##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2002

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

For the transition period from _________ to __________

Commission file number 0-19267

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
|                                                   |  |               

64 Sidney Street, Cambridge, MA
02139-4136

---

(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. Yes  box   No  box

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 7, 2002
|                                        |  |                                        
|Common Stock, par value $.01            |  |                                         | 64,312,182 | 
|                                       
|                                       
|                                       
|                                       
|Non-Voting Common Stock, par value $.01 |  |                                         | 382,632    | 





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TABLE OF CONTENTS



|                                                   |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                     
|                                                   | Item 1. CONSOLIDATED FINANCIAL STATEMENTS:                                                   
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | 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                           
|PART II. OTHER INFORMATION                        
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|Exhibit Index                                     
|Ex.99.1 Section 906 certification, Richard F. Pops
|Ex.99.2 Section 906 certification, James M. Frates



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##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES

INDEX

|                               |                                                                                               |  |    |          |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  | -- | -------- |  | 
|                               |                                                                                               |  |    | Page No.
|                               |                                                                                               |  |    |         
|PART I  FINANCIAL INFORMATION |                                                                                               |  |    |         
|                              
|                              
|                              
|                              
|                               | Item 1. Consolidated Financial Statements                                                     |  |    |          | 
|                              
|                              
|                              
|                              
|                               | Consolidated Balance Sheets
- June 30, 2002 and March 31, 2002                                |  |    | 3        | 
|                              
|                              
|                              
|                              
|                               | Consolidated Statements of Operations
- Three months ended June 30, 2002 and 2001             |  |    | 4        | 
|                              
|                              
|                              
|                              
|                               | Consolidated Statements of Cash Flows
- Three months ended June 30, 2002 and 2001             |  |    | 5        | 
|                              
|                              
|                              
|                              
|                               | Notes to Consolidated Financial Statements                                                    |  |    | 6        | 
|                              
|                              
|                              
|                              
|                               | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |  |    | 9        | 
|                              
|                              
|                              
|                              
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |    | 16       | 
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION    |                                                                                               |  |    |         
|                              
|                              
|                              
|                              
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |  |    | 17       | 
|                              
|                              
|                              
|                              
|SIGNATURES                     |                                                                                               |  | 18 |         
|                              
|                              
|                              
|                              
|EXHIBIT INDEX                  |                                                                                               |  | 19 |         

(2)



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##### Table of Contents












PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |   |         |             |  
|------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | - | -------- | ----------- | ------------ | - | ------- | ----------- | -
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   | June 30, |             | March 31,   
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   | 2002     |             | 2002        
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |             
|                                           |                                                                                    |                                      |                                                                                                                            | ASSETS                                         |   |          |             |              |   |         |             |  
|                                          
|                                          
|                                          
|                                          
|Current Assets:                            |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |             
|                                          
|                                          
|                                          
|                                          
|                                           | Cash and cash equivalents                                                          |                                      | $                                                                                                                          | 9,488,795                                      |   |          | $           | 16,023,074   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Short-term investments                                                             |                                      |                                                                                                                            | 100,338,942                                    |   |          |             | 136,323,768  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Receivables from collaborative arrangements                                        |                                      |                                                                                                                            | 19,501,908                                     |   |          |             | 19,039,706   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid expenses and other current assets                                          |                                      |                                                                                                                            | 5,647,655                                      |   |          |             | 5,249,797    |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      |                                                                                                                            | Total current assets                           |   |          | 134,977,300 |              |   |         | 176,636,345 |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Property, Plant and Equipment:             |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |             
|                                          
|                                          
|                                          
|                                          
|                                           | Land                                                                               |                                      |                                                                                                                            | 235,000                                        |   |          |             | 235,000      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Building                                                                           |                                      |                                                                                                                            | 5,076,961                                      |   |          |             | 5,058,936    |  
|                                          
|                                          
|                                          
|                                          
|                                           | Furniture, fixtures and equipment                                                  |                                      |                                                                                                                            | 51,274,335                                     |   |          |             | 49,558,745   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Leasehold improvements                                                             |                                      |                                                                                                                            | 15,108,993                                     |   |          |             | 15,016,553   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Construction in progress                                                           |                                      |                                                                                                                            | 41,245,053                                     |   |          |             | 26,497,064   |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      | 112,940,342                                                                                                                |                                                |   |          | 96,366,298  |             
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                    |                                      |                                                                                                                            | Less accumulated depreciation and amortization |   |          | (36,745,946 | )            |   |         | (34,530,467 | )
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      | 76,194,396                                                                                                                 |                                                |   |          | 61,835,831  |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Investments                                |                                                                                    |                                      | 8,823,556                                                                                                                  |                                                |   |          | 9,126,093   |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Investment in Reliant Pharmaceuticals, LLC |                                                                                    |                                      | 70,383,636                                                                                                                 |                                                |   |          | 94,596,536  |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Other Assets                               |                                                                                    |                                      | 7,224,197                                                                                                                  |                                                |   |          | 8,155,472   |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      |                                                                                                                            | Total Assets                                   |   | $        | 297,603,085 |              |   | $       | 350,350,277 |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    | LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                            |                                                |   |          |             |              |   |        
|                                          
|                                          
|                                          
|                                          
|Current Liabilities:                       |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |             
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable and accrued expenses                                              |                                      | $                                                                                                                          | 22,703,760                                     |   |          | $           | 20,764,375   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued interest                                                                   |                                      |                                                                                                                            | 2,881,226                                      |   |          |             | 1,013,521    |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue                                                                   |                                      |                                                                                                                            | 6,807,177                                      |   |          |             | 7,083,516    |  
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term obligations  current portion                                            |                                      |                                                                                                                            | 3,900,000                                      |   |          |             | 14,025,000   |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      |                                                                                                                            | Total current liabilities                      |   |          | 36,292,163  |              |   |         | 42,886,412  |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Long-Term Obligations                      |                                                                                    |                                      | 6,825,000                                                                                                                  |                                                |   |          | 7,800,000   |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Convertible Subordinated Notes             |                                                                                    |                                      | 200,000,000                                                                                                                |                                                |   |          | 200,000,000 |             
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|Shareholders Equity:                      |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |             
|                                          
|                                          
|                                          
|                                          
|                                           | Capital stock, par value $.01 per share: authorized, 4,550,000 shares; none issued |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, par value $.01 per share:                                            |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                    |                                      | authorized, 160,000,000 shares; issued, 64,290,178 and
64,225,395 shares at
June 30, 2002 and March 31, 2002, respectively |                                                |   | 642,902  |             |              |   | 642,254 |            
|                                          
|                                          
|                                          
|                                          
|                                           | Non-voting common stock, par value $.01 per share:                                 |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                    |                                      | authorized, 450,000 shares; issued, 382,632 at June 30, 2002 and
March 31, 2002                                            |                                                |   | 3,826    |             |              |   | 3,826   |            
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                         |                                      |                                                                                                                            | 444,851,926                                    |   |          |             | 444,425,742  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred compensation                                                              |                                      |                                                                                                                            | (2,587,460                                     | ) |          |             | (3,162,448   | )
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated other comprehensive income                                             |                                      |                                                                                                                            | 692,198                                        |   |          |             | 1,619,541    |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated deficit                                                                |                                      |                                                                                                                            | (389,117,470                                   | ) |          |             | (343,865,050 | )
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      |                                                                                                                            | Total shareholders equity                     |   |          | 54,485,922  |              |   |         | 99,663,865  |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  
|                                           |                                                                                    |                                      |                                                                                                                            | Total Liabilities and Shareholders Equity     |   | $        | 297,603,085 |              |   | $       | 350,350,277 |  
|                                           |                                                                                    |                                      |                                                                                                                            |                                                |   |          |             |              |  

See notes to consolidated financial statements.

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##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                     |                                                                   |                              |              |              |            |              |             |            |            | 
|---------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------- | ------------ | ------------ | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                                     |                                                                   |                              |              | Three Months |            | Three Months
|                                                     |                                                                   |                              |              | Ended        |            | Ended       
|                                                     |                                                                   |                              |              | June 30,     |            | June 30,    
|                                                     |                                                                   |                              |              | 2002         |            | 2001        
|                                                     |                                                                   |                              |              |              |            |             
|Revenues:                                            |                                                                   |                              |              |              |            |              |             |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research and development revenue under
collaborative arrangements |                              | $            | 10,291,391   |            |              | $           | 15,526,675 |           
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Expenses:                                            |                                                                   |                              |              |              |            |              |             |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research and development                                          |                              |              | 24,599,673   |            |              |             | 20,710,031 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | General and administrative                                        |                              |              | 6,016,040    |            |              |             | 5,374,278  |           
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|                                                     |                                                                   | Total expenses               |              |              | 30,615,713 |              |             |            | 26,084,309 | 
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Net operating loss                                   |                                                                   |                              | (20,324,322  | )            |            |              | (10,557,634 | )         
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Other income (expense):                              |                                                                   |                              |              |              |            |              |             |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest income                                                   |                              |              | 1,365,936    |            |              |             | 4,525,015  |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest expense                                                  |                              |              | (2,081,134   | )          |              |             | (2,309,927 | )         
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|                                                     |                                                                   | Total other (expense) income |              |              | (715,198   | )            |             |            | 2,215,088  | 
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Equity in losses of Reliant Pharmaceuticals, LLC     |                                                                   |                              | 24,212,900   |              |            |              |            |           
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Net loss                                             |                                                                   |                              | ($45,252,420 | )            |            |              | ($8,342,546 | )         
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Basic and diluted loss per common share              |                                                                   |                              | ($0.70       | )            |            |              | ($0.13      | )         
|                                                     |                                                                   |                              |              |              |            |              |             |            |           
|Weighted average number of common shares outstanding |                                                                   |                              | 64,260,903   |              |            |              | 63,236,893  |           
|                                                     |                                                                   |                              |              |              |            |              |             |            |           

See notes to consolidated financial statements.

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##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)

|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |           |            |  
|---------------------------------------------------- |  | --------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------- | ------------ | ------------ | ----------- | ------------ | ----------- | --------- | ---------- | -
|                                                     |  |                                                                             |                                                       |                                             |              | Three Months |             | Three Months
|                                                     |  |                                                                             |                                                       |                                             |              | Ended        |             | Ended       
|                                                     |  |                                                                             |                                                       |                                             |              | June 30,     |             | June 30,    
|                                                     |  |                                                                             |                                                       |                                             |              | 2002         |             | 2001        
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |             
|Cash flows from operating activities:                |  |                                                                             |                                                       |                                             |              |              |             |             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Net loss                                                                    |                                                       |                                             | ($45,252,420 | )            |             |              | ($8,342,546 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Adjustments to reconcile net loss to net cash used by
operating activities: |                                                       |                                             |              |              |             |              |             |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Depreciation, amortization and other noncash expenses |                                             |              | 3,071,035    |             |              |             | 2,313,341 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Equity in losses of Reliant Pharmaceuticals, LLC      |                                             |              | 24,212,900   |             |              |             |          |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Noncash interest expense                              |                                             |              |             |             |              |             | 138,730   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Adjustments to other assets                           |                                             |              |             |             |              |             | 250,447   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             | Changes in assets and liabilities:                    |                                             |              |              |             |              |             |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             |                                                       | Receivables from collaborative arrangements |              |              | (462,201    | )            |             |           | (6,132,254 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             |                                                       | Prepaid expenses and other current assets   |              |              | (400,779    | )            |             |           | 1,011,462  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             |                                                       | Accounts payable and accrued expenses       |              |              | 3,823,187   |              |             |           | 1,818,670  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  |                                                                             |                                                       | Deferred revenue                            |              |              | (276,341    | )            |             |           | (579,472   | )
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|                                                     |  |                                                                             |                                                       | Net cash used by operating activities       |              |              | (15,284,619 | )            |             |           | (9,521,622 | )
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Cash flows from investing activities:                |  |                                                                             |                                                       |                                             |              |              |             |             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Additions to property, plant and equipment                                  |                                                       |                                             | (16,626,892  | )            |             |              | (2,441,554  | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Purchases of available-for-sale short-term investments                      |                                                       |                                             | (35,290,276  | )            |             |              | (69,221,396 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Sales of available-for-sale short-term investments                          |                                                       |                                             | 71,241,888   |              |             |              | 66,764,763  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Purchases of held-to-maturity short-term investments, net                   |                                                       |                                             |             |              |             |              | (19,309,847 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Maturities of long-term investments, net                                    |                                                       |                                             |             |              |             |              | 38,739,459  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Increase in other assets                                                    |                                                       |                                             |             |              |             |              | (300,000    | )        
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|                                                     |  |                                                                             |                                                       | Net cash provided by investing activities   |              |              | 19,324,720  |              |             |           | 14,231,425 |  
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Cash flows from financing activities:                |  |                                                                             |                                                       |                                             |              |              |             |             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Proceeds from issuance of common stock                                      |                                                       |                                             | 480,681      |              |             |              | 1,402,349   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Repayment of loan                                                           |                                                       |                                             | (10,000,000  | )            |             |              |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Payment of long-term obligations                                            |                                                       |                                             | (1,100,000   | )            |             |              | (1,350,000  | )        
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|                                                     |  |                                                                             | Net cash (used by) provided by financing activities   |                                             |              | (10,619,319  | )           |              |             | 52,349    |           
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Effect of exchange rate changes on cash              |  |                                                                             | 44,939                                                |                                             |              |              | (10,948     | )           
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Net (decrease) increase in cash and cash equivalents |  |                                                                             | (6,534,279                                            | )                                           |              |              | 4,751,204   |             
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |  |                                                                             | 16,023,074                                            |                                             |              |              | 5,923,282   |             
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Cash and cash equivalents, end of period             |  | $                                                                           | 9,488,795                                             |                                             |              | $            | 10,674,486  |             
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          
|Supplementary information:                           |  |                                                                             |                                                       |                                             |              |              |             |             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |  | Cash paid for interest                                                      |                                                       | $                                           | 213,428      |              |             | $            | 301,123     |          
|                                                     |  |                                                                             |                                                       |                                             |              |              |             |              |             |          

See notes to consolidated financial statements.

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ALKERMES, INC. AND SUBSIDIARIES

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, 2002 and 2001 are unaudited and include all
adjustments which are normal and recurring and, in the opinion of management,
are necessary to present fairly the results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. These financial
statements should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended March 31, 2002, which includes consolidated
financial statements and notes thereto for the years ended March 31, 2002, 2001
and 2000. 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 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 INCOME (LOSS)

Comprehensive income (loss) is comprised of net income (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 income (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.

Comprehensive income (loss) for the three months ended June 30, 2002 and 2001
is as follows:

|                                                |  |               |              |               |  |  |             |  
|----------------------------------------------- |  | ------------- | ------------ | ------------- |  |  | ----------- | -
|                                                |  | Three Months  |              | Three Months 
|                                                |  | Ended         |              | Ended        
|                                                |  | June 30, 2002 |              | June 30, 2001
|                                                |  |               |              |              
|Net loss                                        |  |               | ($45,252,420 | )             |  |  | ($8,342,546 | )
|                                               
|                                               
|                                               
|                                               
|Foreign currency translation adjustments        |  |               | 49,908       |               |  |  | (10,575     | )
|                                               
|                                               
|                                               
|                                               
|Unrealized (loss) gain on marketable securities |  |               | (977,251     | )             |  |  | 9,182       |  
|                                                |  |               |              |               |  |  |             |  
|Comprehensive loss                              |  |               | ($46,179,763 | )             |  |  | ($8,343,939 | )
|                                                |  |               |              |               |  |  |             |  

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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 the 3 3/4%
Convertible Subordinated Notes due 2007 (the 3 3/4% Notes). The Company
continues to be in a net loss position and, therefore, diluted net loss per
share is the same amount as basic net loss per share. Certain securities were
not included in the computations of diluted net loss per share for the three
months ended June 30, 2002 and 2001 because they would have an antidilutive
effect due to net losses for such periods. These securities include
(i) outstanding stock
options and awards with respect to 11,368,201 and 9,455,725 shares of common
stock in the three months ended June 30, 2002 and 2001 and (ii) 2,952,030
shares of common stock issuable upon conversion of the 3 3/4% Notes in the
three months ended June 30, 2002 and 2001.

4. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC

In December 2001, the Company announced a strategic alliance with Reliant
Pharmaceuticals, LLC, a privately held pharmaceutical company marketing
branded, prescription pharmaceutical products to primary care physicians in the
U.S.

As part of the alliance, 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 million. The investment is being 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 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
investment will be recognized in proportion to the Companys percentage
participation in the Series C financing, and not in proportion to its
percentage ownership interest in Reliant. The Company records its equity in
the income or losses of Reliant three months in arrears. Reliant is a
privately held company over which the Company does not exercise
control and it relies on the
unaudited financial statements prepared by Reliant and provided to
the Company to
calculate its share of Reliants losses in the Companys consolidated statements of
operations. The Company anticipates that Reliant will have substantial net
losses through 2003, and accordingly, recorded its 63% share of such losses in
its consolidated financial statements beginning in the quarter ended March 31,
2002.

In connection with the Companys $100 million equity investment in Reliant, the
Company is in the process of allocating its proportionate share of the assets
acquired and liabilities assumed in accordance with the guidance set forth in
Statement of Financial Accounting Standards (SFAS) No. 141. The Company took
a $2.7 million noncash charge for in-process research and development through
the income statement under the caption Equity in losses of Reliant
Pharmaceuticals, LLC in fiscal 2002. The $2.7 million noncash charge is
related to managements current estimate of the amount of the purchase price to
be allocated to in-process research and development. This analysis of the
purchase price allocation is preliminary and the amount of in-process research
and development is subject to future adjustment.

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Termination of Proposed Merger Transaction with Reliant

On March 20, 2002, we entered into an Agreement and
Plan of Merger (the Merger Agreement) with Reliant. On August 14, 2002, the Company and Reliant
announced the mutual termination of the Merger Agreement. The
companies agreed to terminate due to general market conditions. There
will be no payments triggered by the mutual termination and each
company will bear its own legal and transaction fees.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when
the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not believe that the adoption of SFAS
No. 146 will have a material impact on its financial
statements and result of operations.

6. SUBSEQUENT EVENT

In August, the Company announced the regulatory
approval and expected commercial launch of Risperdal Consta in Germany
and the United Kingdom. Under the Companys agreements with
Janssen and based on the foregoing, certain minimum revenues are to
be paid to the Company in minimum annual amounts for up to ten years
beginning in calendar 2003. The actual amount of such minimum
revenues will be determined by a formula and are currently estimated to
aggregate approximately $150 million. The minimum revenue obligation
will be satisfied upon receipt by the Company of revenues equalling
such aggregate amount of minimum revenues.

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

Introduction

Alkermes, Inc. (together with its subsidiaries, referred to as we, us,
our or the Registrant), a Pennsylvania corporation organized in 1987, is an
emerging pharmaceutical company developing products based on applying its
sophisticated 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 twofold. We
partner our proprietary technology systems and drug delivery expertise with
many 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. In addition to our Cambridge,
Massachusetts headquarters, research and manufacturing facilities, we operate
research and manufacturing facilities in Ohio and a medical affairs office in
Cambridge, England. Since our inception in 1987, we have devoted substantially
all of our resources to research and development programs. At June
30, 2002, we had an accumulated deficit of $389.1 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) Johnson & Johnson Pharmaceutical Research and Development, LLC received a
non-approvable letter for Risperdal Consta from the FDA and there
can be no assurance that the issues raised in the letter will be
resolved in a timely basis, if at all; (ii) Nutropin Depot, Risperdal Consta and our
product candidates (including Vivitrex), if approved for
marketing, may not produce significant revenues and, in commercial use, may
have unintended

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side effects, adverse reactions or incidents of misuse; (iii)
our delivery technologies or product development efforts may not produce safe,
efficacious or commercially viable products; (iv) 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; (v) we may be unable to manufacture our first
products, Nutropin Depot and Risperdal Consta, or to manufacture future
products, on a commercial scale or economically; (vi) after the completion of
clinical trials and the submission to the FDA of an 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; (vii) clinical trials are a time-consuming and expensive process;
(viii) 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; (ix) we could lose our entire investment in Reliant Pharmaceuticals,
LLC (Reliant); (x)
we depend on others to market and sell our products and product candidates;
(xi) 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; (xii) technological change in the biotechnology or
pharmaceutical industries could render our product candidates obsolete or
noncompetitive; (xiii) difficulties or set-backs in obtaining and enforcing our
patents and difficulties with the patent rights of others could
occur; (xiv) we
will need to spend substantial funds to become profitable and will, therefore,
continue to incur losses for the foreseeable future; and (xv) we could incur
difficulties or set-backs in obtaining the substantial additional funding
required to continue research and development programs and clinical trials.

Critical Accounting Policies

In December 2001, the Securities and Exchange Commission (SEC) requested that
all registrants discuss their most critical accounting policies in
managements discussion and analysis of financial condition and results of
operations. The SEC indicated that a critical accounting policy is one which
is both important to the portrayal of our financial condition and results and
requires managements most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements, we believe the
following accounting policies to be important to the portrayal of our financial
condition and can require estimates from time to time. For the three months
ended June 30, 2002, there were estimates made in connection with upfront fees
paid under license agreements that were immaterial to the overall revenues
earned and there were immaterial estimates made for research and development
expenses. In connection with the $100 million equity investment in Reliant in
December 2001, we recorded a $2.7 million noncash
charge for in-process research and development based on managements estimate
at the time of the investment, which is subject to adjustment (see Results of
Operations below).

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Revenue Recognition Research and development revenue consists of
non-refundable research and development funding under collaborative
arrangements with various corporate 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 product 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.

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 its 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 under contract by external companies,
hospitals or medical centers for us. All such costs are charged to research
and development expenses as incurred.

Results of Operations

The net loss for the three months ended June 30, 2002 in accordance with
generally accepted accounting principles was $45.3 million or $0.70 basic and
diluted loss per common share. The net loss in accordance with generally
accepted accounting principles for the three months ended June 30, 2001 was
$8.3 million or $0.13 basic and diluted loss per common share. The net
loss for the three months ended June 30, 2002 excluding the $24.2 million
noncash charge related to the equity in losses of our investment in Reliant
Pharmaceuticals, LLC was $21.0 million or $0.33 basic and diluted loss per
common share. The increase in the net loss excluding our loss in
Reliant, increased primarily as a result of an increase in research
and development and general and administrative expenses as we
continue to advance our proprietary product candidates and our
collaborators product candidates through development and clinical
trials and prepare for commercialization. This was coupled with a decrease in
revenues as our Risperdal Consta program evolves from a
development stage project into a commercial program.

Our research and development revenue under collaborative arrangements for the
three months ended June 30, 2002 was $10.3 million compared to $15.5 million
for the corresponding period of the prior year. The decrease for the three
months ended June 30, 2002 was the result of a milestone payment received
during the three months ended June 30, 2001 as well as decreased funding from
Janssen Pharmaceutica, Inc. (Janssen) during the three months ended June 30, 2002 as the
Risperdal Consta project evolves from a development stage project into a
commercial program. See the Risperdal Consta discussion below for the status
of Risperdal Consta. The decrease in research and development funding was
partially offset by an increase in research and development funding earned
under other collaborative agreements.

Total operating expenses increased to $30.6 million for the three months ended
June 30, 2002 from $26.1 million for the three months ended June 30, 2001. The
increase was due to increases in

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research and development expenses and general and administrative expenses, which
are discussed below.

Research and development expenses for the three months ended June 30, 2002 were
$24.6 million as compared to $20.7 million for the corresponding period of the
prior year. The increase in research and development expenses for the three
months ended June 30, 2002 as compared to the three months ended June 30, 2002
was mainly the result of increases in personnel and external research expenses
as we advance our proprietary product candidates and our collaborators product
candidates through development and clinical trials and prepare for
commercialization. There was also an increase in occupancy costs as we
continue to expand our facilities in both Massachusetts and Ohio. We expect an
increase in research and development expenses during fiscal 2003 resulting from
the continuing development of our proprietary product candidates and
collaborators product candidates.

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

|                            |  |                                     |  |                             
|--------------------------- |  | ----------------------------------- |  | ----------------------------
|Product                     |  |                                     |  | Phase of Clinical           
|Candidate                   |  | Indication                          |  | Development (1)             
|                            |  |                                     |  |                             
|Nutropin Depot              |  | Pediatric growth hormone deficiency |  | Marketed                    
|                           
|                           
|                           
|                           
|Risperdal Consta            |  | Schizophrenia                       |  | (2)                         
|                           
|                           
|                           
|                           
|Vivitrex                    |  | Alcohol dependence                  |  | Phase III                   
|                           
|                           
|                           
|                           
|Vivitrex                    |  | Opioid dependence                   |  | Phase II                    
|                           
|                           
|                           
|                           
|Nutropin Depot              |  | Adult growth hormone deficiency     |  | Phase III                   
|                           
|                           
|                           
|                           
|AIR Albuterol               |  | Asthma                              |  | Phase II completed          
|                           
|                           
|                           
|                           
|Cereport and Carboplatin    |  | Pediatric brain tumor               |  | Phase I/II                  
|                           
|                           
|                           
|                           
|ProLease r-hFSH             |  | Infertility                         |  | Phase I completed           
|                           
|                           
|                           
|                           
|Medisorb AC2993 (Exendin-4) |  | Diabetes                            |  | Phase II                    
|                           
|                           
|                           
|                           
|AIR Insulin                 |  | Diabetes                            |  | Undisclosed                 
|                           
|                           
|                           
|                           
|AIR hGH                     |  | Growth hormone deficiency           |  | Phase I completed           
|                           
|                           
|                           
|                           
|AIR small molecule products |  | Respiratory disease                 |  | Phase I completed/Preclincal



---

|(1) |  | Phase I/II 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 in the United Kingdom
and Germany. Received a non-approvable letter from the FDA. See Results of Operations- Risperdal Consta for further information on
the status of Risperdal Consta.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

General and administrative expenses for the three months ended June 30, 2002
were $6.0 million as compared to $5.4 million for the corresponding period of
the prior year. The increase in the three months ended June 30,
2002 as
compared to the three months ended June 30, 2001 was primarily a result of an
increase in personnel, as well as increased professional fees and consulting
costs.

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Interest income for the three months ended June 30, 2002 was $1.4 million
compared to $4.5 million for the corresponding period of the prior year. The
decrease in such income for the three months ended June 30, 2002 as compared to
the three months ended June 30, 2001 was primarily the result of a lower
average cash and investment balance as compared to the prior year
period as discussed below.
Interest income also decreased as a result of a decline in interest rates as
compared to the same periods in the prior year.

Interest expense for the three months ended June 30, 2002 was $2.1 million as
compared to $2.3 million for the corresponding period of the prior year. The
decrease in interest expense for the three months ended June 30,
2002 as
compared to the three months ended June 30, 2001 was primarily the result of a
decrease in the average outstanding debt balance as compared to the prior year
period.

In December 2001, we announced a strategic alliance with Reliant
Pharmaceuticals, LLC. As part of the alliance, in December 2001, we 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 million. The investment is being
accounted for under the equity method of accounting because Reliant is
organized as a limited liability company which is under applicable
accounting rules, treated in a manner similar
to a partnership. Because, at the time of our investment, Reliant had
an accumulated deficit from operations
and deficit in members capital, under applicable accounting rules, our share of Reliants losses from the date of
our investment will be recognized in proportion to our percentage participation
in the Series C financing, and not in proportion to our percentage ownership
interest in Reliant. Alkermes records its equity in the income or losses of
Reliant three months in arrears. For the three months ended June 30, 2002,
this noncash charge amounted to $24.2 million. Reliant is a privately held
company over which we do not exercise control and we rely on the unaudited
financial statements prepared by Reliant and provided to us to calculate our
share of Reliants losses in our consolidated statements of operations. We
anticipate that Reliant will have substantial net losses through 2003, and
accordingly, recorded our 63% share of such losses in our consolidated
financial statements beginning in the quarter ended March 31, 2002.

In connection with our $100 million equity investment in Reliant, we are in the
process of allocating our proportionate share of the assets acquired and
liabilities assumed in accordance with the guidance set forth in SFAS No. 141.
We have taken a $2.7 million noncash charge for in-process research and
development through the income statement under the caption Equity in losses of
Reliant Pharmaceuticals, LLC. The $2.7 million noncash charge is related to
managements current estimate of the amount of the purchase price to be
allocated to in-process research and development. This analysis of the
purchase price allocation is preliminary and the amount of in-process research
and development is subject to future adjustment.

Termination of Proposed Merger Transaction with Reliant

On March 20, 2002, we entered into an Agreement and Plan of Merger (the Merger
Agreement) with Reliant. On August 14, 2002, we and Reliant
announced the mutual termination of the Merger Agreement. The
companies agreed to terminate due to general market conditions. There
will be no payments triggered by the mutual termination and each
company will bear its own legal and transaction fees.

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Risperdal Consta

In August 2001, Janssen Pharmaceutica, L.P. filed a new drug application
(NDA) for Risperdal Consta with the U.S. Food and Drug Administration
(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 antipyschotic drug
Risperdal®. On June 28, 2002, Johnson & Johnson Pharmaceutical Research and
Development, LLC (J&J PRD), an affiliate of our collaborative partner
Janssen, received a non-approvable letter for Risperdal Consta from the FDA.
Johnson & Johnson has met with the FDA and is working to
answer the agencys questions. There can be no assurance that the issues
raised in the FDAs letter will be resolved on a timely basis, if at all. On August
1, 2002 and August 9, 2002, we announced that J&J PRD received approval to
market Risperdal Consta in Germany and the United Kingdom, respectively. We
also announced that Risperdal Consta is in late-stage regulatory review in a
number of other countries. However, the impact of the FDAs non-approvable
letter on the 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 our Annual
Report on Form 10-K, Risk Factors J&J PRD received a non-approvable letter
for Risperdal Consta from the FDA and the future of Risperdal Consta is
uncertain.

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

Liquidity and Capital Resources

Cash and cash equivalents and short-term
investments were approximately $109.8 million at June 30, 2002
as compared to $152.3 million at March 31, 2002. The
decrease in cash and short-term investments is a result of cash 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 such investments taken as
a whole are, first, to assure liquidity and conservation of capital, and
second, to obtain investment income. Investments classified as long-term at
June 30, 2002 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 was determined
based on quoted market prices.

In August, 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, certain minimum revenues are to be paid
to us in minimum annual amounts for up to ten years beginning in calendar 2003.
The actual amount of such minimum revenues will be determined by a formula and are
currently estimated to aggregate approximately $150 million. The minimum revenue
obligation will be satisfied upon receipt by us of revenues equaling such aggregate
amount of minimum revenues.

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

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

Capital expenditures were approximately $16.6 million for the three months
ended June 30, 2002, principally reflecting equipment purchases and building
expansion and improvements. We expect our capital expenditures to increase
significantly during fiscal year 2003, primarily as a result of the expansions
of our facilities in both Massachusetts and Ohio. The estimated total
expenditures related to these projects and other capital expenditures are expected to be approximately $42 million in fiscal 2003. 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 our existing loans, Fleet
National Bank has a security interest in certain of our assets. See our Annual
Report on Form 10-K for our material contractual cash obligations.

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, lease
arrangements relating to fixed assets or other financing methods. 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.

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 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 August 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (including Certain Costs
Incurred in Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. We do not believe that the
adoption of SFAS No. 146 will have a material impact on our financial
statements and result of operations.

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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 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 quarter-end market interest rates would result in no
material impact on the net fair value of such interest-sensitive financial
instruments.

The interest rate on our 3 3/4% Notes is fixed and, therefore, is not subject
to interest rate risk.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K



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

| |  |        |      |         |  |                                                                                                                                                                                                                                                       
| |  | ------ | ---- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Number |      | Exhibit
| |  |        |      |        
| |  |        | 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 Companys Report on Form 10-K for the
fiscal year ended March 31, 2001).     
|
|
|
|
| |  |        |      |         |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |        | 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 Company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 Company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 Companys Report on Form 10-K for the
fiscal year ended March 31, 1999).                                                           
|
|
|
|
| |  |        |      |         |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |        | 4.3  |         |  | Indenture, dated as of February 18, 2000,
between Alkermes, Inc. and State Street Bank and Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.6 to the Companys Registration Statement on Form S-3, as
amended (File No. 333-31354)).
|
|
|
|
| |  |        |      |         |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |        | 99.1 |         |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by Chief Executive Officer.                                                                                                                           
|
|
|
|
| |  |        |      |         |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |        | 99.2 |         |  | 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, 2002, the Company filed a Current Report
on Form 8-K, dated April 2, 2002, under Items 7 and 9
and a Current Report on Form 8-K, dated June 28, 2002, under Item 5.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

|                      |  |                             |  |                                                                                                                   
|--------------------- |  | --------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|                      |  | ALKERMES, INC.
(Registrant)
|                     
|                     
|                     
|                     
|                      |  |                             |  |                                                                                                                   
|                     
|                     
|                     
|                     
|Date: August 14, 2002 |  | By:                         |  | /s/ Richard F. Pops                                                                                               
|                      |  |                             |  |                                                                                                                   
|                      |  |                             |  | Richard F. Pops
Chief Executive Officer and
Director
(Principal Executive Officer)                                
|                     
|                     
|                     
|                     
|                      |  |                             |  |                                                                                                                   
|                     
|                     
|                     
|                     
|Date: August 14, 2002 |  | By:                         |  | /s/ James M. Frates                                                                                               
|                      |  |                             |  |                                                                                                                   
|                      |  |                             |  | James M. Frates
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)

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##### Table of Contents






Exhibit Index

| |  |         |      |             |  |                                                                                                                                                                                                                                                       
| |  | ------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit |      |            
| |  | Number  |      | Description
| |  |         |      |            
| |  |         | 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 Companys Report on Form 10-K for the
fiscal year ended March 31, 2001).     
|
|
|
|
| |  |         |      |             |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |         | 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 Company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 Company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 Companys Report on Form 10-K for the
fiscal year ended March 31, 1999).                                                           
|
|
|
|
| |  |         |      |             |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |         | 5.3  |             |  | Indenture, dated as of February 18, 2000,
between Alkermes, Inc. and State Street Bank and Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.6 to the Companys Registration Statement on Form S-3, as
amended (File No. 333-31354)).
|
|
|
|
| |  |         |      |             |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |         | 99.1 |             |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by Chief Executive Officer.                                                                                                                           
|
|
|
|
| |  |         |      |             |  |                                                                                                                                                                                                                                                       
|
|
|
|
| |  |         | 99.2 |             |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by Chief Financial Officer.                                                                                                                           

(19)