##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

|  |  |                                                                                          
|- |  | -----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|PENNSYLVANIA                                                   |  | 23-2472830                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|88 Sidney Street, Cambridge, MA          |  | 02139-4136
|                                         |  |           
|(Address of principal executive offices) |  | (Zip Code)



|Registrants telephone number including area code: | (617) 494-0171
|-------------------------------------------------- | --------------
|                                                   |               



---

(Former name, former address, and former fiscal year, if changed since last report)


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yesx     No      o

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

|                                        |  |                                         |            | 
|--------------------------------------- |  | --------------------------------------- | ---------- | 
|Class                                   |  | Shares Outstanding as of August 8, 2003
|                                        |  |                                        
|Common Stock, par value $.01            |  |                                         | 88,884,694 | 
|Non-Voting Common Stock, par value $.01 |  |                                         | 382,632    | 

(1)



---

TABLE OF CONTENTS



|                                                 |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1. Consolidated Financial Statements:                                                   
|                                                 |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                 |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                 |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                 |                                                                                               | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                      
|                                                 | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|Exhibit Index                                   
|EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
|EX-32.1 CERTIFICATION TO SECT. 906 (CEO)        
|EX-32.2 CERTIFICATION TO SECT. 906 (CFO)        



---



##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES

INDEX

|                               |         |  |                                                            |                                                                                             |    |          |   | 
|------------------------------ | ------- |  | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                               |         |  |                                                            |                                                                                             |    | Page No.
|                               |         |  |                                                            |                                                                                             |    |         
|PART I  FINANCIAL INFORMATION |         |  |                                                            |                                                                                            
|                               | Item 1. |  | Consolidated Financial Statements                          |                                                                                             |    |          |  
|                               |         |  |                                                            | Condensed Consolidated Balance Sheets  June 30, 2003 and March 31, 2003                    |    |          | 3 | 
|                               |         |  |                                                            | Condensed Consolidated Statements of Operations  Three months ended June 30, 2003 and 2002 |    |          | 4 | 
|                               |         |  |                                                            | Condensed Consolidated Statements of Cash Flows  Three months ended June 30, 2003 and 2002 |    |          | 5 | 
|                               |         |  |                                                            | Notes to Condensed Consolidated Financial Statements                                        |    |          | 6 | 
|                               | Item 2. |  | Managements Discussion and Analysis of                    |                                                                                             |    | 13       |  
|                               |         |  |                                                            | Financial Condition and Results of Operations                                               |    |          |   | 
|                               | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk |                                                                                             |    | 24       |  
|                               | Item 4. |  | Controls and Procedures                                    |                                                                                             |    | 25       |  
|PART II  OTHER INFORMATION    |         |  |                                                            |                                                                                            
|                               | Item 2. |  | Changes in Securities and Use of Proceeds                  |                                                                                             |    | 26       |  
|                               | Item 6. |  | Exhibits and Reports on Form 8-K                           |                                                                                             |    | 26       |  
|SIGNATURES                     |         |  |                                                            |                                                                                             | 28 |         
|EXHIBIT INDEX                  |         |  |                                                            |                                                                                             | 29 |         

(2)



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements:




ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ----------- | ------------ | ----------- | --------- | ----------- | ------------ | ----------- | -
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             | June 30,     |             | March 31,
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             | 2003         |             | 2003     
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |          
|ASSETS                                                                                                                                                                   |                                                                                                                                                                    |                                                |             |             
|Current Assets:                                                                                                                                                          |                                                                                                                                                                    |                                                |             |              |             |           |             |             
|                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                          |                                                | $           | 39,432,369   |             |           | $           | 72,478,675   |            
|                                                                                                                                                                         | Short-term investments                                                                                                                                             |                                                |             | 65,247,112   |             |           |             | 63,615,497   |            
|                                                                                                                                                                         | Receivables from collaborative arrangements                                                                                                                        |                                                |             | 3,150,319    |             |           |             | 7,300,923    |            
|                                                                                                                                                                         | Prepaid expenses and other current assets                                                                                                                          |                                                |             | 2,140,671    |             |           |             | 2,166,238    |            
|                                                                                                                                                                         | Inventory                                                                                                                                                          |                                                |             | 3,431,100    |             |           |             | 2,576,082    |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    | Total current assets                           |             |              | 113,401,571 |           |             |              | 148,137,415 |  
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Property, Plant and Equipment:                                                                                                                                           |                                                                                                                                                                    |                                                |             |              |             |           |             |             
|                                                                                                                                                                         | Land                                                                                                                                                               |                                                |             | 235,000      |             |           |             | 235,000      |            
|                                                                                                                                                                         | Building                                                                                                                                                           |                                                |             | 15,505,909   |             |           |             | 5,093,815    |            
|                                                                                                                                                                         | Furniture, fixtures and equipment                                                                                                                                  |                                                |             | 61,455,827   |             |           |             | 56,005,820   |            
|                                                                                                                                                                         | Leasehold improvements                                                                                                                                             |                                                |             | 31,762,505   |             |           |             | 31,603,290   |            
|                                                                                                                                                                         | Construction in progress                                                                                                                                           |                                                |             | 29,010,861   |             |           |             | 39,500,993   |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              | 137,970,102 |           |             |              | 132,438,918 |  
|                                                                                                                                                                         |                                                                                                                                                                    | Less accumulated depreciation and amortization |             |              | (43,220,406 | )         |             |              | (40,964,851 | )
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             | 94,749,696   |             |           |             | 91,474,067   |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Investments                                                                                                                                                              |                                                                                                                                                                    |                                                | 8,950,042   |              |             |           | 8,945,908   |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Other Assets                                                                                                                                                             |                                                                                                                                                                    |                                                | 9,211,386   |              |             |           | 7,141,780   |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    | Total Assets                                   |             | $            | 226,312,695 |           |             | $            | 255,699,170 |  
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                    |                                                                                                                                                                    |                                                |             |             
|Current Liabilities:                                                                                                                                                     |                                                                                                                                                                    |                                                |             |              |             |           |             |             
|                                                                                                                                                                         | Accounts payable and accrued expenses                                                                                                                              |                                                | $           | 14,535,837   |             |           | $           | 14,252,083   |            
|                                                                                                                                                                         | Accrued interest                                                                                                                                                   |                                                |             | 481,058      |             |           |             | 2,901,984    |            
|                                                                                                                                                                         | Accrued restructuring costs                                                                                                                                        |                                                |             | 3,001,341    |             |           |             | 3,537,010    |            
|                                                                                                                                                                         | Deferred revenue                                                                                                                                                   |                                                |             | 14,600,956   |             |           |             | 12,253,338   |            
|                                                                                                                                                                         | Derivative liability related to convertible senior subordinated notes                                                                                              |                                                |             | 17,064,437   |             |           |             | 13,300,000   |            
|                                                                                                                                                                         | Long-term obligations  current portion                                                                                                                            |                                                |             | 6,825,000    |             |           |             | 7,800,000    |            
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    | Total current liabilities                      |             |              | 56,508,629  |           |             |              | 54,044,415  |  
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Deferred Revenue                                                                                                                                                         |                                                                                                                                                                    |                                                | 6,741,426   |              |             |           | 10,114,032  |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Convertible Senior Subordinated Notes                                                                                                                                    |                                                                                                                                                                    |                                                | 166,130,997 |              |             |           | 165,910,429 |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Convertible Subordinated Notes                                                                                                                                           |                                                                                                                                                                    |                                                | 676,000     |              |             |           | 676,000     |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Convertible Preferred Stock, par value $.01 per share: authorized and issued, 3,000
shares at June 30, 2003 and March 31, 2003, respectively (at liquidation preference) |                                                                                                                                                                    |                                                | 30,000,000  |              |             |           | 30,000,000  |             
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|Shareholders Deficit:                                                                                                                                                   |                                                                                                                                                                    |                                                |             |              |             |           |             |             
|                                                                                                                                                                         | Capital stock, par value $.01 per share: authorized, 4,550,000 shares; none issued;
includes 2,997,000 shares of preferred stock                                   |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         | Common stock, par value $.01 per share: authorized, 160,000,000 shares; issued, 64,776,830 and
64,692,848 shares at June 30, 2003 and March 31, 2003, respectively |                                                |             | 647,769      |             |           |             | 646,929      |            
|                                                                                                                                                                         | Non-voting common stock, par value $.01 per share:
authorized, 450,000 shares; issued, 382,632 at June 30, 2003 and
March 31, 2003                                 |                                                |             | 3,826        |             |           |             | 3,826        |            
|                                                                                                                                                                         | Additional paid-in capital                                                                                                                                         |                                                |             | 447,663,033  |             |           |             | 447,103,721  |            
|                                                                                                                                                                         | Deferred compensation                                                                                                                                              |                                                |             | (1,304,109   | )           |           |             | (1,864,281   | )          
|                                                                                                                                                                         | Accumulated other comprehensive income (loss)                                                                                                                      |                                                |             | 580,292      |             |           |             | (173,104     | )          
|                                                                                                                                                                         | Accumulated deficit                                                                                                                                                |                                                |             | (481,335,168 | )           |           |             | (450,762,797 | )          
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    | Total shareholders deficit                    |             |              | (33,744,357 | )         |             |              | (5,045,706  | )
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            
|                                                                                                                                                                         |                                                                                                                                                                    | Total Liabilities and Shareholders Deficit    |             | $            | 226,312,695 |           |             | $            | 255,699,170 |  
|                                                                                                                                                                         |                                                                                                                                                                    |                                                |             |              |             |           |             |              |            

See notes to condensed consolidated financial statements.

(3)



---



##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|---------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------- | ------------ | ------------ | ---------- | ------------ | ------------ | ---------- | ---------- | -
|                                                     |                                                                   |                              |              | Three Months |            | Three Months
|                                                     |                                                                   |                              |              | Ended        |            | Ended       
|                                                     |                                                                   |                              |              | June 30,     |            | June 30,    
|                                                     |                                                                   |                              |              | 2003         |            | 2002        
|                                                     |                                                                   |                              |              |              |            |             
|Revenues:                                            |                                                                   |                              |              |              |            |              |              |           
|                                                     | Manufacturing and royalty revenues                                |                              | $            | 1,544,754    |            |              | $            |           |           
|                                                     | Research and development revenue under collaborative arrangements |                              |              | 2,756,706    |            |              |              | 10,291,391 |           
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|                                                     |                                                                   | Total revenues               |              |              | 4,301,460  |              |              |            | 10,291,391 |  
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Expenses:                                            |                                                                   |                              |              |              |            |              |              |           
|                                                     | Cost of goods manufactured                                        |                              |              | 2,560,670    |            |              |              |           |           
|                                                     | Research and development                                          |                              |              | 21,672,964   |            |              |              | 24,599,673 |           
|                                                     | General and administrative                                        |                              |              | 5,780,598    |            |              |              | 6,016,040  |           
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|                                                     |                                                                   | Total expenses               |              |              | 30,014,232 |              |              |            | 30,615,713 |  
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Net operating loss                                   |                                                                   |                              | (25,712,772  | )            |            |              | (20,324,322  | )         
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Other income (expense):                              |                                                                   |                              |              |              |            |              |              |           
|                                                     | Interest income                                                   |                              |              | 975,161      |            |              |              | 1,365,936  |           
|                                                     | Other income, net                                                 |                              |              | 1,409,478    |            |              |              |           |           
|                                                     | Derivative loss related to convertible senior subordinated notes  |                              |              | (3,764,437   | )          |              |              |           |           
|                                                     | Interest expense                                                  |                              |              | (3,479,801   | )          |              |              | (2,081,134 | )         
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|                                                     |                                                                   | Total other (expense) income |              |              | (4,859,599 | )            |              |            | (715,198   | )
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Equity in losses of Reliant Pharmaceuticals, LLC     |                                                                   |                              |             |              |            |              | (24,212,900  | )         
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Net loss                                             |                                                                   |                              | ($30,572,371 | )            |            |              | ($45,252,420 | )         
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Basic and diluted loss per common share              |                                                                   |                              | ($0.47       | )            |            |              | ($0.70       | )         
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  
|Weighted average number of common shares outstanding |                                                                   |                              | 64,736,097   |              |            |              | 64,260,903   |           
|                                                     |                                                                   |                              |              |              |            |              |              |            |            |  

See notes to condensed consolidated financial statements.

(4)



---



##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |            |           |             |  
|---------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ---------- | ------------ | ----------- | ------------ | ---------- | --------- | ----------- | -
|                                               |                                                                             |                                                                  |                                                         |                                       |            | Three Months |             | Three Months
|                                               |                                                                             |                                                                  |                                                         |                                       |            | Ended        |             | Ended       
|                                               |                                                                             |                                                                  |                                                         |                                       |            | June 30,     |             | June 30,    
|                                               |                                                                             |                                                                  |                                                         |                                       |            | 2003         |             | 2002        
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |             
|Cash flows from operating activities:          |                                                                             |                                                                  |                                                         |                                       |            |              |             |             
|                                               | Net loss                                                                    |                                                                  |                                                         | ($30,572,371                          | )          |              |             | ($45,252,420 | )         
|                                               | Adjustments to reconcile net loss to net cash used by
operating activities: |                                                                  |                                                         |                                       |            |              |             |              |           
|                                               |                                                                             | Depreciation and amortization                                    |                                                         |                                       | 2,426,522  |              |             |              | 2,315,760  |          
|                                               |                                                                             | Other noncash charges                                            |                                                         |                                       | 1,046,228  |              |             |              | 755,275    |          
|                                               |                                                                             | Equity in losses of Reliant Pharmaceuticals, LLC                 |                                                         |                                       |           |              |             |              | 24,212,900 |          
|                                               |                                                                             | Other noncash income                                             |                                                         |                                       | (1,409,478 | )            |             |              |           |          
|                                               |                                                                             | Derivative loss related to convertible senior subordinated notes |                                                         |                                       | 3,764,437  |              |             |              |           |          
|                                               |                                                                             | Changes in assets and liabilities:                               |                                                         |                                       |            |              |             |              |            |          
|                                               |                                                                             |                                                                  | Receivables from collaborative arrangements             |                                       |            | 4,150,604    |             |              |            | (462,201  | )          
|                                               |                                                                             |                                                                  | Prepaid expenses and other current assets               |                                       |            | (829,988     | )           |              |            | (400,779  | )          
|                                               |                                                                             |                                                                  | Accounts payable, accrued expenses and accrued interest |                                       |            | (2,127,162   | )           |              |            | 3,823,187 |            
|                                               |                                                                             |                                                                  | Accrued restructuring costs                             |                                       |            | (535,669     | )           |              |            |          |            
|                                               |                                                                             |                                                                  | Deferred revenue                                        |                                       |            | (1,024,988   | )           |              |            | (276,341  | )          
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |            |           |            
|                                               |                                                                             |                                                                  |                                                         | Net cash used by operating activities |            |              | (25,111,865 | )            |            |           | (15,284,619 | )
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |            |           |             |  
|Cash flows from investing activities:          |                                                                             |                                                                  |                                                         |                                       |            |              |             |             
|                                               | Additions to property, plant and equipment                                  |                                                                  |                                                         | (5,531,184                            | )          |              |             | (16,626,892  | )         
|                                               | Purchases of available-for-sale short-term investments                      |                                                                  |                                                         | (39,514,266                           | )          |              |             | (35,290,276  | )         
|                                               | Sales of available-for-sale short-term investments                          |                                                                  |                                                         | 37,797,890                            |            |              |             | 71,241,888   |           
|                                               | Increase in other assets                                                    |                                                                  |                                                         | (150,022                              | )          |              |             |             |           
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |            |           |             |  
|                                               | Net cash (used by) provided by investing activities                         |                                                                  |                                                         | (7,397,582                            | )          |              |             | 19,324,720   |           
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|Cash flows from financing activities:          |                                                                             |                                                                  |                                                         |                                       |            |              |             |             
|                                               | Proceeds from issuance of common stock                                      |                                                                  |                                                         | 455,591                               |            |              |             | 480,681      |           
|                                               | Payment of long-term obligations                                            |                                                                  |                                                         | (975,000                              | )          |              |             | (1,100,000   | )         
|                                               | Repayment of loan                                                           |                                                                  |                                                         |                                      |            |              |             | (10,000,000  | )         
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|                                               | Net cash used by financing activities                                       |                                                                  |                                                         | (519,409                              | )          |              |             | (10,619,319  | )         
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|Effect of exchange rate changes on cash        |                                                                             |                                                                  | (17,450                                                 | )                                     |            |              | 44,939      |             
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|Net decrease in cash and cash equivalents      |                                                                             |                                                                  | (33,046,306                                             | )                                     |            |              | (6,534,279  | )           
|Cash and cash equivalents, beginning of period |                                                                             |                                                                  | 72,478,675                                              |                                       |            |              | 16,023,074  |             
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|Cash and cash equivalents, end of period       |                                                                             | $                                                                | 39,432,369                                              |                                       |            | $            | 9,488,795   |             
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|Supplementary information:                     |                                                                             |                                                                  |                                                         |                                       |            |              |             |             
|                                               | Cash paid for interest                                                      |                                                                  | $                                                       | 5,418,375                             |            |              | $           | 213,428      |           
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|                                               | Cash paid for income taxes                                                  |                                                                  | $                                                       | 37,534                                |            |              | $           |             |           
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           
|                                               | Conversion of 6.52% Convertible Senior Subordinated Notes into common stock |                                                                  | $                                                       | 100,861                               |            |              | $           |             |           
|                                               |                                                                             |                                                                  |                                                         |                                       |            |              |             |              |           

See notes to condensed consolidated financial statements.

(5)



---



##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements of Alkermes, Inc. (the Company) for the
three months ended June 30, 2003 and 2002 are unaudited and include all
adjustments which, in the opinion of management, are necessary to present
fairly the results of operations for the periods then ended. Such adjustments,
consisting of normal recurring items, included approximately $3.8 million in
non-recurring expenses in the three months ended June 30, 2003 related to the
embedded derivative in the Companys 6.52% Convertible Senior
Subordinated Notes due December 31, 2009 (the 6.52% Senior
Notes). These financial
statements should be read in conjunction with the Companys consolidated
financial statements and notes thereto for the years ended March 31, 2003, 2002
and 2001, which are contained in Companys Annual Report for the year ended
March 31, 2003 filed on Form 10-K. In addition, the financial statements
include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes
Controlled Therapeutics Inc. II, Advanced Inhalation Research, Inc. (AIR®),
Alkermes Investments, Inc., Alkermes Europe, Ltd. and Alkermes Development
Corporation II (ADC II), wholly owned subsidiaries of the Company.

The results of the Companys operations for any interim period are not
necessarily indicative of the results of the Companys operations for any other
interim period or for a full fiscal year.

The preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America (GAAP) necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

2. COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and other comprehensive income
(loss). Other comprehensive income (loss) includes certain changes in the shareholders
equity of the Company that are excluded from net loss. Specifically, other
comprehensive income (loss) includes unrealized holding gains and losses on the
Companys available-for-sale securities and changes in cumulative foreign
currency translation adjustments.

(6)



---



##### Table of Contents



2. COMPREHENSIVE LOSS (Continued)

Comprehensive loss for the three months ended June 30, 2003 and 2002 is as
follows:

|                                                |  |               |             |               |  |   |             |  
|----------------------------------------------- |  | ------------- | ----------- | ------------- |  | - | ----------- | -
|                                                |  | Three Months  |             | Three Months 
|                                                |  | Ended         |             | Ended        
|                                                |  | June 30, 2003 |             | June 30, 2002
|                                                |  |               |             |              
|Net loss                                        |  | $             | (30,572,371 | )             |  | $ | (45,252,420 | )
|Foreign currency translation adjustments        |  |               | (7,977      | )             |  |   | 49,908      |  
|Unrealized gain (loss) on marketable securities |  |               | 761,373     |               |  |   | (977,251    | )
|                                                |  |               |             |               |  |   |             |  
|Comprehensive loss                              |  | $             | (29,818,975 | )             |  | $ | (46,179,763 | )
|                                                |  |               |             |               |  |   |             |  

3. NET LOSS PER SHARE

Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding during the period. Basic net loss per
share excludes any dilutive effect from stock options and awards, convertible
preferred stock, convertible senior subordinated notes and convertible
subordinated notes. Certain common shares potentially issuable were not
included in the computation of diluted net loss per share for the three months
ended June 30, 2003 and 2002 because they would have an antidilutive effect due
to net losses for such periods.

Common shares potentially issuable but excluded from the calculation of net
loss per share consist of the following as of June 30:

|                                                                             |  |      |            |      |  |  |            | 
|---------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                                                                             |  | 2003 |            | 2002
|                                                                             |  |      |            |     
|Stock options and awards                                                     |  |      | 14,618,925 |      |  |  | 11,368,201 | 
|Shares issuable on conversion of
3.75% Convertible Subordinated Notes        |  |      | 9,978      |      |  |  | 2,952,030  | 
|Shares issuable on conversion of
6.52% Convertible Senior
Subordinated Notes |  |      | 22,713,226 |      |  |  |           | 
|Shares issuable on conversion of
Convertible Preferred Stock                 |  |      | 2,824,859  |      |  |  |           | 
|                                                                             |  |      |            |      |  |  |            | 
|                                                                             |  |      | 40,166,988 |      |  |  | 14,320,231 | 
|                                                                             |  |      |            |      |  |  |            | 

(7)



---



##### Table of Contents



4. INVENTORY

Inventory is stated at the lower of cost or market and consists of currently
marketed products. Cost is determined in a manner that approximates the
first-in, first-out method. Inventory consists of the following at June 30,
2003 and March 31, 2003:

|                |  |          |           |           |  |   |           | 
|--------------- |  | -------- | --------- | --------- |  | - | --------- | 
|                |  | June 30, |           | March 31,
|                |  | 2003     |           | 2003     
|                |  |          |           |          
|Raw materials   |  | $        | 675,705   |           |  | $ | 620,653   | 
|Work in process |  |          | 1,900,368 |           |  |   | 1,955,429 | 
|Finished goods  |  |          | 855,027   |           |  |   |          | 
|                |  |          |           |           |  |   |           | 
|                |  | $        | 3,431,100 |           |  | $ | 2,576,082 | 
|                |  |          |           |           |  |   |           | 

5. DERIVATIVES

The Company has recorded a derivative liability related to the
6.52% Senior Notes. Pursuant to
the terms of the 6.52% Senior Notes, the Company will pay additional interest
equal to two full years of interest on the 6.52% Senior Notes (the Two-Year
Interest Make-Whole) if the 6.52% Senior Notes are automatically converted on
or prior to December 30, 2004 or if the holders voluntarily convert prior to
December 30, 2004. The Two-Year Interest Make-Whole represents an embedded
derivative which is required to be accounted for apart from the underlying
6.52% Senior Notes. On June 18, 2003, the Company announced that
it exercised its automatic conversion right for the 6.52% Senior Notes. The embedded derivative
was adjusted to the value of the remaining balance of the Two-Year Interest Make-Whole payment, or approximately $17.1 million, at June 30,
2003 and is accounted for as a liability on the consolidated balance sheets. A
$3.8 million noncash charge to Derivative loss related to convertible senior
subordinated notes has been recorded in the consolidated statements of
operations in the quarter ended June 30, 2003 to account for the increase of
this derivative liability. On July 18, 2003, upon conversion of the then
outstanding 6.52% Senior Notes and payment of the Two-Year Interest Make-Whole,
the embedded derivative was settled in full and the balance was reduced to zero.

The Company has recorded a gain of approximately $1.4 million in other income
in the consolidated statements of operations in connection with the changes in
the fair value of warrants held by the Company in connection with licensing
arrangements. The recorded value of such warrants can fluctuate significantly
based on fluctuations in the market value of the underlying securities of the
issuer of the warrants.

6.     INVESTMENT IN RELIANT PHARMACEUTICALS, LLC

In December 2001, the Company purchased approximately 63% of an offering by
Reliant of its Series C Convertible Preferred Units, representing approximately
19% of the equity interest in Reliant, for a purchase price of $100,000,000.
The investment has been accounted for under the equity method of accounting
because Reliant is organized as a limited liability company, which is

(8)



---



##### Table of Contents



6. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC (Continued)

treated in a manner similar to a partnership. Because, at the time of the
Companys investment, Reliant had an accumulated deficit from operations and a
deficit in members capital, under
applicable accounting rules, the Companys share of Reliants losses from the
date of the Companys investment has been recognized in proportion to the
Companys percentage participation in the Series C financing, and not in
proportion to the Companys percentage ownership interest in Reliant. The
Company recorded its equity in the income or losses of Reliant three months in
arrears. For the three months ended June 30, 2003 and 2002, this charge
amounted to $0 and approximately $24,213,000, respectively, and is recorded in
the Companys consolidated statements of operations under the caption Equity
in losses of Reliant Pharmaceuticals, LLC.

Reliant is a privately held company over which the Company does not exercise
control and the Company has relied on the unaudited and audited financial
statements prepared by Reliants management and provided to the Company to
calculate the Companys share of Reliants losses. The Companys $100,000,000
investment was reduced to $0 during the fiscal year ended March 31, 2003.
Since the Company has no further funding commitments to Reliant, it will not
record any further share of losses of Reliant in its consolidated statements of
operations. To the extent Reliant has net income in the future, the Company
would record its proportional share of Reliants net income.

Summarized unaudited financial information of Reliant for the three months
ended March 31, 2003 and 2002 is as follows:

|                   |  |                    |         |                    |  |   |         |  
|------------------ |  | ------------------ | ------- | ------------------ |  | - | ------- | -
|                   |  | Three Months Ended |         | Three Months Ended
|(In thousands)     |  | March 31, 2003     |         | March 31, 2002    
|                   |  |                    |         |                   
|Revenues           |  | $                  | 47,476  |                    |  | $ | 58,609  |  
|Costs and expenses |  |                    | 59,070  |                    |  |   | 88,461  |  
|Net Loss           |  |                    | (12,475 | )                  |  |   | (29,644 | )

7. RESTRUCTURING OF OPERATIONS

In August 2002, the Company announced a restructuring program to reduce the
Companys cost structure as a result of the Companys expectations regarding
the financial impact of a delay in the U.S. launch of Risperdal Consta by the
Companys collaborative partner, Janssen. The restructuring program reduced
the Companys workforce by 122 employees, representing 23% of the Companys
total workforce, and includes consolidation and closure of certain leased
facilities in Cambridge, Massachusetts, closure of the Companys medical
affairs office in Cambridge, England, write-off of leasehold improvements at
leased facilities being vacated and reductions of other expenses. The
workforce reductions were made across all functions of the Company. Under the
restructuring plan, the Company is focusing development activities on those
programs that are in the later stages of clinical development and those
programs that involve the most productive collaborations.

In connection with the restructuring program, the Company recorded charges of
approximately $6,500,000 in the consolidated statements of operations and
comprehensive loss for the year ended March 31, 2003, which consisted of
approximately $1,500,000 in employee separation costs, including severance and
related benefits, and approximately $5,000,000 in facility consolidation and

(9)



---



##### Table of Contents



7. RESTRUCTURING OF OPERATIONS (Continued)

closure costs, including significant estimates relating to a lease cancellation
fee, the length of time it will take to sublease certain of the Companys
facilities and the lease rates at which the Company
may negotiate sublease agreements with third parties. As of June 30, 2003, the
Company had paid an aggregate of approximately $1,500,000 in employee
separation costs and $2,000,000 in facility closure costs under the
restructuring program.

The amounts in the accrual are expected to be paid through fiscal 2006.
Pursuant to the restructuring plan, the following charges and payments have
been recorded during the three months ended June 2003:

|                          |  |               |           |            |  |              |   |          |  |   |          |   |  |          |           | 
|------------------------- |  | ------------- | --------- | ---------- |  | ------------ | - | -------- |  | - | -------- | - |  | -------- | --------- | 
|                          |  |               |           |            |  |              |   |          |  |   |          |   |  | Balance,
|                          |  | Balance,      |           | Charge for |  | Payments for |   | June 30,
|Type of Liability         |  | April 1, 2003 |           | the Period |  | the Period   |   | 2003    
|                          |  |               |           |            |  |              |   |         
|Employee separation costs |  | $             | 16,547    |            |  | $            |  |          |  | $ | (1,000   | ) |  | $        | 15,547    | 
|Facility closure costs    |  |               | 3,520,463 |            |  |              |  |          |  |   | (534,669 | ) |  |          | 2,985,794 | 
|                          |  |               |           |            |  |              |   |          |  |   |          |   |  |          |           | 
|Total                     |  | $             | 3,537,010 |            |  | $            |  |          |  | $ | (535,669 | ) |  | $        | 3,001,341 | 
|                          |  |               |           |            |  |              |   |          |  |   |          |   |  |          |           | 

The Company substantially completed its restructuring program during fiscal
2003. However, the Companys remaining restructuring accrual is an estimate of
costs associated with leases of closed facilities and may require adjustment in
the future.

8. STOCK BASED COMPENSATION

The Company uses the intrinsic value method to measure compensation expense
associated with the grants of stock options and awards to employees. The
Company accounts for stock options and awards to nonemployees using the
fair-value method.

Under the intrinsic value method, compensation associated with stock awards to
employees is determined as the difference, if any, between the current fair
value of the underlying common stock on the date compensation is measured and
the price an employee must pay to exercise the award. The measurement date for
employee awards is generally the grant date. Under the fair-value method,
compensation associated with stock awards to nonemployees is determined based
on the estimated fair value of the award itself, measured using either current
market data or an established option pricing model. The measurement date for
nonemployee awards is generally the date performance of certain services is
complete. Pro forma information regarding net loss and basic and diluted loss
per common share for the three months ended June 30, 2003 and 2002 has been
determined as if the
Company had accounted for its employee stock options under the fair-value
method. The resulting effect on pro forma net loss and basic and diluted loss
per common share is not necessarily likely to
be representative of the effects on net loss and basic and diluted loss per
common share on a pro forma basis in future years, as options vest over several
years and the Company expects to grant varying levels of stock options in
future periods at exercise prices equal to the fair market value of the
Companys common stock at the date of grant, which can fluctuate significantly.

(10)



---



##### Table of Contents



8. STOCK BASED COMPENSATION (Continued)

The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rates of 2.46% and 3.07% for the three months
ended June 30, 2003 and 2002, respectively; dividend yields of 0% for the three
months ended June 30, 2003 and 2002; volatility factors for the expected market
price of the Companys common stock of 73% and 74% for the three months ended
June 30, 2003 and 2002, respectively; and a weighted average expected life of
four years in the three months ended June 30, 2003 and 2002. Using the
Black-Scholes option-pricing model, the weighted average fair value of options
granted in the three months ended June 30, 2003 and 2002 was $5.48 and $10.14,
respectively. For purposes of pro forma disclosures, the estimated fair value
of options is amortized to pro forma expense over the vesting period of the
option.

Pro forma information for the three months ended June 30, 2003 and 2002 is as
follows:

|                                                                                                                      |  |      |             |      |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                                                                                                      |  | 2003 |             | 2002
|                                                                                                                      |  |      |             |     
|Net
loss  as reported                                                                                                |  | $    | (30,572,371 | )    |  | $ | (45,252,420 | )
|Add: Stock-based compensation as reported
in the consolidated statements of operations and
comprehensive loss         |  |      | 563,872     |      |  |   | 521,138     |  
|Deduct: Total stock-based employee
compensation expense determined
under fair-value method for all options and awards |  |      | (5,019,799  | )    |  |   | (8,349,953  | )
|                                                                                                                      |  |      |             |      |  |   |             |  
|Pro forma net loss                                                                                                    |  | $    | (35,028,298 | )    |  | $ | (53,081,235 | )
|                                                                                                                      |  |      |             |      |  |   |             |  
|Basic
and diluted loss per common share  as reported                                                                 |  | $    | (0.47       | )    |  | $ | (0.70       | )
|                                                                                                                      |  |      |             |      |  |   |             |  
|Basic
and diluted loss per common share  pro forma                                                                   |  | $    | (0.54       | )    |  | $ | (0.83       | )
|                                                                                                                      |  |      |             |      |  |   |             |  

9. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2000, the Emerging Issues Task Force (EITF) released EITF Issue No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, for
comment which addresses revenue recognition for arrangements with multiple
deliverables. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, with early
adoption permitted. The adoption of EITF Issue No. 00-21 did not have a
material impact on the Companys financial position and results of operations.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim

(11)



---



##### Table of Contents



9. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. The adoption of FASB 150 is not expected to have a material
impact on the Companys financial position and results of operations.

10. SUBSEQUENT EVENT

On June 18, 2003, the Company announced that it had exercised its right to
automatically convert all of its outstanding 6.52% Senior Notes into shares of
the Companys common stock, par value $0.01 per share. The Company set the
automatic conversion date at July 18, 2003. The Company had the right to elect
to automatically convert the 6.52% Senior Notes because the closing price of
the Companys common stock exceeded 150% of the conversion price of the 6.52%
Senior Notes ($7.682) for 20 trading days during the 30-day trading period that
ended on June 18, 2003.

Prior to June 30, 2003, certain holders of the 6.52% Senior Notes elected to
convert $106,000 principal amount of the 6.52% Senior Notes into 13,798 shares
of the Companys common stock at the ratio of 130.1744 shares of the Companys
common stock per $1,000 principal amount of the 6.52% Senior Notes. Pursuant
to the terms of the 6.52% Senior Notes, the Company also made a cash payment of
approximately $14,000 to satisfy the Two-Year Interest Make-Whole payment.

During July 2003, $150,707,000 principal amount of 6.52% Senior Notes were
exchanged for shares of the Companys common stock. The Company issued an
aggregate of 20,934,514 shares of common stock in exchange for such 6.52%
Senior Notes, reflecting the value of both principal and interest.

On July 18, 2003, upon conversion of the remaining $23,776,000 principal amount
of the 6.52% Senior Notes, the Company issued an aggregate of 3,095,017 shares
of common stock and paid an aggregate of approximately $2,300,000 in cash to
satisfy the Two-Year Interest Make-Whole payment. The Company converted each
$1,000 principal amount of such 6.52% Senior Notes into 130.1744 shares of
common stock and paid the holder thereof an interest payment of $97.80 in cash,
representing the remaining 1.5 years of interest due on the 6.52% Senior Notes.

(12)



---



##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Alkermes, Inc. (as used in this section, together with our subsidiaries, us,
we or our), a Pennsylvania corporation organized in 1987, is an emerging
pharmaceutical company developing products based on applying our proprietary
drug delivery technologies to enhance therapeutic outcomes. Our areas of focus
include: controlled, extended-release of injectable drugs using our ProLease®
and Medisorb® delivery systems and the development of inhaled pharmaceuticals
based on our proprietary Advanced Inhalation Research, Inc. (AIR®) pulmonary
delivery system. Our business strategy is two-fold. We partner our
proprietary technology systems and drug delivery expertise with several of the
worlds finest pharmaceutical companies and we also develop novel, proprietary
drug candidates for our own account. We have a pipeline of products in various
stages of development and two marketed products, Risperdal Consta and Nutropin
Depot®. In addition to our Cambridge, Massachusetts corporate headquarters,
research and manufacturing facilities, we operate research and manufacturing
facilities in Ohio. Since our inception in 1987, we have devoted a significant
portion of our resources to research and development programs and the purchase
of property, plant and equipment. At June 30, 2003, we had an accumulated
deficit of $481.3 million. We expect to incur substantial additional operating
losses over the next few years.

We have funded our operations primarily through public offerings and private
placements of debt and equity securities, bank loans and payments under
research and development agreements with collaborators. We historically have
developed our product candidates in collaboration with others on whom we rely
for funding, development, manufacturing and/or marketing. While we continue to
develop product candidates in collaboration with others, we also develop
proprietary product candidates for our own account that we fund on our own.

Forward-Looking Statements

Any statements herein or otherwise made in writing or orally by us with regard
to our expectations as to financial results and other aspects of our business
may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to our
future plans, objectives, expectations and intentions and may be identified by
words like believe, expect, may, will, should, seek, or
anticipate, and similar expressions.

Although we believe that our expectations are based on reasonable assumptions
within the bounds of our knowledge of our business and operations, our business
is subject to significant risks and there can be no assurance that actual
results of our development and manufacturing activities and our results of
operations will not differ materially from our expectations. Factors which
could cause actual results to differ from expectations include, among others:
(i) whether additional regulatory approvals will be received for Risperdal
Consta, particularly in the U.S. after Johnson & Johnson Pharmaceutical
Research and Development, LLC (J&J PRD) received a non-approvable letter for
Risperdal Consta from the FDA; (ii) whether additional commercial launches of
Risperdal Consta in countries where it has been or may be approved

(13)



---



##### Table of Contents



occur in a timely or successful manner; (iii) Nutropin Depot, Risperdal Consta
and our product candidates (including our proprietary product candidate,
Vivitrex®), if approved for marketing, may not produce significant revenues and
we rely on our partners to determine the regulatory and marketing strategies
for Risperdal Consta and Nutropin Depot; (iv) Nutropin Depot, Risperdal Consta
and our product candidates (including our proprietary product candidate,
Vivitrex), when in commercial use, may have unintended side effects, adverse
reactions or incidents of misuse; (v) we may enter into a collaboration with a
third party to market or fund a proprietary product candidate and the terms of
such a collaboration may not meet our expectations; (vi) our delivery
technologies or product development efforts may not produce safe, efficacious
or commercially viable products; (vii) our collaborators could elect to
terminate or delay programs at any time and disputes with collaborators or
failure to negotiate acceptable new collaborative arrangements for our
technologies could occur; (viii) we may be unable to manufacture our first
products, Nutropin Depot and Risperdal Consta, or to manufacture or scale-up
our future products, on a commercial scale or economically; (ix) unexpected
events could interrupt manufacturing operations at our Risperdal Consta and
Nutropin Depot facilities, which are, in each case, the sole source of supply
for these products; (x) after the completion of clinical trials and the
submission to the FDA of a New Drug Application (NDA) for marketing approval
and to other health authorities as a marketing authorization application, the
FDA or other health authorities could refuse to accept such filings or could
request additional preclinical or clinical studies be conducted, each of which
could result in significant delays, or such authorities could refuse to approve
the product at all; (xi) clinical trials are a time-consuming and expensive
process; (xii) our product candidates could be ineffective or unsafe during
preclinical studies and clinical trials and we and our collaborators may not be
permitted by regulatory authorities to undertake new or additional clinical
trials for product candidates incorporating our technologies, or clinical
trials could be delayed; (xiii) we may not recoup any of our $100 million
investment in Reliant Pharmaceuticals, LLC (Reliant); (xiv) even if our
product candidates appear promising at an early stage of development, product
candidates could fail to receive necessary regulatory approvals, be difficult
to manufacture on a large scale, be uneconomical, fail to achieve market
acceptance, be precluded from commercialization by proprietary rights of third
parties or experience substantial competition in the marketplace; (xv)
technological change in the biotechnology or pharmaceutical industries could
render our product candidates obsolete or noncompetitive; (xvi) difficulties or
set-backs in obtaining and enforcing our patents and difficulties with the
patent rights of others could occur; (xvii) we may need to spend substantial
funds to become profitable and will, therefore, continue to incur losses for
the foreseeable future; and (xviii) we will need to raise substantial
additional funding to continue research and development programs and clinical
trials and could incur difficulties or setbacks in raising such funds.

Critical Accounting Policies

While our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements on Form 10-K for the year ended March 31,
2003, we believe the following accounting policies to be important to the
portrayal of our financial condition and results of operations and can require
estimates from time to time.

Revenue Recognition- Manufacturing and royalty revenues consist of revenue
earned under certain manufacturing and supply and license agreements for our
two commercial products, Risperdal Consta and Nutropin Depot. Manufacturing
revenues are earned when product is shipped to our collaborative partners.
Royalty revenues are earned on product sales made by our

(14)



---



##### Table of Contents



collaborative partners and are recorded in the period the product is sold by
our collaborative partners. Manufacturing revenues recognized by us are based
on information supplied to us by our collaborative partners and may require
estimates to be made.

Research and development revenue consists of nonrefundable research and
development funding under collaborative arrangements with various collaborative
partners. Research and development funding generally compensates us for
formulation, preclinical and clinical testing related to the collaborative
research programs, and is recognized as revenue at the time the research and
development activities are performed under the terms of the related agreements,
when the corporate partner is obligated to pay and when no future performance
obligations exist.

Fees for the licensing of technology or intellectual property rights on
initiation of collaborative arrangements are recorded as deferred revenue upon
receipt and recognized as income on a systematic basis (based upon the timing
and level of work performed or on a straight-line basis if not otherwise
determinable) over the period that the related products or services are
delivered or obligations, as defined in the agreement, are performed. Revenue
from milestone or other upfront payments is recognized as earned in accordance
with the terms of the related agreements. These agreements may require
deferral of revenue recognition to future periods.

Equity Method Investment in Reliant- In December 2001, we purchased 63% of an
offering by Reliant of its Series C Convertible Preferred Units, representing
approximately 19% of the equity interest in Reliant, for a purchase price of
$100 million. The investment has been accounted for under the equity method of
accounting because Reliant is organized as a limited liability company, which
is treated in a manner similar to a partnership. Because, at the time of our
investment, Reliant had an accumulated deficit from operations and a deficit in
members capital, under applicable accounting rules, our share of Reliants
losses from the date of our investment has been recognized in proportion to our
percentage participation in the Series C financing, and not in proportion to
our percentage ownership interest in Reliant. We recorded our equity in the
income or losses of Reliant three months in arrears. For the three months
ended June 30, 2003 and 2002, this charge amounted to $0 and $24.2 million,
respectively, and is recorded in our consolidated statements of operations
under the caption Equity in losses of Reliant Pharmaceuticals, LLC. The
Companys $100 million investment was reduced to $0 during the fiscal year
ended March 31, 2003. Since we have no further funding commitments to Reliant,
we will not record any further share of losses in Reliant in our consolidated
statement of operations. To the extent Reliant has net income in the future,
we would record our proportional share of Reliants net income. Reliant is a
privately held company over which we do not exercise control and we have relied
on the unaudited and audited financial statements prepared by Reliants
management and provided to us to calculate our share of Reliants losses.

Embedded Derivative- We exchanged our 3.75% Convertible Subordinated Notes due
2007 (the 3.75% Subordinated Notes) and offered for sale new 6.52%
Convertible Senior Subordinated Notes due December 31, 2009 (the 6.52% Senior
Notes) to existing holders in December 2002. The 6.52% Senior Notes are
automatically convertible by us if the closing price of our common stock has
exceeded $11.523 for at least 20 trading days during any 30-day trading period.
If the automatic conversion occurs on or prior to December 30, 2004 or if the
holders voluntarily convert prior to December 30, 2004, the Company will pay
additional interest equal to two full years of interest on the 6.52% Senior
Notes (the Two-Year Interest Make-Whole), less any interest paid or provided
for on the 6.52% Senior Notes prior to conversion. The Two-Year Interest
Make-Whole represents an embedded derivative which is required to be accounted

(15)



---



##### Table of Contents



for apart from the underlying 6.52% Senior Notes. On June 18, 2003, we
announced that we exercised our automatic conversion right for the 6.52% Senior
Notes. The embedded derivative was adjusted to the value of the remaining
balance of the Two-Year Interest Make-Whole payment, or approximately $17.1
million, at June 30, 2003 and is accounted for as a liability on the
consolidated balance sheets. A $3.8 million noncash charge to Derivative loss
related to convertible senior subordinated notes has been recorded in the
consolidated statements of operations in the quarter ended June 30, 2003 to
account for the increase of this derivative liability. On July 18, 2003, upon
conversion of the then outstanding 6.52% Senior Notes and payment of the
Two-Year Interest Make-Whole, the embedded derivative was settled in full and the balance was reduced to zero.

Cost of Goods Manufactured- Our cost of goods manufactured includes estimates
made with respect to allocations of salaries and related benefits, occupancy
costs, depreciation expense and other allocable costs directly related to our
manufacturing activities. Costs of goods manufactured are incurred in
connection with the manufacture of Risperdal Consta and Nutropin Depot.

Research and Development Expenses- Our research and development expenses
include salaries and related benefits, laboratory supplies, temporary help
costs, external research costs, consulting costs, occupancy costs, depreciation
expense and other allocable costs directly related to our research and
development activities. Research and development expenses are incurred in
conjunction with the development of our technologies, proprietary product
candidates, collaborators product candidates and in-licensing arrangements.
External research costs relate to toxicology studies, pharmacokinetic studies
and clinical trials that are performed for us under contract by external
companies, hospitals or medical centers. All such costs are charged to
research and development expenses as incurred.

Results of Operations

The net loss provided in accordance with accounting principles generally
accepted in the U.S. (known as GAAP) for the three months ended June 30, 2003
was $30.6 million or $0.47 per share as compared to a net loss of $45.3 million
or $0.70 per share in the same period of the prior year. Included in the net
loss for the three months ended June 30, 2002 is a $24.2 million noncash charge
related to the equity investment we made in Reliant in December 2001. Our
investment in Reliant has been reduced to zero, and since no further funding
commitments exist to Reliant, we have not recorded any share of Reliants
losses in the current quarter.

Total manufacturing and royalty revenues were $1.5 million for the three months
ended June 30, 2003, including $1.1 million of manufacturing and royalty
revenues for Risperdal Consta. During the quarter, we conducted our
semi-annual shutdown of the Risperdal Consta facility in Ohio. In July 2003,
we resumed manufacturing and began multi-shift operations at this facility in
anticipation of approval of Risperdal Consta in the U.S. Alkermes developed
the delivery technology for Risperdal Consta, which is an injectable,
long-acting formulation of Risperdal®, a Janssen Pharmaceutica, Inc.
(Janssen) drug. Johnson & Johnson has filed for approval of Risperdal Consta
around the world. To date the product has been approved for sale in 35
countries. Janssen-Cilag, a wholly owned subsidiary of Johnson & Johnson, is
currently marketing Risperdal Consta in Australia, Austria, Denmark, Finland,
Germany, Ireland, Israel, Korea, Mexico, The Netherlands, New Zealand, Norway,
Spain, Switzerland, and the United Kingdom. The product is approved, but has
not yet been launched, in Argentina, Bahrain, Belgium, Bulgaria, Colombia, the
Czech Republic, Estonia, Hong Kong, Hungary, Iceland,

(16)



---



##### Table of Contents



Kuwait, Latvia, Lithuania, Philippines, Portugal, Singapore, Slovenia,
Thailand, Trinidad/Tobego and Uruguay.

Our research and development revenue under collaborative arrangements was $2.8
million and $10.3 million for the three months ended June 30, 2003 and 2002,
respectively. The decrease in such revenue was primarily the result of the
restructuring of our AIR insulin and AIR hGH programs with Eli Lilly and
Company (Lilly), changes in our partners, as well as changes in the stage of
several other collaborative programs. Beginning January 1, 2003, we no longer
record research and development revenue for work performed on the Lilly
programs but instead use the proceeds from Lillys purchase of $30 million of
our convertible preferred stock in December 2002 to pay for development costs
into calendar year 2004. Also, in December 2002, the royalty payable to us
based on revenues of potential inhaled insulin products was increased. Lilly
has the right to return the convertible Preferred Stock to us in exchange for a
reduction in this royalty rate.

For the three months ended June 30, 2003, the cost of goods manufactured was
$2.6 million consisting of approximately $1.4 million for Risperdal Consta and
approximately $1.2 million for Nutropin Depot.

Research and development expenses were $21.7 million for the three months ended
June 30, 2003 compared to $24.6 million for the three months ended June 30,
2002. The decrease in research and development expenses for three months ended
June 30, 2003 as compared to the three months ended June 30, 2002 is primarily
because we now separately report the cost of goods manufactured for our
commercial products, Risperdal Consta and Nutropin Depot. The decrease in
research and development expenses for the three months ended June 30, 2003 as
compared to the three months ended June 30, 2002 was partially offset by an
increase in occupancy costs and depreciation expense related to the expansion
of our facilities in both Massachusetts and Ohio. We expect an increase in
research and development costs in fiscal 2004 resulting from the continuing
development of our proprietary product candidates and our collaborators
product candidates.

A significant portion of our research and development expenses (including
laboratory supplies, travel, dues and subscriptions, recruiting costs,
temporary help costs, consulting costs and allocable costs such as occupancy
and depreciation) are not tracked by project as they benefit multiple projects
or our drug delivery technologies in general. Expenses incurred to purchase
specific services from third parties to support our collaborative research and
development activities are tracked by project and are reimbursed to us by our
partners. We generally bill our partners under collaborative arrangements
using a single full-time equivalent or hourly rate. This rate has been
established by us annually based on our annual budget of salaries, employee
benefits and the billable non-project-specific costs mentioned above and is
often increased annually thereafter based on increases in the consumer price
index. Each collaborative partner is billed using a full-time equivalent or
hourly rate for the hours worked by our employees on a particular project, plus
any direct external research costs. We account for our research and
development expenses on a departmental and functional basis in accordance with
our budget and management practices.

(17)



---



##### Table of Contents



Below is a summary of our key proprietary and collaborators commercial
products and product candidates and their respective stages of clinical
development.

|                       |  |                                     |  |                  
|---------------------- |  | ----------------------------------- |  | -----------------
|Product                |  |                                     |  | Phase of Clinical
|Candidate              |  | Indication                          |  | Development (1)  
|                       |  |                                     |  |                  
|Risperdal Consta       |  | Schizophrenia                       |  | Marketed (2)     
|Nutropin Depot         |  | Pediatric growth hormone deficiency |  | Marketed         
|Vivitrex               |  | Alcohol dependence                  |  | Phase III        
|Vivitrex               |  | Opioid dependence                   |  | Phase II         
|Nutropin Depot         |  | Adult growth hormone deficiency     |  | Phase III        
|Exenatide LAR (AC2993) |  | Diabetes                            |  | Phase II         
|AIR Epinephrine        |  | Anaphylaxis                         |  | Phase I          
|ProLease r-hFSH        |  | Infertility                         |  | Phase Ib         
|AIR Insulin            |  | Diabetes                            |  | Undisclosed      
|AIR hGH                |  | Growth hormone deficiency           |  | Phase I          
|Others                 |  | Various                             |  | Preclinical      



---

(1)  Phase I clinical trials indicates that the compound is being tested in
humans for safety and preliminary indications of biological activity in a
limited patient population. Phase II clinical trials indicates that the
trial is being conducted in patients and is to provide information on dosing
and is testing for safety and preliminary evidence of efficacy. Phase III
clinical trials indicates that the trial is being conducted in patients and is
testing the safety and efficacy of the compound. Preclinical indicates that
we or our partners are conducting formulation, efficacy, pharmacology and/or
toxicology testing of a compound in animal models or biochemical assays.


(2)  Approved for sale in 35 countries. Marketed in Australia, Austria,
Denmark, Finland, Germany, Ireland, Israel, Korea, Mexico, The Netherlands, New
Zealand, Norway, Spain, Switzerland and the United Kingdom. Janssen has also
received marketing approval but has not yet launched in Argentina, Bahrain,
Belgium, Bulgaria, Colombia, the Czech Republic, Estonia, Hong Kong, Hungary,
Iceland, Kuwait, Latvia, Lithuania, Philippines, Portugal, Singapore, Slovenia,
Thailand, Trinidad/Tobego and Uruguay. Received a non-approvable letter from
the U.S. FDA. See Results of Operations  Risperdal Consta in our Annual
Report on Form 10-K for further information on the status of Risperdal Consta
in the U.S.

General and administrative expenses were $5.8 million for the three months
ended June 30, 2003 as compared to $6.0 million for the comparative period of
the prior year. The decrease for the three months ended June 30, 2003 as
compared to the three months ended June 30, 2002 was primarily the result of a
decrease in consulting costs. The decrease in general and administrative
expenses was partially offset by an increase in personnel costs and insurance
costs.

In August 2002, we announced a restructuring program to reduce our cost
structure as a result of our expectations regarding the financial impact of a
delay in the U.S. launch of Risperdal Consta by our collaborative partner,
Janssen. The restructuring program reduced our workforce by 122 employees,
representing 23% of our total workforce and includes consolidation and closure
of certain leased facilities in Cambridge, Massachusetts, closure of our
medical affairs office in Cambridge, England, write-off of leasehold
improvements at leased facilities being vacated and other expenses. The
workforce reductions were made across all functions of the Company.

(18)



---



##### Table of Contents



In connection with the restructuring program, we recorded charges of
approximately $6.5 million in the consolidated statements of operations and
comprehensive loss for the year ended March 31, 2003, which consisted of
approximately $1.5 million in employee separation costs, including severance
and related benefits, and approximately $5.0 million in facility consolidation
and closure costs, including significant estimates relating to a lease
cancellation fee, the length of time it will take to sublease certain of our
facilities and the lease rates at which we may negotiate sublease agreements
with third parties. As of June 30, 2003, we had paid an aggregate of
approximately $1.5 million and $2.0 million in employee separation costs and
facility closure costs, respectively.

The amounts in the accrual are expected to be paid through fiscal 2006.
Pursuant to the restructuring plan, the following charges and payments have
been recorded during the three months ended June 30, 2003:

|                          |  |               |           |            |  |              |   |               |  |  |           |   |  |   |           | 
|------------------------- |  | ------------- | --------- | ---------- |  | ------------ | - | ------------- |  |  | --------- | - |  | - | --------- | 
|                          |  | Balance,      |           | Charge for |  | Payments for |   | Balance,     
|Type of Liability         |  | April 1, 2003 |           | the Period |  | the Period   |   | June 30, 2003
|                          |  |               |           |            |  |              |   |              
|Employee separation
costs |  | $             | 16,547    |            |  | $            |  |               |  |  | ($1,000   | ) |  | $ | 15,547    | 
|Facility closure costs    |  |               | 3,520,463 |            |  |              |  |               |  |  | (534,669  | ) |  |   | 2,985,794 | 
|                          |  |               |           |            |  |              |   |               |  |  |           |   |  |   |           | 
|Total                     |  | $             | 3,537,010 |            |  | $            |  |               |  |  | ($535,669 | ) |  | $ | 3,001,341 | 
|                          |  |               |           |            |  |              |   |               |  |  |           |   |  |   |           | 

We substantially completed our restructuring program during fiscal 2003.
However, the remaining restructuring accrual is an estimate of costs associated
with leases or closed facilities and may require adjustment in the future.

Interest income was $1.0 million for the three months ended June 30, 2003 as
compared to $1.4 million for the same period of the prior year. The decrease
for the three months ended June 30, 2003 as compared to the three months ended
June 30, 2002 was primarily the result of a decline in interest rates.

Other income, net was $1.4 million in the three months ended June 30, 2003 as
compared to $0 for the three months ended June 30, 2002. Other income, net for
the three months ended June 30, 2003 represents income recognized on the
changes in the fair value of the warrants held in connection with licensing
arrangements, which are recorded as derivatives under the caption other assets
in the consolidated balance sheets. The recorded value of such warrants can
fluctuate significantly based on fluctuations in the market value of the
underlying securities of the issuer of the warrants.

Derivative loss related to convertible senior subordinated notes was $3.8
million in the three months ended June 30, 2003 as compared to $0 for the three
months ended June 30, 2002. On June 18, 2003, we announced that we had
exercised our right to automatically convert the 6.52% Senior Notes
into our common stock on July 18, 2003. The 6.52% Senior Notes contained a provision
that if the automatic conversion occurred on or prior to December 30, 2004 or
if the holders voluntarily converted prior to December 30, 2004, we would pay
additional interest equal to two full years of interest on the converted new
notes or the Two-Year Interest Make-Whole, less any interest paid prior to
conversion. The Two-Year Interest Make-Whole represented an embedded
derivative. The value of the embedded derivative was increased by $3.8 million
in the quarter to reflect the full value of amounts to be paid pursuant to the
Two-Year Interest Make-

(19)



---



##### Table of Contents



Whole. The total value of the derivative was approximately $17.1 million at
June 30, 2003 and is reflected as a liability in the consolidated balance
sheets. On July 18, 2003, upon the conversion of the then outstanding 6.52%
Senior Notes and payment of the Two-Year Interest Make-Whole, the embedded
derivative was settled in full and the balance was reduced to zero.

Interest expense was $3.5 million for the three months ended June 30, 2003 as
compared to $2.1 million for the three months ended June 30, 2002. The
increase for the three months ended June 30, 2003 as compared to the prior year
period was primarily the result of interest charges related to the 6.52% Senior
Notes issued in December 2002.

We do not believe that inflation and changing prices have had a material impact
on our results of operations.

Reliant

For the three months ended June 30, 2003 and 2002, the noncash charge related
to our equity in the losses of Reliant amounted to $0 and $24.2 million,
respectively, and is recorded in our consolidated statements of operations and
comprehensive loss under the caption Equity in losses of Reliant
Pharmaceuticals, LLC. Our $100 million investment was reduced to zero during
the year ended March 31, 2003. Since we have no further funding commitments to
Reliant, we will not record any further share of losses of Reliant in our
consolidated statements of operations and comprehensive loss. To the extent
that Reliant has net income in the future, we would record our proportional
share of Reliants net income. There can be no assurance that Reliant will
have net income in the near future, if ever. Reliant is a privately held
company over which we do not exercise control and we relied on the unaudited
and audited financial statements prepared by Reliants management and provided
to us to calculate our share of Reliants losses.

Risperdal Consta

In August 2001, Janssen filed an NDA for Risperdal Consta with the FDA and
similar regulatory filings have been submitted to other drug regulatory
agencies worldwide. Risperdal Consta is a Medisorb long-acting formulation of
Janssens antipsychotic drug Risperdal®. In June 2002, an affiliate of Janssen
received a non-approvable letter for Risperdal Consta from the FDA. Johnson &
Johnson has met with the FDA and, in April 2003, submitted additional data and
analyses as a complete response to the agencys questions. There can be no
assurance that the complete response will resolve the issues raised in the
FDAs letter on a timely basis, if at all. Risperdal Consta has been approved
in 35 countries and Risperdal Consta is in late-stage regulatory review in a
number of other countries. Nevertheless, the impact of the FDAs
non-approvable letter on other regulatory filings made worldwide is not known
at this time. There can be no assurance that Risperdal Consta will be approved
by the FDA or other regulatory agencies on a timely basis, if at all. See
Risk Factors  J&J PRD received a non-approvable letter for Risperdal Consta
from the FDA included in our Annual Report on Form 10-K for the year ended
March 31, 2003.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were approximately $104.7
million at June 30, 2003 as compared to $136.1 million at March 31, 2003. The
decrease in cash and short-term investments during the three months ended June
30, 2003 was primarily a result of cash

(20)



---



##### Table of Contents



used to fund our operations, to acquire fixed assets and to make interest and
principal payments on our indebtedness.

We invest in cash equivalents, U.S. Government obligations, high-grade
corporate notes and commercial paper, with the exception of our $100 million
investment in Reliant. Our investment objectives for our investments, other
than our investment in Reliant, are, first, to assure liquidity and
conservation of capital and, second, to obtain investment income. Investments
classified as long-term at June 30, 2003 consist of U.S. Government obligations
held as collateral under certain letters of credit, lease and loan agreements.

All of our investments in debt securities are classified as
available-for-sale and are recorded at fair value. Fair value is determined
based on quoted market prices.

In December 2002, we and Lilly expanded the collaboration for the development
of inhaled formulations of insulin and hGH based on our AIR pulmonary drug
delivery technology and Lilly purchased $30 million of our newly issued
Convertible Preferred Stock pursuant to a stock purchase agreement. We agreed
to use the proceeds from the Convertible Preferred Stock to fund the
development of inhaled insulin and hGH during calendar year 2003 and into
calendar year 2004. We will not record any research and development revenue
for these programs while the $30 million in proceeds from the Convertible
Preferred Stock are used to fund this development. To the extent that the $30
million is not used for purposes specified in the agreement, Lilly will be
entitled to credits for additional research services in the future. In
addition, the royalty rate payable to us based on revenues of potential inhaled
insulin products has been increased. Lilly has the right to return the
Convertible Preferred Stock to us in exchange for a reduction in this royalty
rate. The Convertible Preferred Stock is convertible into our common stock at
the market price at the time of conversion at our option or automatically upon
the filing of a new drug application with the FDA for a pulmonary insulin
product. The collaboration cannot terminate without cause until January 2005.
We will register for resale all of our shares of common stock issued upon
conversion of the Convertible Preferred Stock.

In August 2002, we announced the regulatory approval and expected commercial
launch of Risperdal Consta in Germany and the United Kingdom. Under our
agreements with Janssen and based on the foregoing, manufacturing revenues
relating to our sales of Risperdal Consta to Janssen under a manufacturing and
supply agreement are to be paid by Janssen to us in minimum annual amounts for
up to ten years beginning in calendar 2003. The actual amount of such minimum
manufacturing revenues will be determined by a formula and is currently
estimated to aggregate approximately $150 million. The minimum revenue
obligation will be satisfied upon receipt by us of manufacturing revenues
relating to our sales of Risperdal Consta equaling such aggregate amount of
minimum manufacturing revenues. In December 2002, Janssen prepaid the first
two years of minimum manufacturing revenues to us, totaling $23.9 million and
these amounts were recorded as deferred revenue.

We have funded our operations primarily through public offerings and private
placements of debt and equity securities, bank loans and payments under
research and development agreements with collaborators. We expect to incur
significant additional research and development and other costs in connection
with collaborative arrangements and as we expand the development of our
proprietary product candidates, including costs related to preclinical studies,
clinical trials and facilities expansion. We expect that our costs, including
research and development costs for our product candidates and sales, marketing
and promotion expenses for any future products to be

(21)



---



##### Table of Contents



marketed by us, will exceed revenues significantly for the next few years,
which will result in continuing losses from operations.

Capital expenditures were approximately $5.5 million for the three months ended
June 30, 2003, principally reflecting equipment purchases and building
expansion and improvements. We expect our capital expenditures to total
approximately $14 million during fiscal year 2004, primarily to complete the
expansion of our facilities in both Massachusetts and Ohio and for general
purposes. During the three months ended June 30, 2003, the expansion of our
Ohio facility was substantially completed and validation is ongoing. Our
capital expenditures for equipment, facilities and building improvements have
been financed to date primarily with proceeds from bank loans and the sales of
debt and equity securities. Under the provisions of the existing loans, Fleet
National Bank and GECC have security interests in certain of our assets.

On June 18, 2003, we announced that we had exercised our right to automatically
convert all of our outstanding 6.52% Senior Notes into shares of our common
stock on July 18, 2003. We had the right to elect to automatically convert the
6.52% Senior Notes because the closing price of our common stock exceeded 150%
of the conversion price of the 6.52% Senior Notes ($7.682) for 20 trading days
during the 30-day trading period that ended on June 18, 2003.

Prior to June 30, 2003, certain holders of the 6.52% Senior Notes elected to
convert $106,000 principal amount of the 6.52% Senior Notes into 13,798 shares
of our common stock at the ratio of 130.1744 shares of our common stock per
$1,000 principal amount of the 6.52% Senior Notes. Pursuant to the terms of
the 6.52% Senior Notes, we also made a cash payment of approximately $14,000
to satisfy the Two-Year Interest Make-Whole payment.

During July 2003, $150.7 million principal amount of 6.52% Senior Notes were
exchanged for shares of our common stock. We issued an aggregate of 20.9 million
shares of common stock in exchange for such 6.52% Senior Notes, reflecting the
value of both principal and interest.

On July 18, 2003, upon conversion of the remaining $23.8 million principal amount
of the 6.52% Senior Notes, we issued an aggregate of 3.1 million shares of common
stock and paid an

(22)



---



##### Table of Contents



aggregate of approximately $2.3 million in cash to satisfy the Two-Year Interest
Make-Whole payment. The Company converted each $1,000 principal amount of such
6.52% Senior Notes into 130.1744 shares of common stock and paid the holder
thereof an interest payment of $97.80 in cash, representing the remaining 1.5
years of interest due on the 6.52% Senior Notes.

We will continue to pursue opportunities to obtain additional financing in the
future. Such financing may be sought through various sources, including debt
and equity offerings, corporate collaborations, bank borrowings, arrangements
relating to assets or other financing methods or structures. The source,
timing and availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital requirements will also
depend on many factors, including continued scientific progress in our research
and development programs (including our proprietary product candidates), the
magnitude of these programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the
costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the establishment of additional
collaborative arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of product
in-licensing and any possible acquisitions and, for any future proprietary
products, the sales, marketing and promotion expenses associated with marketing
products.

We may need to raise substantial additional funds for longer-term product
development, including development of our proprietary product candidates,
regulatory approvals and manufacturing and sales and marketing activities that
we might undertake in the future. There can be no assurance that additional
funds will be available on favorable terms, if at all. If adequate funds are
not available, we may be required to curtail significantly one or more of our
research and development programs and/or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates or future products.

Recent Accounting Pronouncements

In July 2000, the Emerging Issues Task Force (EITF) released EITF Issue No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, for
comment which addresses revenue recognition for arrangements with multiple
deliverables. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, with early
adoption permitted. The adoption of EITF Issue No. 00-21 did not have a
material impact on our financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption.

(23)



---



##### Table of Contents



Restatement is not permitted. The adoption of FASB 150 is not expected to have
a material impact on our financial position and results of operations.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

As part of our investment portfolio we own financial instruments that are
sensitive to market risks. The investment portfolio, excluding our December
2001 $100 million investment in Reliant, is used to preserve our capital until
it is required to fund operations, including our research and development
activities. Our short-term investments and investments consist of U.S.
Government obligations, high-grade corporate notes and commercial paper. All
of our investments in debt securities are classified as available-for-sale
and are recorded at fair value. Our investments, excluding our investment in
Reliant, are subject to interest rate risk, and could decline in value if
interest rates increase. Due to the conservative nature of our short-term
investments and investments policy we do not believe that we have a material
exposure to interest rate risk. Although our investments, excluding our
investment in Reliant, are subject to credit risk, our investment policies
specify credit quality standards for our investments and limit the amount of
credit exposure from any single issue, issuer or type of investment.

Our available-for-sale marketable securities are sensitive to changes in
interest rates. Interest rate changes would result in a change in the fair
value of these financial instruments due to the difference between the market
interest rate and the rate at the date of purchase of the financial instrument.
A 10% decrease in year-end market interest rates would result in no material
impact on the net fair value of such interest-sensitive financial instruments.

A 10% increase or decrease in market interest rates on our 6.52% Senior Notes
and 3.75% Subordinated Notes would result in no material impact on our notes.

(24)



---



##### Table of Contents






Item 4. Controls and Procedures

The chief executive officer and chief financial officer evaluated Alkermes
controls and procedures as of the end of the quarterly period related to its
reporting and disclosure obligations. These officers have concluded that these
disclosure controls and procedures are sufficient to provide that (a) material
information relating to Alkermes, including its consolidated subsidiaries, is
made known to these officers by other employees of Alkermes and its
consolidated subsidiaries, particularly material information related to the
period for which this periodic report is being prepared; and (b) this
information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the rules and forms
promulgated by the Securities and Exchange Commission.

There have been no significant changes in Alkermes internal controls or in
other factors that could significantly affect these internal controls
subsequent to the date of the evaluation.

(25)



---



##### Table of Contents






PART II. OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds

Exchanges of 6.52% Senior Notes for Shares of Common Stock

On December 31, 2002, we issued our 6.52% Senior Notes pursuant to an effective
registration statement on Form S-1/S-4 that registered the 6.52% Senior Notes
and shares of our common stock to be issued upon conversion thereof. On June
18, 2003, pursuant to the indenture, dated December 31, 2002, between Alkermes
and U.S. Bank National Association, as trustee, we provided notice of the
automatic conversion of the outstanding 6.52% Senior Notes into shares of our
common stock on July 18, 2003. In July 2003, we exchanged 6.52% Senior Notes
for shares of our common stock in independently negotiated transactions with
the holder of the 6.52% Senior Notes being exchanged. The 6.52% Senior Notes
obtained in these exchange transactions were retired prior to the automatic
conversion date. An aggregate of 20,934,514 newly issued shares of our
common stock was issued in exchange for an aggregate $150,707,000 principal
amount of the 6.52% Senior Notes. We did not pay or give directly or
indirectly any commission or other remuneration for soliciting these
transactions and no solicitation by us or on our behalf was made in connection
with these transactions. The shares issued were exempt pursuant to Section
3(a)(9) of the Securities Act of 1933, as amended.




Item 6. Exhibits and Reports on Form 8-K



| |  |  | (a) Exhibits:
| |  |  | -------------

|            |  |                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                             
|3.1         |  | Third Amended and Restated Articles of Incorporation as filed
with the Pennsylvania Secretary of State on June 7, 2001.
(Incorporated by reference to Exhibit 3.1 to the Registrants Report
on Form 10-K for the fiscal year ended March 31, 2001.)                                        
|3.1(a)      |  | Amendment to Third Amended and Restated Articles of Incorporation
as filed with the Pennsylvania Secretary of State on December 16,
2002 (2002 Preferred Stock Terms). (Incorporated by reference to
Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on
December 16, 2002.)
|3.2         |  | Amended and Restated By-Laws of Alkermes, Inc., effective as
of February 11, 2001. (Incorporated by reference to Exhibit 3.2 to
the Registrants Report on Form 10-K for the fiscal year ended March
31, 2001.)                                                                             
|4.1         |  | Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrants
Registration Statement on Form S-1, as amended (File No. 33-40250).)                                                                                                     

(26)



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                     
|4.2         |  | Specimen of Non-Voting Common Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.4 to the Registrants
Report on Form 10-K for the fiscal year ended March 31, 1999.)                                                                                      
|           
|4.3         |  | Specimen of 2002 Preferred Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.1 to the Registrants
Report on Form 8-K filed on December 13, 2002.)                                                                                                        
|           
|4.4         |  | Indenture, dated as of February 18, 2000, between Alkermes,
Inc. and State Street Bank and Trust Company, as Trustee. (3.75%
Subordinated Notes) (Incorporated by reference to Exhibit 4.6 to
the Registrants Registration Statement on Form S-3, as amended
(File No. 333-31354).)
|           
|4.5         |  | Form of Indenture between Alkermes, Inc. and State Street
Bank and Trust Company, as Trustee. (6.52% Senior Notes)
(Incorporated by reference to Exhibit 4.1 to the Registrants
Registration Statement on Forms S-1, as amended (File No.
333-101464).)                            
|           
|4.6         |  | Rights Agreement, dated as of February 7, 2003, as amended,
between Alkermes, Inc. and EquiServe Trust Co., N.A., as Rights
Agent. (Incorporated by reference to Exhibit 4.1 to the
Registrants Report on Form 8-A filed on May 2, 2003.)                                          
|           
|31.1        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer.                                                                                                                                                      
|           
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer.                                                                                                                                                      
|           
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 by Chief Executive Officer.                                                                                                                                                         
|           
|32.2        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 by Chief Financial Officer.                                                                                                                                                         

(b)  During the quarter ended June 30, 2003, the Company filed Current Reports
on Form 8-K, dated April 29, 2003 under Item 5 and May 29, 2003 under Item 9.

(27)



---



##### Table of Contents






SIGNATURES

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

|                      |                             |                                             
|--------------------- | --------------------------- | --------------------------------------------
|                      | ALKERMES, INC.
(Registrant)
|                     
|Date: August 13, 2003 | By:                         | /s/ Richard F. Pops                         
|                      |                             |                                             
|                      |                             | Richard F. Pops                             
|                      |                             | Chief Executive Officer and                 
|                      |                             | Director                                    
|                      |                             | (Principal Executive Officer)               
|                     
|Date: August 13, 2003 | By:                         | /s/ James M. Frates                         
|                      |                             |                                             
|                      |                             | James M. Frates                             
|                      |                             | Vice President, Chief                       
|                      |                             | Financial Officer and Treasurer             
|                      |                             | (Principal Financial and
Accounting Officer)

(28)



---



##### Table of Contents






Exhibit Index

|            |  |                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                             
|3.1         |  | Third Amended and Restated Articles of Incorporation as filed
with the Pennsylvania Secretary of State on June 7, 2001.
(Incorporated by reference to Exhibit 3.1 to the Registrants Report
on Form 10-K for the fiscal year ended March 31, 2001.)                                        
|           
|3.1(a)      |  | Amendment to Third Amended and Restated Articles of Incorporation
as filed with the Pennsylvania Secretary of State on December 16,
2002 (2002 Preferred Stock Terms). (Incorporated by reference to
Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on
December 16, 2002.)
|           
|3.2         |  | Amended and Restated By-Laws of Alkermes, Inc., effective as
of February 11, 2001. (Incorporated by reference to Exhibit 3.2 to
the Registrants Report on Form 10-K for the fiscal year ended March
31, 2001.)                                                                             
|           
|4.1         |  | Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrants
Registration Statement on Form S-1, as amended (File No. 33-40250).)                                                                                                     
|           
|4.2         |  | Specimen of Non-Voting Common Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.4 to the Registrants
Report on Form 10-K for the fiscal year ended March 31, 1999.)                                                                                              
|           
|4.3         |  | Specimen of 2002 Preferred Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.1 to the Registrants
Report on Form 8-K filed on December 13, 2002.)                                                                                                                
|           
|4.4         |  | Indenture, dated as of February 18, 2000, between Alkermes,
Inc. and State Street Bank and Trust Company, as Trustee. (3.75%
Subordinated Notes) (Incorporated by reference to Exhibit 4.6 to
the Registrants Registration Statement on Form S-3, as amended
(File No. 333-31354).)        
|           
|4.5         |  | Form of Indenture between Alkermes, Inc. and State Street
Bank and Trust Company, as Trustee. (6.52% Senior Notes)
(Incorporated by reference to Exhibit 4.1 to the Registrants
Registration Statement on Forms S-1, as amended (File No.
333-101464).)                                    
|           
|4.6         |  | Rights Agreement, dated as of February 7, 2003, as amended,
between Alkermes, Inc. and EquiServe Trust Co., N.A., as Rights
Agent. (Incorporated by reference to Exhibit 4.1 to the
Registrants Report on Form 8-A filed on May 2, 2003.)                                                  
|           
|31.1        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer.                                                                                                                                                              
|           
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer.                                                                                                                                                              

(29)



---



##### Table of Contents



|            |  |                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                            
|            |  |                                                                                                                            
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 by Chief Executive Officer.
|32.2        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 by Chief Financial Officer.

(30)