. In 1997, the agreement was amended, due to the settlement of the PerSeptive lawsuit (see Note N), eliminating BioSepra's obligation to repay to Beckman part of such payments made by Beckman under the agreement if BioSepra failed to meet such milestones or if BioSepra terminates Beckman's right to use and sell licensed products, including HyperD media, because a court finds that any such licensed products infringe any third-party patents. As a result of the amendment, BioSepra recognized $2,700,000 of license fee revenue in December 1997, rather than over the next three years. Under the agreement, Beckman made payments of $1,400,000 and $3,500,000 in 1996 and 1995, respectively. BioSepra recognized $3,600,000, $900,000 and $400,000, of revenue under the agreement in 1997, 1996 and 1995, respectively and $3,600,000 was recorded as deferred revenue as of December 31, 1996. There was no deferred revenue under this agreement as of December 31, 1997. See Note W for subsequent event. K - NOTES PAYABLE TO BANK AND LONG-TERM DEBT Notes payable and long-term debt consist of the following at December 31:
(in thousands) 1997 1996 ------------------------------------------------------------------------------------------PIBOR plus .08% French Franc Loan Payable in quarterly installments through 2000 $ 624 $ 1,012 PIBOR plus 1.8%, French Franc Loan Payable in quarterly installments through 2001 Variable rate, 6.45% - 6.57%, French Franc Line of Credit Variable rate, 4.89% - 5.08%, French Franc Line of Credit 8.05% French Franc Term Loan, payable in monthly installments through 1997 Loan from Nova Scotia Business Development Corporation ("NSBDC") bearing interest at 9.25% until May 31, 2000 and thereafter at 9.5%, repayable in 120 consecutive monthly payments of $21 principal plus interest with a final payment of $20 in June 2005 Loan from Atlantic Canada Opportunities Agency, noninterest bearing, repayable in 60 equal installments commencing March 15, 1998 Government grant from Nova Scotia Department of Economic Development Obligations under Capital Lease Obligations (See Note M)

138

--

1

--

--

13

--

7

1,925

2,183

370

370

816

992

375 614 -------------------------

Less current portion Total

4,249 5,191 (861) (804) ------------------------$ 3,388 $ 4,387 -------------------------

At December 31, 1997, BioSepra's wholly-owned French subsidiary ("BioSepra S.A.") had two available credit facilities aggregating 3,000,000 French Francs from two French commercial banks, of which $1,000 and $13,000 was outstanding at December 31, 1997 and 1996, respectively. The amount available under the 4.89% - 5.08% credit facility, which is payable on demand, is guaranteed by Sepracor. Sepracor also guarantees a certain French Franc loan held by BioSepra S.A. The amount outstanding under this loan was $624,000 and $1,012,000 as of December 31, 1997 and 1996, respectively. The interest rate on this loan at December 31, 1997 and 1996 was 4.50% and 4.23%, respectively. In December 1996, Sepracor, BioSepra and Versicor entered into a revolving credit agreement with a commercial bank that provides for borrowing of up to $10,000,000. This agreement was amended in 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 1997 to remove Versicor as a party thereto. BioSepra can borrow up to $3,000,000. All borrowings are collateralized by certain assets of the companies. The credit agreement contains covenants relating to minimum tangible capital base, minimum cash or cash equivalents, minimum liquidity ratio and maximum leverage for Sepracor and BioSepra. Sepracor is a guarantor of all outstanding borrowings. At December 31, 1997, there was no amount outstanding under this agreement. The annual interest rate on such borrowings is the lower of the prime rate or LIBOR plus 1.75%. In December 1996, Versicor entered into a term loan agreement with a commercial bank that provided for borrowing of up to $3,000,000 for the purpose of financing capital equipment purchases. No term loan could be less than $500,000 and should be payable in sixteen equal quarterly installments commencing on January 1, 1998 with the final payment of the balance on December 31, 2001 or such earlier date that the balance shall have been reduced to zero. The annual interest rate on such borrowings was at the lower of the prime rate or the bank's Fixed Quoted Rate plus 1/2%. This agreement was terminated in December 1997 and replaced with two term loans, one for $4,034,000 and another for $2,000,000. Sepracor entered into a put agreement with the commercial bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of Versicor, in the event of a default by Versicor under its loan agreement with the commercial bank. In the event that the put right is exercised by the bank, the bank will assign its security interest in the fixed assets of Versicor to Sepracor. Sepracor guarantees the loan from NSBDC. The government grant received by Sepracor Canada Limited may be repayable if Sepracor Canada Limited fails to meet certain conditions of the agreement. The government assistance is recorded as debt and is amortized on the same basis as the depreciation of the related capital assets. Minimum annual principal repayment of long-term debt, excluding capital leases, in each of the next five years are as follows: 1998-$603,000, 1999-$623,000, 2000-$501,000, 2001-$343,000, 2002-$332,000. L - CONVERTIBLE SUBORDINATED DEBENTURES In November and December, 1995, Sepracor issued $80,880,000 of Convertible Subordinated Debentures (the "Debentures"). The Debentures bear interest at 7% payable semi-annually, commencing on June 1, 1996, and are due on December 1, 2002. The Debentures are convertible into shares of Common Stock of the Company at $19.68 per share. The Debentures are not redeemable by the Company until December 1, 1998. As part of the sale of the Debentures, Sepracor incurred approximately $2,788,000 of offering costs. These costs are classified in other assets and are being amortized over the life of the Debentures, which is seven years. On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4% Debentures are convertible into Sepracor Common Stock, at the option of the holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at 6 1/4% payable semi-annually, commencing on August 15, 1998. The 6 1/4% Debentures are not redeemable by the Company prior to February 18, 2001. The Company may be required to repurchase the 6 1/4% Debentures at the option of the holders in certain circumstances. As part of the sale of the 6 1/4% Debentures, Sepracor incurred approximately $5,915,000 of offering costs, which will be recorded as other assets and amortized over seven years, the term of the 6 1/4% Debentures. The net proceeds to the Company after offering costs was $183,560,000. The Company intends to use the proceeds from the sale of the 6 1/4% Debentures for the establishment of the Company's respiratory sales force, marketing of certain ICEs, ongoing preclinical and clinical trials, funding of other research and development programs, and working capital and other general corporate purposes. M - COMMITMENTS In 1994, Sepracor, HemaSure and BioSepra entered into an equipment leasing arrangement that provides for a total of $2,000,000 for the purpose of financing the purchase of capital equipment in the United States. All outstanding amounts are collateralized by the assets so financed and BioSepra's portion is guaranteed by Sepracor. There was a total of $355,000 and $565,000, relating to Sepracor and BioSepra, outstanding under this agreement at December 31, 1997 and 1996, respectively. Future minimum lease payments under all noncancelable leases in effect at December 31, 1997, are as follows: (in thousands)

Year Operating Leases Capital Leases -------------------------------------------------------------------------------------1998 $1,017 $294 1999 865 118 2000 736 -2001 735 -2002 766 -Thereafter 3,634 ------------------------------Total minimum lease payments $7,753 $412 Less amount representing interest (37) -----------------------------Present value of minimum lease payments $375 ------------------------------

Future minimum lease payments under operating leases relate to Sepracor's and BioSepra's principal office, laboratory and production facilities. The lease terms provide options to extend the leases. The leases require Sepracor to pay its allocated share of taxes and operating costs in addition to the annual base rent payments. Rental expense under these and other leases amounted to $1,687,000, $1,240,000 and $1,003,000 for the years ended December 31, 1997, 1996 and 1995, respectively. N - LITIGATION In July 1997, the United States Patent and Trademark Office (the "PTO") informed Sepracor that it had declared an interference between Sepracor's previously issued method-of-use patent on fexofenadine to treat allergic rhinitis and another similar patent application of Sepracor, and the method-of-use patent application held by Hoechst Marion Roussel Inc. ("HMRI") on the anti-histaminic effects of fexofenadine on hepatically impaired patents. The primary objective of a patent interference, which can only be declared by the PTO, is to determine the first to invent any overlapping subject matter claimed by more 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) than one party. In the course of an interference, the parties typically present evidence relating to their inventive activities as to the overlapping subject matter. The PTO then reviews the evidence to determine which party has the earliest legally sufficient inventive date, and, therefore, is entitled to a patent claiming the overlapping subject matter. (See Note R for further discussion.) If Sepracor prevails in the interference, Sepracor will retain all of its claims in its issued patent. If, however, Sepracor loses the interference, HMRI will be issued a U.S. patent containing its claims involved in the interference and may not be obligated to pay Sepracor milestone or royalty payments pursuant to the terms of the license agreement whereby Sepracor licensed its U.S. patent rights covering fexofenadine to HMRI in 1993. In December 1997, the Company and its subsidiary, BioSepra, settled their longstanding patent lawsuit with PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra. Under the terms of the settlement, PerSeptive received an unspecified amount and BioSepra obtained a limited, non-exclusive license under PerSeptive's Perfusion Chromatography R patents to make, use and sell its HyperD R product line free of claims of infringements by PerSeptive. HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged that HemaSure's manufacture, use and/or sale of the LeukoNet PreStorage Leukoreduction Filtration System product infringes upon three patents held by Pall. On October 14, 1996, in connection with the first action concerning U.S.Patent No. 5,451,321 (the "'321 patent"), HemaSure filed for summary judgment of noninfringement. Pall filed a cross motion for summary judgment of infringement at the same time. In October 1997, the U.S. District Court for the Eastern District of New York granted in part Pall's summary judgment motion relating to the '321 patent. The court has not yet ruled on the validity of Pall's '321 patent claims, which HemaSure has asserted are invalid and unenforceable. The court now will need to review and determine the validity of this patent prior to any further action. No date has been set for these proceedings. With respect to the second action concerning U.S. Patent Nos. 4,340,479 (the "'479 patent") and 4,952,572 (the "'572 patent"), HemaSure has answered the complaint stating that it does not infringe any claim of the asserted patents. Further, HemaSure has counterclaimed for declaratory judgment of invalidity, noninfringement and unenforceability of the '572 patent, and a declaratory judgment of noninfringement of the '479 patent, as a result of a license. HemaSure believes, based on advice of its patent counsel, that a properly informed court should conclude that the manufacture, use and/or sale by HemaSure or its customers of the present LeukoNet product does not infringe any valid enforceable claim of the three asserted Pall patents. However, there can be no assurance that HemaSure will prevail in the pending actions, and an adverse outcome in a patent infringement action would have a material adverse effect on HemaSure's future business and operations. O - STOCKHOLDERS' EQUITY In October 1995, all 79,365 outstanding shares of Series A Convertible Preferred Stock were converted into 793,650 shares of Sepracor's Common Stock. In March 1995, Beckman acquired 312,500 shares of Sepracor's Series B Redeemable Exchangeable Preferred Stock for $5,000,000. This issue is exchangeable into a portion of Sepracor's holdings of BioSepra common stock, representing approximately 4% of BioSepra's shares outstanding, in return for certain rights granted to Beckman under a change of control of BioSepra and is redeemable after the year 2000 based upon certain other events. The holders of Series B Redeemable Exchangeable Preferred Stock are entitled to receive, when, and if declared by the Board of Directors, an annual cash dividend of $1.92 per share. Such dividends shall accrue daily and are cumulative from the date of issuance. The dividends are payable at the mandatory redemption date of February 2000. As of December 31, 1997, Sepracor had accrued $1,700,000 of dividends payable. See Note W for subsequent event. In August 1995, Sepracor received approximately $62,336,000 of net proceeds from the sale of 4,600,000 shares of its Common Stock in a follow-on public offering.

In May 1996, the stockholders of Sepracor approved an amendment to Sepracor's Restated Certificate of Incorporation increasing from 35,000,000 to 40,000,000 the number of authorized shares of Common Stock. In 1996, Sepracor issued stock options to certain consultants. As a result, $248,000 was initially recorded as unearned compensation. In 1997, an adjustment of $107,000 was made for cancelled options and $28,000 and $14,000 were recorded in related amortization in 1997 and 1996, respectively. P - STOCK PLANS AND WARRANTS STOCK PLANS: The Company has two stock-based compensation plans, which are described below. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based or fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted disclosure provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and related interpretations in accounting for its plans. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates, as calculated in accordance with SFAS 123, the Company's net loss and basic and 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) diluted loss per share for the years ended December 31, 1997 and 1996 would have been increased to the pro forma amounts indicated below:
1997 1996 NET BASIC AND DILUTED Net Basic and Diluted (in thousands) LOSS LOSS PER SHARE Loss Loss Per Share ----------------------------------------------------------------------------------------As Reported $(26,723) $(0.97) $(60,710) $(2.25) Pro forma $(30,745) $(1.11) $(63,398) $(2.35)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts, since SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are not anticipated. The fair value of each stock option is estimated on the date of grant using Black-Scholes option-pricing model with the following weighted average assumptions: an expected life of 7 years, expected volatility of 60%, a riskfree interest rate of 5.0% to 7.8% and no dividends. The 1985 Stock Option Plan (the "Plan") permits Sepracor to grant shares of common stock under incentive stock options ("ISOs") and nonstatutory stock options ("NSOs"). The Plan provides for the granting of ISOs to officers and key employees of Sepracor and NSOs to officers, key employees, consultants and directors of Sepracor. ISOs and NSOs granted under the Plan have a maximum term of ten years from the date of grant and have an exercise price not less than the fair value of the stock on the date of grant and vest over five years. In 1991, the Board adopted the 1991 Restated Stock Option Plan which amended and restated the 1985 Stock Option Plan. In May 1996, the stockholders approved an amendment to the Plan increasing the number of shares of common stock, which may be granted to 5,000,000. Stock option activity related to this plan is summarized below. In January 1995, Sepracor adopted a Stock Option Exchange Program. Upon employee consent, the program provides for the grant to each employee a new stock option in exchange for the cancellation of the old stock option. The new stock option, granted at fair market value at date of issuance, will become exercisable for a number of shares of common stock equal to the number of shares covered by the old stock option. The 1991 Directors' Plan provides for the granting of NSOs to directors of Sepracor who are not officers or employees of Sepracor. The options granted under the Directors' Plan have a maximum term of ten years from date of grant and have an exercise price of not less than the fair market value of the stock on the date of grant and vest over five years. In May 1996, the shareholders approved an amendment to the Directors' Plan increasing the number of shares of common stock, which may be granted to 275,000. On October 1997, the Board of Directors approved the Company's 1997 Stock Option Plan. The 1997 Stock Option Plan permits Sepracor to grant ISOs and NSOs to purchase up to 500,000 shares of common stock to employees and consultants of the Company. Executive officers are not entitled to receive stock options under the 1997 Stock Option Plan. ISOs and NSOs granted under the Plan have a maximum term of ten years from the date of grant and ISOs may not be granted at an exercise price less than fair market value. The following tables summarize information about stock options outstanding at December 31, 1997 (in thousands, except per share amounts):
Options Exercisable Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Per Share Outstanding Life Price Exercisable Price --------------------------------------------------------------------------------------------------------$ 1.50 - 3.50 27 2.52 $ 2.75 27 $ 2.75 5.00 - 5.00 365 6.57 5.00 200 5.00 5.25 - 5.75 351 6.96 5.71 190 5.70 Options Outstanding

6.00 - 6.56 379 6.59 6.12 202 6.07 6.63 - 12.63 506 7.15 10.08 206 9.03 14.13 - 14.13 99 8.09 14.13 22 14.13 14.62 - 14.62 736 7.79 14.62 292 14.62 14.75 - 22.50 371 8.84 17.65 101 15.40 24.13 - 24.13 56 9.37 24.13 --24.25 - 41.00 595 9.51 24.37 ----------------------------------------------------------------------------------------------------------$ 1.50 - 41.00 3,485 7.75 $13.16 1,240 $ 9.18 ---------------------------------------------------------------------------------------------------------

1996 1995 AVERAGE Average PRICE PER Price Per NUMBER SHARE Number Share Number --------------------------------------------------------------------------------------------------------Balance at January 1 3,277 $ 9.55 3,225 $ 7.77 2,468 Granted 757 24.10 651 13.77 1,760 Exercised (433) 6.00 (429) 3.88 (340) Cancelled (116) 9.84 (170) 6.37 (663) --------------------------------------------------------------------------------------------------------Balance at December 31 3,485 $13.16 3,277 $ 9.55 3,225 --------------------------------------------------------------------------------------------------------Options exercisable at December 31 1,240 1,088 948 Weighted average fair value of options granted during the year

1997

$15.88

$ 9.46

$ 6.99

There were 537,000 options available for future grant as of December 31, 1997. 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1996, the shareholders approved the 1996 Employee Stock Purchase Plan ("1996 Plan"), which succeeded the 1994 Employee Stock Purchase Plan. Under the 1996 plan, an aggregate of 120,000 shares of common stock maybe purchased by employees at 85% of market value on the first or last day of each six month offering period, whichever is lower, through accumulation of payroll deductions ranging from 1% to 10% of compensation as defined, subject to certain limitations. Options were exercised to purchase 31,423, 23,977, and 39,820 shares for a total of $556,111, $296,016, and $229,506, during the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, there were 86,844 shares of authorized but unissued common stock reserved for future issuance under the 1996 plan. STOCK WARRANTS: In 1991, Sepracor issued warrants to purchase 200,000 shares of common stock at $10.00 per share, all of which were exercised in 1995. The warrants were exercised in a cashless transaction in August 1995 with the issuance of 48,340 shares of common stock. In connection with a subordinated debt agreement, Sepracor issued warrants to purchase 30,140 shares of common stock at a price of $1 per share. Warrants to purchase 10,520 shares are outstanding at December 31, 1997. The warrants may be exercised at any time until 2001 and are callable by Sepracor and redeemable at certain times or events. In 1994, in connection with the issuance of the Series A Convertible Preferred Stock, Sepracor issued warrants to purchase 1,021,650 shares of common stock at prices of between $6.30 and $12.00 per share. The warrants expire on September 30, 2004, subject to accelerated expiration in certain events. In July 1995, Sepracor received approximately $6,335,000 from the exercise of these warrants to purchase 971,650 shares of common stock with exercise prices of $6.30 and $7.50 per share. At December 31, 1997, warrants to purchase 23,000 shares remain outstanding, all of which are exercisable at $6.30 per share. Q - 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 bases. Deferred tax assets and liabilities are measured using enacted tax rates. A valuation reserve is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, a valuation reserve has been established for the full amount of the deferred tax asset. Sepracor's statutory and effective tax rates were 34% and 0%, respectively, for the years 1997, 1996 and 1995. The effective tax rate was 0% due net operating losses and nonrecognition of any deferred tax asset. At December 31, 1997, Sepracor had federal and state tax net operating loss carryforwards ("NOL") of approximately $115,000,000 and $75,000,000, which will expire through 2012 and 2002, respectively. Based upon the Internal Revenue Code and changes in company ownership, utilization of the NOL will be subject to an annual limitation. Sepracor also had a NOL from its operation in France of approximately $13,000,000. Approximately $12,000,000 of this NOL will expire in 2000; the remainder may be carried forward indefinitely. Sepracor also had a NOL from its operation in Canada of approximately $3,600,000 which may be carried forward indefinitely. At December 31, 1997, Sepracor had federal and state research and experimentation credit carryforwards of approximately $3,900,000 and $2,900,000, respectively, which will expire through the year 2012. Sepracor also had Canadian research and experimentation credits of $1,100,000 which will expire through 2007. The components of Sepracor's net deferred taxes were as follows at December 31:
(in thousands) 1997 1996 -----------------------------------------------------------------------------Assets NOL Carryforwards $ 50,213 $ 50,596 Reserves 226 306 Tax Credit Carryforward 7,989 5,287 Patent 489 389 Accrued Expenses 5,434 3,735 Research and development capitalization 9,827 9,217 Equity in loss of investees 7,638 7,981 Other 1,605 2,657

-----------------------------------------------------------------------------Liabilities Basis difference of subsidiaries (13,628) (12,005) Property and Equipment -(237) Valuation allowance $(69,793) $(67,926) -----------------------------------------------------------------------------Net deferred taxes $ -$ -------------------------------------------------------------------------------

R - AGREEMENTS In December 1997, Sepracor signed a licensing agreement with Schering-Plough Corporation ("Schering") giving Schering exclusive worldwide rights to Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active metabolite of loratadine. Under the terms of the agreement, Sepracor has exclusively licensed its DCL rights to Schering, which expects to develop and market the DCL product worldwide. Schering will pay Sepracor an upfront license fee of $5,000,000 and royalties on DCL sales, if any, beginning at first product launch. Any such royalties paid to Sepracor would escalate over time and upon the achievement of sales volume and other milestones. As of December 31, 1997, the agreement was still pending clearance under the Hart Scott Rodino Act. In January 1998, Sepracor and Schering were notified that no objection would be raised under the Hart Scott Rodino Act with respect to their license agreement. Shortly thereafter, Sepracor received the $5,000,000 upfront license payment from Schering and recorded the payment as license revenue in the first quarter of 1998. The upfront license fee will be offset against future royalty payments. On February 4, 1998, Sepracor signed a collaboration and license agreement with Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, relating to the development and mar38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) keting of norastemizole, a third generation nonsedating antihistamine. Under the terms of the agreement, the companies will jointly fund the development of norastemizole, and Janssen has an option to acquire certain rights regarding the product in the U.S. and abroad. When exercised, Janssen and Sepracor will equally share the costs and profits associated with the further development, marketing and sales of norastemizole in the United States. Sepracor will also retain the right to co-promote the product in the U.S. Alternatively, Sepracor can elect to receive royalties, if any, on Janssen sales of norastemizole in the U.S. in the event it decides not to co-promote the product. Outside of the U.S., Janssen has the right to develop and market norastemizole, and Sepracor will earn royalties on product sales, if any. In addition, Janssen has worldwide OTC rights to norastemizole. In June 1993, Sepracor licensed to MMD (now Hoescht Marion Roussel Inc.) its U.S. patent application covering the use of terfenadine carboxylate, a metabolite of terfenadine ("Seldane"), to be developed by MMD. Under this agreement, Sepracor recorded $3,750,000 as license fee revenue in 1994, for the issuance of a patent covering the use of terfenadine carboxylate. The agreement calls for future license fees of up to $3,750,000 subject to certain other milestones and royalties on sales if and when they occur. As of December 31, 1997, Sepracor had received the first milestone payment of $1,875,000 and recorded $469,000 in sub-license expense payable to a third party for the year ended December 31, 1997. See Note N for discussion of patent interference. In 1992, Sepracor licensed to Sterling Healthcare, Inc. Sepracor's use-patent application and related technology for the single isomer of a non-steroidal anti-inflammatory drug. Under the terms of the agreement, Sepracor received research and development funding and license fees. In 1995, Sepracor recognized $650,000 related to achievement of a specific benchmark in the agreement. In December 1995, this agreement was terminated with no remaining obligations outstanding. S - EMPLOYEES' SAVINGS PLAN Sepracor has a 401(K) savings plan (the "401K Plan") for all domestic employees. Under the provisions of the 401K Plan, employees may voluntarily contribute up to 15% of their compensation up to the statutory limit. In addition, Sepracor can make a matching contribution at its discretion. Sepracor matched 50% of the first $2,000 contributed by employees up to $1,000 maximum per employee during 1996. In June 1997, this match was raised to 50% of the first $3,000. This match amounted to $119,000 and $49,000 in 1997 and 1996, respectively. There were no Company matches in 1995. T - DISPOSAL OF BIOPASS In July 1995, BioSepra sold Biopass for $1,300,000, payable in quarterly installments of $100,000 from September 30, 1995 through June 30, 1996 and $150,000 beginning on September 30, 1996 through December 31, 1997. The full value of the sale price was reserved pending the buyer's payment and was recognized as payments were received. In 1995, one payment of $100,000 was received. No payments were received in 1996 or 1997. As part of the sale agreement BioSepra retained the chromatography column technology that it assumed when it acquired Biopass. In 1996, BioSepra wrote-off the remaining unamortized portion of this purchased technology of approximately $741,000. The sales contract also provided for a renewable royalty free technology license in which the buyer may develop, manufacture and sell products incorporating the technology retained by BioSepra. During the period the buyer is required to make installment payments, BioSepra is the exclusive seller of chromatography columns and accessories and had committed to at least $1,000,000 in orders per year, provided minimum gross margins are met. In January 1996, the commitment to purchase chromatography columns and accessories was terminated by the Company due to the inability of the purchaser to meet certain commitments. The results of Biopass' operations through July 1995 have been included in the consolidated results. The revenues, loss from operations and net loss for Biopass for 1995 are $1,878,000, $(1,208,000) and $(44,000), respectively. The loss of $2,964,000, on the disposal, was recorded as restructuring and impairment charges in the statement of operations (see Note H). This loss equals the net liabilities transferred in the sale; the net liabilities are excluded from the Company's consolidated balance sheet for 1995. U - SUMMARIZED FINANCIAL INFORMATION The following is the summarized financial information for Versicor, HemaSure and ChiRex:

1997 1996 (in thousands) VERSICOR HEMASURE ChiRex HemaSure -------------------------------------------------------------------------------Current assets $19,610 $ 9,097 $40,853 $ 18,263 Non-current assets 7,300 1,510 89,953 2,297 Current liabilities 1,308 3,026 25,405 3,419 Non-current liabilities 6,034 9,048 15,333 9,212 Net sales Gross profit (loss) Net income (loss) --$(6,203) 2,357 (1,326) $(9,884) 74,615 18,107 $(8,309) 779 (3,006) $(40,598)

Summarized financial information for ChiRex is not presented in 1997, as Sepracor sold its investment on March 31, 1997 (see Footnote D). V - SEGMENT INFORMATION Sepracor, through BioSepra, develops, manufactures and markets processes and products for the synthesis, separation and purification of pharmaceutical and biopharmaceutical compounds. BioSepra operates exclusively in the separations business, which Sepracor considers to be one business segment. Financial information by geographic area is as follows for the periods indicated: 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands) 1997 1996 1995 -------------------------------------------------------------------------------Revenues United States: Unaffiliated customers $ 9,810 $ 11,651 $ 8,883 Transfer to other geographic areas (16) 3,050 1,195 -----------------------------------Total 9,794 14,701 10,078 -----------------------------------Europe: Unaffiliated customers Transfer to other geographic areas Total Eliminations and adjustments Total Revenues

5,527 6,187 7,324 1,571 2,999 1,703 -----------------------------------7,098 9,186 9,027 -----------------------------------(1,555) (8,846) (2,898) -----------------------------------$ 15,337 $15,041 $ 16,207 ------------------------------------

Operating Loss United States Europe Eliminations and adjustments Total Operating Loss

$(55,666) $(45,638) $(33,865) 942 1,752 (6,049) (419) 3 (551) -----------------------------------$(55,143) $(43,883) $(40,465) ------------------------------------

Total Assets United States Europe Canada Eliminations and adjustments Total Assets

$203,806 $165,871 $292,236 5,802 6,343 6,713 7,427 7,088 7,744 (88,528) (32,613) (103,980) -----------------------------------$128,507 $146,689 $202,713 ------------------------------------

Of the $9,810,000, $11,651,000 and $8,883,000 U.S. sales to unaffiliated customers for the years ended December 31, 1997, 1996 and 1995, respectively, $168,000, $630,000, and $1,822,000, respectively, were export sales to the Far East. W - SUBSEQUENT EVENT On March 26, 1998, Sepracor and Beckman terminated their Stock Purchase Agreement under which Beckman acquired 312,500 shares of Sepracor Series B Redeemable Exchangeable Preferred Stock. Sepracor paid Beckman the original purchase price of the stock plus accrued dividends totalling $6,850,000. As a result of this termination subsequent to year-end, Sepracor has reclassed its convertible redeemable preferred stock as a current liability at December 31, 1997. In addition, BioSepra and Beckman amended their distribution agreement whereby BioSepra granted a non-exclusive right to manufacture instruments to Beckman, removed its obligation to manufacture instruments for Beckman, and sold the discontinued instrument product inventory to Beckman for $250,000. ANNUAL MEETING INFORMATION The Annual Meeting of Shareholders will be held at 9:00 a.m. on May 27, 1998 at the offices of Hale and Dorr, Sixty State Street, Boston, MA. COMMON STOCK The Common Stock of Sepracor Inc. is traded on the Nasdaq Stock Market under the symbol SEPR. GENERAL COUNSEL

Hale and Dorr, Boston, MA PATENT COUNSEL Pennie & Edmonds, New York, NY INDEPENDENT ACCOUNTANTS Coopers & Lybrand LLP, Boston, MA CORPORATE HEADQUARTERS Sepracor Inc. 111 Locke Drive Marlborough, MA 01752 Telephone: (508) 481-6700 Facsimile: (508) 357-7499 Sepracor and ICE are trademarks of Sepracor Inc. HemaSure, LeukoNet, and SteriPath are trademarks of HemaSure Inc. BioSepra is a trademark, and Hyper D and ProSys are registered trademarks of BioSepra Inc. Ventolin, Zofran and Serevent are registered trademarks of Glaxo Group Limited. Proventil and Claritin are registered trademarks of Schering Corporation. Foradil is a registered trademark of Ciba-Geigy Corporation. Atock is a trademark of Yamanouchi, Inc. Hismanal is a registered trademark of Janssen Pharmaceutica N.V. Seldane is a registered trademark of Merrell Dow Pharmaceuticals, Inc. Ditropan is a registered trademark of Marion Merrell Dow. Allegra is a registered trademark of Merrell Pharmaceuticals. Cardura is a registered trademark of Pfizer Inc. Orudis is a registered trademark of Rhone-Poulenc Rorer, S.A. Actron is a trademark of Bayer Corporation. Prozac is a registered trademark of Eli Lilly and Company. Propulsid and Sporanox are registered trademarks of Johnson & Johnson. Toradol is a registered trademark of Syntex USA. Levaquin is a trademark of Daiichi Pharmaceutical Company LTD. POROS is a registered trademark of PerSeptive BioSystems, Inc. Prilosec is a registered trademark of Astra Aktiebolag. Prevacid is a registered trademark of TAP Holdings Inc. Imovane is a registered trademark of Rhone-Poulenc Sante. Meridia is a registered trademark of Knoll Pharmaceutical Company. Zyban is a trademark of Glaxo Group Limited. Ambien is a registered trademark of Synthelabo. Paxil is a trademark of Smithkline Beecham Corp. Zoloft is a registered trademark of Pfizer Inc. Wellbutrin is a registered trademark of Glaxo Wellcome Inc. Oxis is a trademark and Turbuhaler is a registered trademark of Akiebolaget Astra. Pantozol is a trademark of Byk Gulden Lomberg Chemische Fabrik GMBH. 40

DIRECTORS James G. Andress Former Chairman, Beecham Pharmaceuticals, Former President and COO, Sterling Drug Inc. Timothy J. Barberich President and Chief Executive Officer, Sepracor Inc. Digby W. Barrios Former President and CEO, Boehringer Ingelheim Corporation Robert J. Cresci Managing Director, Pecks Management Partners Ltd. Robert F. Johnston Managing Director, Johnston Associates Keith Mansford, Ph.D. Former Chairman, R&D, SmithKline Beecham plc James F. Mrazek Former Vice President and General Manager, Healthcare Division of Johnson & Johnson Products Inc. Alan A. Steigrod Former Executive Vice President, Glaxo Holdings plc

OFFICERS Timothy J. Barberich President and Chief Executive Office David S. Barlow Executive Vice President and Preside David P. Southwell Executive Vice President; Chief Fina Secretary James R. Hauske, Ph.D. Senior Vice President, Discovery Douglas E. Reedich, Ph.D., J.D. Chief Patent Counsel Paul D. Rubin, M.D. Senior Vice President, Drug Developm Robert F. Scumaci Senior Vice President, Finance & Adm and Treasurer Stephen A. Wald Vice President, Chemical R&D

[PICTURE OF DIRECTORS/OFFICERS] Pictured left to right, front row: Paul D. Rubin, M.D., Timothy J. Barberich and David S. Barlow. Middle row: James R. Hauske, Ph.D. and David P. Southwell. Back row: Robert F. Scumaci, Stephen A. Wald and Douglas E. Reedich, Ph.D. Design: MediaConcepts Corporation

EXHIBIT 21
List of Subsidiaries Name BioSepra Inc. (64% owned subsidiary of Sepracor) HemaSure Inc. (37% owned subsidiary of Sepracor) Sepracor Canada Holdings, Inc. Sepracor Canada Limited (100% owned subsidiary of Sepracor Canada Holdings, Inc.) Sepracor Securities Corporation (100% owned subsidiary of Sepracor) Jurisdiction of Incorporation Delaware Delaware Delaware

Canada

Massachusetts

Versicor Inc. (22% owned subsidiary of Sepracor)

Delaware

Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Sepracor Inc. on Form S-8 (File Nos. 333-48719, 333-05221, 33-44808, 333-05217, 33-43460, 33-48428, 33-94774, 333-05219) of our reports dated February 19, 1998, except as to the information in Note W for which the date is March 26, 1998, on our audits of the consolidated financial statements and the financial statement schedule of Sepracor Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which reports are included or incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.

Boston, Massachusetts March 26, 1998

Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 27, 1998 on the financial statements of BioSepra Inc. and subsidiaries as of and for the year ended December 31, 1997, included in this Form 10-K.
/s/ Arthur Andersen LLP ----------------------Boston, Massachusetts

March 26, 1998

ARTICLE 5

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED

YEAR DEC 31 1997 JAN 01 1997 DEC 31 1997 82,579,000 9,981,000 2,784,000 369,000 2,722,000 99,240,000 22,887,000 7,761,000 128,507,000 29,276,000 80,880,000 6,700,000 0 2,785,000 9,247,000 128,507,000 9,636,000 15,337,000 5,992,000 64,488,000 2,208,000 0 5,976,000 (26,723,000) 0 (26,723,000) 0 0 0 (26,723,000) (0.97) (0.97)

Exhibit 99 [ARTHUR ANDERSEN LLP] Report of Independent Public Accountants To the Board of Directors and Shareholders of BioSepra Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of BioSepra Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statement of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioSepra Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP Boston, January for the in Note Massachusetts 27, 1998 (except matter discussed Q as to which

the date is March 26, 1998)


								
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