##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2003

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

For the transition period from to

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)


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

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

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



---

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


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

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

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 February 5, 2004
|                                        |  |                                          
|Common Stock, par value $.01            |  |                                           | 89,257,009 | 
|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                                                    
|                                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                               |                                                                                               | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                               | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                    
|                                               | Item 1. Legal Proceedings                                                                    
|                                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                    
|EX-31.1 CERTIFICATION OF THE C.E.O.           
|EX-31.2 CERTIFICATION OF THE C.F.O.           
|EX-32.1 SECT. 1350 CERTIFICATION OF THE C.E.O.
|EX-32.2 SECT. 1350 CERTIFICATION OF THE C.F.O.



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##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES

INDEX

|                               |                                                                                               |                                                      |          |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------- | - | 
|                               |                                                                                               |                                                      | Page No.
|                               |                                                                                               |                                                      |         
|PART I - FINANCIAL INFORMATION |                                                                                               |                                                      |         
|                               | Item 1. Consolidated Financial Statements                                                     |                                                      |          |  
|                               |                                                                                               | Condensed Consolidated Balance Sheets                |          | 3 | 
|                               |                                                                                               | - December 31, 2003 and March 31, 2003               |          |   | 
|                               |                                                                                               | Condensed Consolidated Statements of Operations      |          | 4 | 
|                               |                                                                                               | - Three months ended December 31, 2003 and 2002      |          |   | 
|                               |                                                                                               | - Nine months ended December 31, 2003 and 2002       |          |   | 
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows      |          | 5 | 
|                               |                                                                                               | - Nine months ended December 31, 2003 and 2002       |          |   | 
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements |          | 6 | 
|                               | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                      | 16       |  
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      | 29       |  
|                               | Item 4. Controls and Procedures                                                               |                                                      | 30       |  
|PART II - OTHER INFORMATION    |                                                                                               |                                                      |         
|                               | Item 1. Legal Proceedings                                                                     |                                                      | 31       |  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      | 31       |  
|SIGNATURES                     |                                                                                               | 32                                                   |         

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##### Table of Contents






PART I.  FINANCIAL INFORMATION




Item 1.  Consolidated Financial Statements:




ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |         |             |   | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------- | ------------ | ------- | ------------ | ----------- | ------------ | ------- | ----------- | - | 
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         | December 31, |             | March 31,   
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         | 2003         |             | 2003        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |             
|ASSETS                                                                                                                                                                      
|Current Assets:                                                                                                                                                              |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |             
|                                                                                                                                                                             | Cash and cash equivalents                                                                                                        |                                                                                                                                | $                                                    | 11,948,791   |         |              | $           | 72,478,675   |        
|                                                                                                                                                                             | Investments - short term                                                                                                         |                                                                                                                                |                                                      | 153,716,271  |         |              |             | 63,615,497   |        
|                                                                                                                                                                             | Receivables                                                                                                                      |                                                                                                                                |                                                      | 9,212,734    |         |              |             | 7,300,923    |        
|                                                                                                                                                                             | Prepaid expenses and other current assets                                                                                        |                                                                                                                                |                                                      | 3,196,200    |         |              |             | 2,166,238    |        
|                                                                                                                                                                             | Inventory                                                                                                                        |                                                                                                                                |                                                      | 5,359,577    |         |              |             | 2,576,082    |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Total current assets                                 |              |         | 183,433,573  |             |              |         | 148,137,415 |  
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Property, Plant and Equipment:                                                                                                                                               |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |             
|                                                                                                                                                                             | Land                                                                                                                             |                                                                                                                                |                                                      | 235,000      |         |              |             | 235,000      |        
|                                                                                                                                                                             | Building                                                                                                                         |                                                                                                                                |                                                      | 15,627,456   |         |              |             | 5,093,815    |        
|                                                                                                                                                                             | Furniture, fixtures and equipment                                                                                                |                                                                                                                                |                                                      | 68,605,331   |         |              |             | 56,005,820   |        
|                                                                                                                                                                             | Equipment under capital lease                                                                                                    |                                                                                                                                |                                                      | 463,611      |         |              |             |             |        
|                                                                                                                                                                             | Leasehold improvements                                                                                                           |                                                                                                                                |                                                      | 57,368,915   |         |              |             | 31,603,290   |        
|                                                                                                                                                                             | Construction in progress                                                                                                         |                                                                                                                                |                                                      | 1,944,381    |         |              |             | 39,500,993   |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | 144,244,694                                          |              |         |              | 132,438,918 |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Less accumulated depreciation and amortization       |              |         | (48,020,165  | )           |              |         | (40,964,851 | )
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | 96,224,529                                           |              |         |              | 91,474,067  |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Investments - long term                                                                                                                                                      |                                                                                                                                  |                                                                                                                                | 8,001,006                                            |              |         |              | 8,945,908   |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Other Assets                                                                                                                                                                 |                                                                                                                                  |                                                                                                                                | 9,009,234                                            |              |         |              | 7,141,780   |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Total Assets                                         |              | $       | 296,668,342  |             |              | $       | 255,699,170 |  
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                              
|Current Liabilities:                                                                                                                                                         |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |             
|                                                                                                                                                                             | Accounts payable and accrued expenses                                                                                            |                                                                                                                                | $                                                    | 17,544,671   |         |              | $           | 14,252,083   |        
|                                                                                                                                                                             | Accrued interest                                                                                                                 |                                                                                                                                |                                                      | 1,138,762    |         |              |             | 2,901,984    |        
|                                                                                                                                                                             | Accrued restructuring costs                                                                                                      |                                                                                                                                |                                                      | 1,694,144    |         |              |             | 3,537,010    |        
|                                                                                                                                                                             | Deferred revenue                                                                                                                 |                                                                                                                                |                                                      | 20,828,128   |         |              |             | 12,253,338   |        
|                                                                                                                                                                             | Derivative liability related to convertible subordinated notes                                                                   |                                                                                                                                |                                                      | 4,150,000    |         |              |             | 13,300,000   |        
|                                                                                                                                                                             | Obligation under capital lease - current portion                                                                                 |                                                                                                                                |                                                      | 79,878       |         |              |             |             |        
|                                                                                                                                                                             | Long-term obligations - current portion                                                                                          |                                                                                                                                |                                                      |             |         |              |             | 7,800,000    |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Total current liabilities                            |              |         | 45,435,583   |             |              |         | 54,044,415  |  
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Deferred revenue                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                     |              |         |              | 10,114,032  |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Obligation under capital lease                                                                                                                                               |                                                                                                                                  |                                                                                                                                | 358,583                                              |              |         |              |            |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|21⁄2% Convertible Subordinated Notes                                                                                                                                           |                                                                                                                                  |                                                                                                                                | 121,375,470                                          |              |         |              |            |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|3.75% Convertible Subordinated Notes                                                                                                                                         |                                                                                                                                  |                                                                                                                                | 676,000                                              |              |         |              | 676,000     |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|6.52% Convertible Senior Subordinated Notes                                                                                                                                  |                                                                                                                                  |                                                                                                                                |                                                     |              |         |              | 165,910,429 |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Convertible Preferred Stock, par value $.01 per share: authorized and issued, 3,000
shares at December 31, 2003 and March 31, 2003, respectively (at liquidation preference) |                                                                                                                                  |                                                                                                                                | 30,000,000                                           |              |         |              | 30,000,000  |             
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|Shareholders Equity (Deficit):                                                                                                                                              |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |             
|                                                                                                                                                                             | Capital stock, par value $.01 per share: authorized, 4,550,000 shares; none issued;
includes 2,997,000 shares of preferred stock |                                                                                                                                |                                                      |             |         |              |             |             |        
|                                                                                                                                                                             | Common stock, par value $.01 per share:                                                                                          |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  | authorized, 160,000,000 shares; issued, 89,074,043 and
64,692,848 shares at December 31, 2003 and March 31, 2003, respectively |                                                      |              | 890,741 |              |             |              | 646,929 |            
|                                                                                                                                                                             | Non-voting common stock, par value $.01 per share:                                                                               |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  | authorized, 450,000 shares; issued, 382,632 at December 31, 2003 and
March 31, 2003                                            |                                                      |              | 3,826   |              |             |              | 3,826   |            
|                                                                                                                                                                             | Additional paid-in capital                                                                                                       |                                                                                                                                |                                                      | 625,909,296  |         |              |             | 447,103,721  |        
|                                                                                                                                                                             | Deferred compensation                                                                                                            |                                                                                                                                |                                                      | (391,957     | )       |              |             | (1,864,281   | )      
|                                                                                                                                                                             | Accumulated other comprehensive income (loss)                                                                                    |                                                                                                                                |                                                      | 828,845      |         |              |             | (173,104     | )      
|                                                                                                                                                                             | Accumulated deficit                                                                                                              |                                                                                                                                |                                                      | (528,418,045 | )       |              |             | (450,762,797 | )      
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Total shareholders equity (deficit)                 |              |         | 98,822,706   |             |              |         | (5,045,706  | )
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                | Total Liabilities and Shareholders Equity (Deficit) |              | $       | 296,668,342  |             |              | $       | 255,699,170 |  
|                                                                                                                                                                             |                                                                                                                                  |                                                                                                                                |                                                      |              |         |              |             |              |        

See notes to condensed consolidated financial statements.

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##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |            |             | 
|--------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------- | ----------- | ------------ | ---------- | ------------ | ----------- | ------------ | ---------- | ------------ | ----------- | ---------- | ---------- | -- | ----------- | ---------- | ----------- | 
|                                                                            |                                                                   |                              |             | Three Months |            | Three Months |             | Nine Months  |            | Nine Months 
|                                                                            |                                                                   |                              |             | Ended        |            | Ended        |             | Ended        |            | Ended       
|                                                                            |                                                                   |                              |             | December 31, |            | December 31, |             | December 31, |            | December 31,
|                                                                            |                                                                   |                              |             | 2003         |            | 2002         |             | 2003         |            | 2002        
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |             
|Revenues:                                                                   |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Manufacturing and royalty revenues                                |                              | $           | 8,636,344    |            |              | $           |             |            |              | $           | 15,490,752 |            |    | $           |           |            
|                                                                            | Research and development revenue
under collaborative arrangements |                              |             | 2,584,882    |            |              |             | 15,194,913   |            |              |             | 7,481,962  |            |    |             | 34,957,409 |            
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            |                                                                   | Total revenues               |             |              | 11,221,226 |              |             |              | 15,194,913 |              |             |            | 22,972,714 |    |             |            | 34,957,409  | 
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Expenses:                                                                   |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Cost of goods manufactured                                        |                              |             | 4,069,415    |            |              |             |             |            |              |             | 11,196,771 |            |    |             |           |            
|                                                                            | Research and development                                          |                              |             | 21,148,198   |            |              |             | 21,165,800   |            |              |             | 66,225,725 |            |    |             | 73,951,635 |            
|                                                                            | General and administrative                                        |                              |             | 6,537,692    |            |              |             | 5,367,143    |            |              |             | 18,236,343 |            |    |             | 20,579,906 |            
|                                                                            | Restructuring                                                     |                              |             |             |            |              |             | 2,274,497    |            |              |             |           |            |    |             | 5,956,216  |            
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |            |            
|                                                                            |                                                                   | Total expenses               |             |              | 31,755,305 |              |             |              | 28,807,440 |              |             |            | 95,658,839 |    |             |            | 100,487,757 | 
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Net operating loss                                                          |                                                                   |                              | (20,534,079 | )            |            |              | (13,612,527 | )            |            |              | (72,686,125 | )          |            |    | (65,530,348 | )         
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Other income (expense):                                                     |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Interest income                                                   |                              |             | 957,042      |            |              |             | 552,592      |            |              |             | 2,600,451  |            |    |             | 2,986,467  |            
|                                                                            | Other (expense) income, net                                       |                              |             | (745,589     | )          |              |             |             |            |              |             | 1,761,822  |            |    |             |           |            
|                                                                            | Gain on exchange of notes                                         |                              |             |             |            |              |             | 80,849,437   |            |              |             |           |            |    |             | 80,849,437 |            
|                                                                            | Derivative income (loss) related to convertible notes             |                              |             | 650,000      |            |              |             |             |            |              |             | (4,014,437 | )          |    |             |           |            
|                                                                            | Interest expense                                                  |                              |             | (1,190,455   | )          |              |             | (2,058,281   | )          |              |             | (5,316,959 | )          |    |             | (6,206,129 | )          
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            |                                                                   | Total other income (expense) |             |              | (329,002   | )            |             |              | 79,343,748 |              |             |            | (4,969,123 | )  |             |            | 77,629,775  | 
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Equity in losses of Reliant Pharmaceuticals, LLC                            |                                                                   |                              |            |              |            |              | (24,481,555 | )            |            |              |            |            |            |    | (83,951,109 | )         
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Net (loss) income                                                           |                                                                   | ($                           | 20,863,081  | )            |            | $            | 41,249,666  |              |            | ($           | 77,655,248  | )          |            | ($ | 71,851,682  | )         
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Net (loss) income per common share:                                         |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Basic                                                             |                              | ($          | 0.23         | )          |              | $           | 0.64         |            |              | ($          | 0.97       | )          |    | ($          | 1.12       | )          
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Diluted                                                           |                              | ($          | 0.23         | )          |              | $           | 0.62         |            |              | ($          | 0.97       | )          |    | ($          | 1.12       | )          
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|Weighted average common shares used to
compute net (loss) income per share: |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Basic                                                             |                              |             | 89,013,535   |            |              |             | 64,409,132   |            |              |             | 79,719,932 |            |    |             | 64,329,456 |            
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           
|                                                                            | Diluted                                                           |                              |             | 89,013,535   |            |              |             | 67,059,246   |            |              |             | 79,719,932 |            |    |             | 64,329,456 |            
|                                                                            |                                                                   |                              |             |              |            |              |             |              |            |              |             |            |            |    |             |           

See notes to condensed consolidated financial statements.

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##### Table of Contents






ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |             |            |             |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ---------- | ------------ | ------------ | ------------ | ----------- | ---------- | ----------- | -
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            | Nine Months  |              | Nine Months 
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            | Ended        |              | Ended       
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            | December 31, |              | December 31,
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            | 2003         |              | 2002        
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |             
|Cash flows from operating activities:                |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |             
|                                                     | Net loss                                                                                         |                                                           | ($                                                      | 77,655,248                                          | )          |              | ($           | 71,851,682   | )          
|                                                     | Adjustments to reconcile net loss to net cash used by
operating activities:                      |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     |                                                                                                  | Depreciation and amortization                             |                                                         |                                                     | 8,234,907  |              |              |              | 6,902,847   |           
|                                                     |                                                                                                  | Gain on sale of equipment                                 |                                                         |                                                     | (96,187    | )            |              |              |            |           
|                                                     |                                                                                                  | Other noncash charges                                     |                                                         |                                                     | 2,801,979  |              |              |              | 2,213,081   |           
|                                                     |                                                                                                  | Equity in losses of Reliant Pharmaceuticals, LLC          |                                                         |                                                     |           |              |              |              | 83,951,109  |           
|                                                     |                                                                                                  | Other noncash income                                      |                                                         |                                                     | (1,761,822 | )            |              |              |            |           
|                                                     |                                                                                                  | Gain on exchange of notes                                 |                                                         |                                                     |           |              |              |              | (80,849,437 | )         
|                                                     |                                                                                                  | Derivative loss related to convertible subordinated notes |                                                         |                                                     | 4,014,437  |              |              |              |            |           
|                                                     |                                                                                                  | Changes in assets and liabilities:                        |                                                         |                                                     |            |              |              |              |             |           
|                                                     |                                                                                                  |                                                           | Receivables                                             |                                                     |            | (1,911,811   | )            |              |             | 4,363,344  |            
|                                                     |                                                                                                  |                                                           | Prepaid expenses and other current assets               |                                                     |            | (3,814,701   | )            |              |             | 2,382,754  |            
|                                                     |                                                                                                  |                                                           | Accounts payable, accrued expenses and accrued interest |                                                     |            | (761,644     | )            |              |             | (2,061,491 | )          
|                                                     |                                                                                                  |                                                           | Accrued restructuring costs                             |                                                     |            | (1,842,866   | )            |              |             | 3,820,119  |            
|                                                     |                                                                                                  |                                                           | Deferred revenue                                        |                                                     |            | (1,553,042   | )            |              |             | 18,164,259 |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     |                                                                                                  |                                                           |                                                         | Net cash used by operating activities               |            |              | (74,345,998  | )            |             |            | (32,965,097 | )
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Cash flows from investing activities:                |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |             
|                                                     | Additions to property, plant and equipment                                                       |                                                           |                                                         | (12,703,521                                         | )          |              |              | (40,115,030  | )          
|                                                     | Proceeds from sales of equipment                                                                 |                                                           |                                                         | 784,235                                             |            |              |              | 6,050,174    |            
|                                                     | Purchases of available-for-sale investments                                                      |                                                           |                                                         | (194,388,353                                        | )          |              |              | (77,913,906  | )          
|                                                     | Sales of available-for-sale investments                                                          |                                                           |                                                         | 105,118,723                                         |            |              |              | 165,331,906  |            
|                                                     | (Increase) decrease in other assets                                                              |                                                           |                                                         | (98,491                                             | )          |              |              | 12,478       |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     |                                                                                                  |                                                           |                                                         | Net cash (used by) provided by investing activities |            |              | (101,287,407 | )            |             |            | 53,365,622  |  
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Cash flows from financing activities:                |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |             
|                                                     | Proceeds from issuance of common stock                                                           |                                                           |                                                         | 1,954,808                                           |            |              |              | 913,856      |            
|                                                     | Proceeds from issuance of 21⁄2% Subordinated Notes                                                 |                                                           |                                                         | 125,000,000                                         |            |              |              |             |            
|                                                     | Proceeds from issuance of 6.52% Convertible Senior Subordinated Notes                            |                                                           |                                                         |                                                    |            |              |              | 60,000,000   |            
|                                                     | Proceeds from issuance of convertible preferred stock                                            |                                                           |                                                         |                                                    |            |              |              | 30,000,000   |            
|                                                     | Payment of long-term obligations                                                                 |                                                           |                                                         | (7,825,150                                          | )          |              |              | (3,050,000   | )          
|                                                     | Payment of financing costs in connection with 21⁄2% Subordinated Notes                             |                                                           |                                                         | (3,961,768                                          | )          |              |              |             |            
|                                                     | Payment of financing costs in connection with 6.52% Convertible Senior
Subordinated Notes        |                                                           |                                                         |                                                    |            |              |              | (4,454,030   | )          
|                                                     | Repayment of loan                                                                                |                                                           |                                                         |                                                    |            |              |              | (10,000,000  | )          
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     |                                                                                                  |                                                           |                                                         | Net cash provided by financing activities           |            |              | 115,167,890  |              |             |            | 73,409,826  |  
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Effect of exchange rate changes on cash              |                                                                                                  |                                                           | (64,369                                                 | )                                                   |            |              | 78,449       |             
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Net (decrease) increase in cash and cash equivalents |                                                                                                  |                                                           | (60,529,884                                             | )                                                   |            |              | 93,888,800   |             
|Cash and cash equivalents, beginning of period       |                                                                                                  |                                                           | 72,478,675                                              |                                                     |            |              | 16,023,074   |             
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Cash and cash equivalents, end of period             |                                                                                                  | $                                                         | 11,948,791                                              |                                                     |            | $            | 109,911,874  |             
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|Supplementary information:                           |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |             
|                                                     | Cash paid for interest                                                                           |                                                           | $                                                       | 7,894,075                                           |            |              | $            | 7,215,366    |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     | Cash paid for income taxes                                                                       |                                                           | $                                                       | 84,201                                              |            |              | $            | 75,302       |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     | Conversion of 6.52% Convertible Senior Subordinated Notes and interest
into common stock         |                                                           | $                                                       | 177,264,308                                         |            |              | $            |             |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     | Equipment acquired under capital lease                                                           |                                                           | $                                                       | 463,611                                             |            |              | $            |             |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            
|                                                     | Exchange of 3.75% Convertible Subordinated Notes
for 6.52% Convertible Senior Subordinated Notes |                                                           | $                                                       |                                                    |            |              | $            | 114,985,000  |            
|                                                     |                                                                                                  |                                                           |                                                         |                                                     |            |              |              |              |            

See notes to condensed consolidated financial statements.

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ALKERMES, INC. AND SUBSIDIARIES




CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The consolidated financial statements of Alkermes, Inc. (the Company) for the
three and nine months ended December 31, 2003 and 2002 are unaudited and
include all adjustments which, in the opinion of management, are necessary to
present fairly the results of operations for the periods then ended. These
financial statements should be read in conjunction with the Companys
consolidated financial statements and notes thereto for the years ended March
31, 2003, 2002 and 2001, which are contained in the Companys Annual Report for
the year ended March 31, 2003 filed on Form 10-K. In addition, the financial
statements include the accounts of Alkermes Controlled Therapeutics, Inc.,
Alkermes Controlled Therapeutics Inc. II, Advanced Inhalation Research, Inc.
(AIR®), Alkermes Investments, Inc., Alkermes Europe, Ltd. and Alkermes
Development Corporation II (ADC II), wholly owned subsidiaries of the
Company.

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

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

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2.  COMPREHENSIVE INCOME (LOSS)

Comprehensive loss for the three and nine months ended December 31, 2003 and
2002 is as follows:

|                                         |  |                   |            |                   |  |   |            |  
|---------------------------------------- |  | ----------------- | ---------- | ----------------- |  | - | ---------- | -
|                                         |  | Three Months      |            | Three Months     
|                                         |  | Ended             |            | Ended            
|                                         |  | December 31, 2003 |            | December 31, 2002
|                                         |  |                   |            |                  
|Net (loss) income                        |  | ($                | 20,863,081 | )                 |  | $ | 41,249,666 |  
|Foreign currency translation adjustments |  |                   | (9,975     | )                 |  |   | 1,587      |  
|Unrealized loss on marketable securities |  |                   | (424,546   | )                 |  |   | (215,052   | )
|                                         |  |                   |            |                   |  |   |            |  
|Comprehensive (loss) income              |  | ($                | 21,297,602 | )                 |  | $ | 41,036,201 |  
|                                         |  |                   |            |                   |  |   |            |  

|                                                |  |                   |            |                   |  |    |            |  
|----------------------------------------------- |  | ----------------- | ---------- | ----------------- |  | -- | ---------- | -
|                                                |  | Nine Months       |            | Nine Months      
|                                                |  | Ended             |            | Ended            
|                                                |  | December 31, 2003 |            | December 31, 2002
|                                                |  |                   |            |                  
|Net loss                                        |  | ($                | 77,655,248 | )                 |  | ($ | 71,851,682 | )
|Foreign currency translation adjustments        |  |                   | (31,293    | )                 |  |    | 56,847     |  
|Unrealized gain (loss) on marketable securities |  |                   | 1,033,242  |                   |  |    | (1,936,953 | )
|                                                |  |                   |            |                   |  |    |            |  
|Comprehensive loss                              |  | ($                | 76,653,299 | )                 |  | ($ | 73,731,788 | )
|                                                |  |                   |            |                   |  |    |            |  

3.  NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. For the three and nine months
ended December 31, 2003 and the nine months ended December 31, 2002, the
Company was in a net loss position and, therefore, diluted net loss per share
is the same amount as basic net loss per share. Basic net income (loss) per
share excludes any dilutive effect from stock options and awards, convertible
preferred stock and convertible subordinated notes. Certain common shares
potentially issuable were not included in the computation of diluted net loss
per share for the three and nine months ended December 31, 2003 and the nine
months ended December 31, 2002 because they would have an antidilutive effect
due to net losses for such periods.

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3.  NET LOSS PER SHARE (Continued)

Common shares potentially issuable but excluded from the calculation of net
loss per share for the three and nine months ended December 31, 2003 and the
nine months ended December 31, 2002 consist of the following:

|                                                                                                                          |  |      |            |      |  |  |            | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                                                                                                                          |  | 2003 |            | 2002
|                                                                                                                          |  |      |            |     
|Stock options and awards (exercise prices
ranging
from $0.30 to $96.88, with a weighted average
exercise price of $15.60) |  |      | 16,013,040 |      |  |  | 13,963,588 | 
|Shares issuable on conversion of
3.75% Convertible Subordinated Notes                                                     |  |      | 9,978      |      |  |  | 9,978      | 
|Shares issuable on conversion of
6.52% Convertible Senior Subordinated Notes                                              |  |      |           |      |  |  | 22,727,024 | 
|Shares issuable on conversion of
21⁄2% Convertible Subordinated Notes                                                       |  |      | 9,025,275  |      |  |  |           | 
|Shares issuable on conversion of
Non-voting common stock                                                                  |  |      | 382,632    |      |  |  | 382,632    | 
|Shares issuable on conversion of
Convertible Preferred Stock                                                              |  |      | 2,304,289  |      |  |  | 762,447    | 
|                                                                                                                          |  |      |            |      |  |  |            | 
|                                                                                                                          |  |      | 27,735,214 |      |  |  | 37,845,669 | 
|                                                                                                                          |  |      |            |      |  |  |            | 

For the three months ended December 31, 2002, the difference between basic and
diluted shares used in the computation of earnings per common share was
2,650,114 common equivalent shares. These securities include stock options and
awards to purchase 1,258,002 shares of common stock; 382,632 shares of common
stock issuable upon conversion of non-voting common stock; 247,033 shares of
common stock issuable upon conversion of the 6.52% Convertible Senior
Subordinated Notes; and 762,447
shares of common stock issuable upon conversion of the Convertible Preferred
Stock.

4.  STOCK BASED COMPENSATION

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

Under the intrinsic value method, compensation associated with stock awards to
employees is determined as the difference, if any, between the current fair
value of the underlying common stock on the date compensation is measured and
the price an employee must pay to exercise the award. The measurement date for
employee awards is generally the grant date. Under the fair-value method,
compensation associated with stock awards to nonemployees is determined based
on the estimated fair value of the award itself, measured using either current
market data or an established option pricing model. The measurement date for
nonemployee awards is generally the date performance of certain services is
complete. Pro forma information regarding net income (loss) and basic and
diluted income (loss) per common share for the three and nine months ended
December 31, 2003 and 2002 has been determined as if the Company had accounted
for its employee stock options under the fair-value method.

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4.  STOCK BASED COMPENSATION (Continued)

Using the Black-Scholes option-pricing model, the weighted average fair value
of options granted in the three months ended December 31, 2003 and 2002 was
$7.31 and $4.13, and in the nine months ended December 31, 2003 and 2002 was
$6.43 and $3.66, respectively. For purposes of pro forma disclosures, the
estimated fair value of options is amortized to pro forma expense over the
vesting period of the option.

Pro forma information for the three and nine months ended December 31, 2003 and
2002 is as follows:

|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |      |  
|--------------------------------------------------------------------------------------------------------------------- | ------- | -- | ------------------ | ---- | ----------------- | - | ---------- | ---- | ---- | -- | ----------- | ---- | - | -- | ----------- | ---- | -
|                                                                                                                      |         |    | Three Months Ended |      | Nine Months Ended
|                                                                                                                      |         |    | December 31,       |      | December 31,     
|                                                                                                                      |         |    |                    |      |                  
|                                                                                                                      |         |    | 2003               |      | 2002              |   | 2003       |      | 2002
|                                                                                                                      |         |    |                    |      |                   |   |            |      |     
|Net (loss) incomeas reported                                                                                         |         | ($ | 20,863,081         | )    |                   | $ | 41,249,666 |      |      | ($ | 77,655,248  | )    |   | ($ | 71,851,682  | )   
|Add: Stock-based compensation as reported
in the consolidated statements of operations                                |         |    | 167,196            |      |                   |   | 490,588    |      |      |    | 1,302,594   |      |   |    | 1,508,837   |     
|Deduct: Total stock-based employee
compensation expense determined
under fair-value method for all options and
awards |         |    | (5,481,990         | )    |                   |   | (5,669,762 | )    |      |    | (16,392,310 | )    |   |    | (19,850,820 | )   
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|Pro forma net (loss) income                                                                                           |         | ($ | 26,177,875         | )    |                   | $ | 36,070,492 |      |      | ($ | 92,744,964  | )    |   | ($ | 90,193,665  | )   
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|Net (loss) income per common shareas reported                                                                        |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|                                                                                                                      | Basic   |    | ($                 | 0.23 | )                 |   | $          | 0.64 |      |    | ($          | 0.97 | ) |    | ($          | 1.12 | )
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|                                                                                                                      | Diluted |    | ($                 | 0.23 | )                 |   | $          | 0.62 |      |    | ($          | 0.97 | ) |    | ($          | 1.12 | )
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|Net (loss) income per common sharepro forma                                                                          |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|                                                                                                                      | Basic   |    | ($                 | 0.29 | )                 |   | $          | 0.56 |      |    | ($          | 1.16 | ) |    | ($          | 1.40 | )
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     
|                                                                                                                      | Diluted |    | ($                 | 0.29 | )                 |   | $          | 0.54 |      |    | ($          | 1.16 | ) |    | ($          | 1.40 | )
|                                                                                                                      |         |    |                    |      |                   |   |            |      |      |    |             |      |   |    |             |     

The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

|                      |  |              |      |              |  |              |      |              |  |  |      |   |  |  |      |  
|--------------------- |  | ------------ | ---- | ------------ |  | ------------ | ---- | ------------ |  |  | ---- | - |  |  | ---- | -
|                      |  | Three Months |      | Three Months |  | Nine Months  |      | Nine Months 
|                      |  | Ended        |      | Ended        |  | Ended        |      | Ended       
|                      |  | December 31, |      | December 31, |  | December 31, |      | December 31,
|                      |  | 2003         |      | 2002         |  | 2003         |      | 2002        
|                      |  |              |      |              |  |              |      |             
|Expected life (years) |  |              | 4    |              |  |              | 4    |              |  |  | 4    |   |  |  | 4    |  
|Interest rate         |  |              | 3.17 | %            |  |              | 3.07 | %            |  |  | 2.91 | % |  |  | 3.07 | %
|Volatility            |  |              | 73   | %            |  |              | 74   | %            |  |  | 73   | % |  |  | 74   | %

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5.  INVENTORY

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

|                |  |              |           |           |  |   |           | 
|--------------- |  | ------------ | --------- | --------- |  | - | --------- | 
|                |  | December 31, |           | March 31,
|                |  | 2003         |           | 2003     
|                |  |              |           |          
|Raw materials   |  | $            | 952,512   |           |  | $ | 620,653   | 
|Work in process |  |              | 1,941,771 |           |  |   | 1,955,429 | 
|Finished goods  |  |              | 2,465,294 |           |  |   |          | 
|                |  |              |           |           |  |   |           | 
|                |  | $            | 5,359,577 |           |  | $ | 2,576,082 | 
|                |  |              |           |           |  |   |           | 

6.  CONVERTIBLE NOTES

Conversion of 6.52% Senior Notes In June 2003, the Company announced that it
had exercised its right to automatically convert all of its outstanding 6.52%
Convertible Senior Subordinated Notes due December 31, 2009 (the 6.52% Senior
Notes) into shares of the Companys common stock, par value $0.01 per share,
in July, 2003. During June and July 2003, $150,707,000 principal amount of
6.52% Senior Notes were exchanged for, and $23,882,000 principal amount of such
notes were converted into, the Companys common stock. In aggregate, the
Company issued 24,043,329 shares of common stock in connection with the
exchanges and conversions and paid approximately $2,300,000 in cash to satisfy
a two-year interest make-whole provision in the bond indenture. None of the
6.52% Notes are currently outstanding and no gain or loss was recorded on the
conversion of the 6.52% Senior Notes, which was done in accordance with the
underlying indenture.

Issuance of 21⁄2% Subordinated Notes In August and September 2003, the
Company issued an aggregate of $100 million and $25 million, respectively,
principal amount of 21⁄2% Convertible Subordinated Notes due 2023 (the
21⁄2% Subordinated Notes). The 21⁄2% Subordinated Notes are convertible
into shares of the Companys common stock at a conversion price of $13.85 per
share, subject to adjustment in certain events. The 21⁄2% Subordinated Notes
bear interest at 21⁄2% per year, payable semiannually on March 1 and
September 1, commencing on March 1, 2004 and are subordinated to existing and
future senior indebtedness of the Company.

The Company may elect to automatically convert the notes anytime the closing
price of its common stock has exceeded 150% of the conversion price ($20.78),
for at least 20 trading days during any 30-day trading period. The Company may
redeem some or all of the notes on or after September 6, 2006. Holders of the
notes have the right to require the Company to repurchase some or all of their
notes on September 1, 2008, 2013, and 2018 and upon certain events, including a
change in control.

If an automatic conversion occurs on or prior to September 1, 2006, the Company
will pay additional interest in cash or, at the Companys option, in common
stock, equal to three full years of interest on the converted notes (the
Three-Year Interest Make-Whole), less any interest actually paid or provided
for on the notes prior to automatic conversion. If the Company elects
to pay the additional interest in common stock, the shares of common stock will
be valued at 97.5% of the average closing price of the Companys common stock
for the five trading days

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6.  CONVERTIBLE NOTES (Continued)

immediately preceding the second trading day prior to the conversion date. See
discussion of the embedded derivative related to the Three-Year Interest
Make-Whole in Note 7 below.

As a part of the sale of the 21⁄2% Subordinated Notes, the Company incurred
approximately $4,000,000 of offering costs which were recorded as other assets
in the consolidated balance sheets and are being amortized to interest expense
over five years through September 1, 2008, the first date on which holders of
the 21⁄2% Subordinated Notes have the right to require the Company to
repurchase the 21⁄2% Subordinated Notes.

7.  DERIVATIVES

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

21⁄2% Subordinated Notes In August and September 2003, the Company issued
$125 million principal amount of 21⁄2% Subordinated Notes. The Three-Year
Interest Make-Whole provision, included in the note indenture and described in
Note 6, represents an embedded derivative which is required to be accounted for
apart from the underlying 21⁄2% Subordinated Notes. At issuance of the
21⁄2% Subordinated Notes, the Three-Year Interest Make-Whole had an estimated
initial aggregate fair value of $3.9 million, which reduced the amount of the
outstanding debt and has been recorded as a derivative liability in the
consolidated balance sheets. The Three-Year Interest Make-Whole amount will be
adjusted to its fair value on a quarterly basis until it expires or is paid and
such adjustments will be charged to Derivative income (loss) related to
convertible notes in the consolidated statements of operations. In the
three months ended December 31, 2003, the Company recorded income of $0.65
million under the caption Derivative income (loss) related to convertible
notes in the consolidated statements of operations to account for the decrease
of this derivative liability from September 30, 2003 through December 31, 2003.
The recorded value of the derivative liability related to the 21⁄2%
Subordinated Notes can fluctuate significantly based on fluctuations in the
market value of the Companys common stock.

Warrants The Company has recorded net charges of approximately $0.75 million
and net gains of approximately $1.8 million in the three and nine months ended
December 31, 2003,

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7.  DERIVATIVES (Continued)

respectively, in other (expense) income in the consolidated statements of
operations in connection with the changes in the fair value of warrants of
publicly traded companies received by us from licensees. The recorded value of
such warrants can fluctuate significantly based on
fluctuations in the market value of the underlying securities of the issuer of
the warrants. At December 31, 2003, the warrants had a fair value of
approximately $2.8 million and were recorded under the caption Other assets
in our consolidated balance sheets.

8.  INVESTMENT IN RELIANT PHARMACEUTICALS, LLC

In December 2001, the Company purchased approximately 63% of an offering by
Reliant of its Series C Convertible Preferred Units, which represented
approximately 19% of the equity interest in Reliant, for a purchase price of
$100,000,000. The investment has been accounted for under the equity method of
accounting because Reliant is organized as a limited liability company, which
is treated in a manner similar to a partnership. Because, at the time of the
Companys investment, Reliant had an accumulated deficit from operations and a
deficit in members capital, under applicable accounting rules, the Companys
share of Reliants losses from the date of the Companys investment has been
recognized in proportion to the Companys percentage participation in the
Series C financing, and not in proportion to the Companys percentage ownership
interest in Reliant. The Company records its equity in the income or losses of
Reliant three months in arrears. For the three and nine months ended December
31, 2003, this charge amounted to $0 and $0, respectively as compared to $24.5
million and $84.0 million for the same periods of the prior year, and is
recorded in the Companys consolidated statements of operations under the
caption Equity in losses of Reliant Pharmaceuticals, LLC.

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

During the period from September 2003 through December 2003, Reliant closed on
offerings of its Series D Convertible Preferred Units at a price of $20 per
unit totaling approximately $271.4 million, including the exchange of
approximately $65.9 million of existing secured debt under its credit facility.
The Series D Convertible Preferred Units rank senior to the Series A, B and C
Preferred Units and the common units.

The Series D Convertible Preferred Unit holders are entitled to receive a
preferred return at an annual rate of 8.5%, compounded quarterly.

As a result of the Series D offering by Reliant, Alkermes ownership percentage
in Reliant has been reduced from approximately 19% to approximately 12.5%.

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8.  INVESTMENT IN RELIANT PHARMACEUTICALS, LLC (Continued)

Summarized unaudited financial
information of Reliant for the three and nine months ended September 30, 2003 and 2002 is as follows:

|                  |  |               |         |               |  |               |         |               |  |   |         |   |  |   |          |  
|----------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | -------- | -
|                  |  | Three Months  |         | Three Months  |  | Nine Months   |         | Nine Months  
|                  |  | Ended         |         | Ended         |  | Ended         |         | Ended        
|                  |  | September 30, |         | September 30, |  | September 30, |         | September 30,
|(In thousands)    |  | 2003          |         | 2002          |  | 2003          |         | 2002         
|                  |  |               |         |               |  |               |         |              
|Revenues          |  | $             | 47,260  |               |  | $             | 38,602  |               |  | $ | 122,250 |   |  | $ | 139,372  |  
|Cost and expenses |  |               | 62,224  |               |  |               | 68,385  |               |  |   | 210,507 |   |  |   | 245,847  |  
|Net loss          |  |               | (14,964 | )             |  |               | (29,783 | )             |  |   | (88,257 | ) |  |   | (106,475 | )

9.  RESTRUCTURING OF OPERATIONS

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

In connection with the restructuring program, the Company recorded charges of
approximately $6.5 million in the consolidated statements of operations and
comprehensive loss for the year ended March 31, 2003, which consisted of
approximately $1.5 million in employee separation costs, including severance
and related benefits, and approximately $5.0 million in facility consolidation
and
closure costs, including significant estimates relating to a lease cancellation
fee, the length of time it will take to sublease certain of the Companys
facilities and the lease rates at which the Company may negotiate sublease
agreements with third parties. As of December 31, 2003, the Company had paid
an aggregate of approximately $1.5 million in employee separation costs and
$3.3 million in facility closure costs under the restructuring program.

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9.  RESTRUCTURING OF OPERATIONS (Continued)

The amounts in the accrual are expected to be paid through fiscal 2006.
Pursuant to the restructuring plan, the following charges and payments have
been recorded during the nine months ended December 31, 2003:

|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 
|------------------------- |  | ------------- | --------- | ---------- |  | ------------ | - | ------------ |  | -- | ---------- | - |  | -------- | --------- | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  | Balance,
|                          |  | Balance,      |           | Charge for |  | Payments for |   | December 31,
|Type of Liability         |  | April 1, 2003 |           | the Period |  | the Period   |   | 2003        
|                          |  |               |           |            |  |              |   |             
|Employee separation costs |  | $             | 16,547    |            |  | $            |  |              |  | ($ | 16,547     | ) |  | $        |          | 
|Facility closure costs    |  |               | 3,520,463 |            |  |              |  |              |  |    | (1,826,319 | ) |  |          | 1,694,144 | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 
|Total                     |  | $             | 3,537,010 |            |  | $            |  |              |  | ($ | 1,842,866  | ) |  | $        | 1,694,144 | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 

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

10.  LITIGATION

Beginning in October 2003, the Company and certain of its current and former
officers and directors have been named as defendants in purported securities
class action lawsuits filed in the United States District Court for the
District of Massachusetts. The cases are captioned Bennett v. Alkermes, Inc.,
et. al., 1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc., et. al.,
1:03-CV-12184 (D. Mass.); Barry Family LP v. Alkermes, Inc., et. al.,
1:03-CV-12243 (D. Mass.); Waltzer v. Alkermes, Inc., et. al., 1:03-CV-12277 (D.
Mass.); Folkerts v. Alkermes, Inc., et. al., 1:03-CV-12386 (D. Mass.); and
Slavas v. Alkermes, Inc., et. al., 1:03-CV-12471 (D. Mass.). These actions
were allegedly filed on behalf of purchasers of the Companys common stock
during the period April 22, 1999 to July 1, 2002 and generally allege, among
other things, that, during such period, the defendants made misstatements to
the investing public relating to FDA approval of the Companys Risperdal Consta
product. The complaints seek unspecified damages. Although the Company
believes these allegations lack merit and intends to vigorously defend against
them, the litigation process is inherently uncertain and there can be no
guarantee as to the ultimate outcome of these matters.

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11.  RECENT ACCOUNTING PRONOUNCEMENTS

In July 2000, the Emerging Issues Task Force (EITF) released EITF Issue No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, for
comment which addresses revenue recognition for arrangements with multiple
deliverables. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company
adopted EITF Issue No. 00-21 on June 1, 2003 and it did not have a material
impact on the Companys financial position and results of operations.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of the Statement and still existing at the beginning
of the interim period of adoption. Restatement is not permitted. The adoption
of FASB 150 did not have a material impact on the Companys financial position
and results of operations.

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

Introduction

Alkermes, Inc. (as used in this section, together with our subsidiaries, us,
we or our), a Pennsylvania corporation organized in 1987, is an emerging
pharmaceutical company developing products based on applying our proprietary
drug delivery technologies. Our areas of focus include: controlled,
extended-release of injectable drugs using our ProLease® and Medisorb® delivery
systems and the development of inhaled pharmaceuticals based on our proprietary
Advanced Inhalation Research, Inc. (AIR®) pulmonary delivery system. Our
business strategy is two-fold. We partner our proprietary technology systems
and drug delivery expertise with several of the worlds finest pharmaceutical
companies and we also develop novel, proprietary drug candidates for our own
account. We have a pipeline of products and product candidates in various
stages of development, including our proprietary product candidate, Vivitrex®,
for which we announced successful Phase III clinical trial results in December
2003 and two marketed products, Risperdal Consta and Nutropin Depot®. In
addition to our Massachusetts corporate headquarters, research and
manufacturing facilities, we operate research and manufacturing facilities in
Ohio. Since our inception in 1987, we have devoted a significant portion of
our resources to research and development programs and the purchase of
property, plant and equipment. At December 31, 2003, we had an accumulated
deficit of $528.4 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, including, but not limited to,
statements concerning future operating results, manufacturing revenues,
research and development spending, capital expenditures and future financings.
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, the
forward-looking statements contained in this document are neither promises or
guarantees and our business is subject to significant risks and there can be no
assurance that our actual results will not differ materially from our
expectations. Factors which could cause actual results to differ materially
from our expectations set forth in our forward-looking statements include,
among others: (i) Risperdal Consta, Nutropin Depot and our product candidates
(including our proprietary product candidate,

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Vivitrex), if approved for
marketing, may not be launched successfully in one or all indications for which
marketing is approved, and, if launched, may not produce significant revenues;
(ii) we rely on our partners to determine the regulatory and marketing
strategies for Risperdal Consta and Nutropin Depot; (iii) after the completion
of clinical trials for our product candidates (including our proprietary
product candidate, Vivitrex) and the submission to the FDA of a New Drug
Application (NDA) for marketing approval and requests for marketing approval
to other health authorities, 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; (iv) we may be unable
to manufacture our first products, Risperdal Consta and Nutropin Depot, or to
manufacture or scale-up our future products, including our proprietary product
candidate, Vivitrex, on a commercial scale or economically; (v) whether
additional regulatory approvals will be received or whether commercial launches
of Risperdal Consta in countries where it has been or may be approved occur in
a timely or successful manner; (vi) Risperdal Consta, Nutropin Depot and our
product candidates (including our proprietary product candidate, Vivitrex), in
commercial use, may have unintended side effects, adverse reactions or
incidents of misuse; (vii) we may enter into a collaboration with a third party
to market or fund a proprietary product candidate and the terms of such a
collaboration may not meet our expectations; (viii) our delivery technologies
or product development efforts may not produce safe, efficacious or
commercially viable products; (ix) 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; (x) unexpected events could interrupt manufacturing operations at our
Risperdal Consta and Nutropin Depot facilities, which are, in each case, the
sole source of supply for these products; (xi) clinical trials are a
time-consuming and expensive process; (xii) our product candidates could be
ineffective or unsafe during preclinical studies and clinical trials and we and
our collaborators may not be permitted by regulatory authorities to undertake
new or additional clinical trials for product candidates incorporating our
technologies, or clinical trials could be delayed; (xiii) we may not recoup any
of our $100 million investment in Reliant Pharmaceuticals, LLC (Reliant);
(xiv) the securities litigation brought against us may result in financial
losses or require the dedication of significant management resources; (xv) 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; (xvi) technological change in the biotechnology or
pharmaceutical industries could render our product candidates obsolete or
noncompetitive; (xvii) difficulties or set-backs in obtaining and enforcing our
patents and difficulties with the patent rights of others could occur; (xviii)
we may need to spend substantial funds to become profitable and will,
therefore, continue to incur losses for the foreseeable future; and (xix) we
may need to raise substantial additional funding to continue research and
development programs and clinical trials and could incur difficulties or
setbacks in raising such funds.

The forward-looking statements made in this document are made only as of the
date hereof and we do not intend to update any of these factors or to publicly
announce the results of any revisions to any of our forward-looking statements
other than as required under the federal securities laws.

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Critical Accounting Policies

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

Revenue Recognition  Manufacturing and royalty revenues consist of revenue
earned under certain manufacturing and supply and license agreements for our
two commercial products, Risperdal Consta and Nutropin Depot. Manufacturing
revenues are earned when product is shipped to our collaborative partners.
Royalty revenues are earned on product sales made by our collaborative partners
and are recorded in the period the product is sold by our collaborative
partners. Manufacturing revenues recognized by us are based on information
supplied to us by our collaborative partners and may require estimates to be
made.

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

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

Equity Method Investment in Reliant  In December 2001, we purchased 63% of an
offering by Reliant of its Series C Convertible Preferred Units, representing
approximately 19% of the equity interest in Reliant, for a purchase price of
$100 million. The investment has been accounted for under the
equity method of accounting because Reliant is organized as a limited liability
company, which is treated in a manner similar to a partnership. Because, at
the time of our investment, Reliant had an accumulated deficit from operations
and a deficit in members capital, under applicable accounting rules, our share
of Reliants losses from the date of our investment has been recognized in
proportion to our percentage participation in the Series C financing, and not
in proportion to our percentage ownership interest in Reliant. We record our
equity in the income or losses of Reliant three months in arrears. For the
three and nine months ended December 31, 2003, this charge amounted to $0 and
$0, respectively. For the three and nine months ended December 31, 2002, this
charge amounted to $24.5 million and $84.0 million and was recorded in our
consolidated statements of operations under the caption Equity in losses of
Reliant Pharmaceuticals, LLC. Our $100 million investment was reduced to $0
during the fiscal year ended March 31, 2003. Since we have no further funding
commitments to Reliant, we will not record any further share of losses in
Reliant in our consolidated statement of operations. To the extent Reliant has
net income in the future, we would record our proportional share of Reliants
net income. Reliant is a privately held company over which we do not exercise
control and we have relied on the unaudited and audited financial statements
prepared by Reliants management and provided to us to calculate our share of
Reliants losses.

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During the period from September 2003 through December 2003, Reliant closed on
offerings of its Series D Preferred Units at a price of $20 per unit totaling
approximately $271.4 million, including the exchange of approximately $65.9
million of existing secured debt under its credit facility. The Series D
Preferred Units rank senior to the Series A, B and C Preferred Units and the
common units. The Series D Preferred Unit holders are entitled to receive a
preferred return at an annual rate of 8.5%, compounded quarterly.

As a result of the Series D offering by Reliant, Alkermes ownership percentage
in Reliant has been reduced from approximately 19% to approximately 12.5%.

Derivatives Embedded in Certain Debt Securities  Certain of our debt
securities have contained features providing for cash payments to be made in
the event of our stock price exceeding certain levels and triggering
conversions of the debt to common stock. In general, these features call for
make-whole payments equal to two or three years of interest on the debt less
any amounts paid or accrued prior to the date conversion is triggered. These
features expire once the holder has received a defined number of interest
payments.

These features represent embedded derivatives which are required to be
accounted for separately from the related debt securities. The estimated fair
value of these features is valued using a simulation model that incorporates
factors such as the current price of our common stock, its volatility, and time
to expiration. Changes in the estimated fair value of the liability
represented by these factors are charged to the consolidated statements of
operations under the caption Derivative income (loss) related to convertible
notes. These adjustments will be required until the features are either
triggered or expire. The recorded value of these liabilities can fluctuate
significantly based on changes in the value of our common stock.

Warrant ValuationWe hold warrants to acquire shares of certain publicly held
companies, received in connection with our collaboration and licensing
activities. The warrants are valued using an established option pricing
model and changes in value are recorded in the consolidated statements of
operations under the caption Other (expense) income, net. The recorded value
of these warrants can fluctuate significantly based on changes in the value of
the underlying common stock of the issuer. At December 31, 2003, the warrants
had a fair value of approximately $2.8 million and were recorded under the
caption Other assets in our consolidated balance sheets.

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

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

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

Results of Operations

The net loss for the three months ended December 31, 2003 provided in
accordance with accounting principles generally accepted in the U.S. (known as
GAAP) was $20.9 million or $0.23 per share as compared to net income of $41.2
million or $0.64 per share in the same period of the prior year. Included in
net income for the three months ended December 31, 2002 are a non-recurring
gain of approximately $80.9 million related to the exchange of our 3.75%
Subordinated Notes for our 6.52%% Senior Notes in December 2002 and a $24.5
million noncash charge related to the equity investment we made in Reliant in
December 2001. Our investment in Reliant has been reduced to $0, and since no
further funding commitments exist to Reliant, we have not recorded any share of
Reliants losses in the current quarter.

The net loss for the nine months ended December 31, 2003 provided in accordance
with GAAP was $77.7 million or $0.97 per share as compared to a net loss of
$71.9 million or $1.12 per share in the same period of the prior year.
Included in the net loss for the nine months ended December 31, 2002 are the
non-recurring gain of approximately $80.9 million and an $84.0 million noncash
charge related to the equity investment we made in Reliant in December 2001.

Total manufacturing and royalty revenues for the three and nine months ended
December 31, 2003 were $8.6 million and $15.5 million, including manufacturing
and royalty revenues for Risperdal Consta of $8.2 million and $14.4 million,
respectively. Beginning in the first quarter of fiscal 2004, as manufacturing
and royalty revenues became material to our quarterly results, we began
reporting royalty and manufacturing revenues separate from research and
development revenues under collaborative arrangements. The increase in
manufacturing and royalty revenues as compared to the three months ended
September 30, 2003 was due to an increase in product shipped to our partner,
Janssen Pharmaceutica, Inc. (Janssen), a wholly owned
subsidiary of Johnson & Johnson, as well as an increase in royalties earned on
worldwide sales of Risperdal Consta by our partner. Alkermes developed the
delivery technology for Risperdal Consta, which is an injectable, long-acting
formulation of Risperdal®, a Janssen Pharmaceutica, Inc. (Janssen) drug.
Johnson & Johnson has filed for approval of Risperdal Consta around the world.
On October 29, 2003, Johnson & Johnson Pharmaceutical Research and Development
(J&J PRD) received a letter from the FDA approving Risperdal Consta for sale
in the U.S. for the treatment of schizophrenia. Janssen Pharmaceutica Products,
L.P. launched Risperdal Consta in the U.S. on December 3, 2003. To date the
product has been approved for sale in approximately 50 countries outside the
U.S. and is currently being marketed in more than 25 of such countries.

Our research and development revenue under collaborative arrangements for the
three and nine months ended December 31, 2003 was $2.6 million and $7.5 million
compared to $15.2 million and $35.0 million for the corresponding periods of
the prior year. The decrease in such revenue was primarily the result of the
restructuring of our AIR insulin and AIR hGH programs with Eli Lilly and
Company (Lilly), changes in our partners, as well as changes in the stage of
several other collaborative programs. Beginning January 1, 2003, we no longer
record research and development revenue for work performed on the Lilly
programs but instead use the proceeds from Lillys purchase of $30.0 million of
our convertible preferred stock in December 2002 to pay for development costs
into calendar year 2004. Also, in December 2002, the royalty payable to us
based on revenues of potential inhaled insulin products was increased. Lilly
has the right to

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return the convertible preferred stock to us in exchange for a
reduction in this royalty rate. At December 31, 2003, approximately $18.8
million of the proceeds from the sale of $30.0 million of our convertible
preferred stock had been spent. In December 2003, Lilly made payments to us
totaling approximately $7.0 million in order to fund an increase in the scope
of our Lilly development programs. This funding has been recorded as deferred
revenue in the consolidated balance sheets and we expect to recognize the $7.0
million as revenue after the proceeds from the sale of $30.0 million of our
convertible preferred stock have been spent.

For the three and nine months ended December 31, 2003, the cost of goods
manufactured was $4.1 million and $11.2 million, consisting of approximately
$2.7 million and $7.5 million, respectively, for Risperdal Consta and
approximately $1.4 million and $3.7 million, respectively, for Nutropin Depot.

Research and development expenses for the three and nine months ended December
31, 2003 were $21.1 million and $66.2 million as compared to $21.2 million and
$74.0 million for the corresponding periods of the prior year. Beginning in
the first quarter of fiscal 2004, as the cost of goods manufactured became
material to our quarterly results, we began reporting such
costs separate from research and development expenses. The decrease in research
and development expenses for the three and nine months ended December 31, 2003
compared to the three and nine months ended December 31, 2002 is primarily
because we now separately report the cost of goods manufactured for our
commercial products, Risperdal Consta and Nutropin Depot. As a result, certain
costs that were previously reported as research and development expenses are
now reported as cost of goods manufactured. The decrease in research and
development expenses for the three and nine months ended December 31, 2003
compared to the three and nine months ended December 31, 2002 was partially
offset by an increase in occupancy costs and depreciation expense related to
the expansion of our facilities in both Massachusetts and Ohio. There was also
an increase in research and development costs in fiscal 2004 as compared to
fiscal 2003 resulting from an increase in personnel and related costs and
external research expenses related to the continuing development of our
proprietary product candidates and our collaborators product candidates.

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

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

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



---

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

General and administrative expenses for the three and nine months ended
December 31, 2003 were $6.5 million and $18.2 million as compared to $5.4
million and $20.6 million for the corresponding periods of the prior year. The
increase for the three months ended December 31, 2003 compared to the same
period of the prior year was primarily the result of increased personnel and
related costs as well as increases in consulting and insurance costs. The
decrease for the nine months ended December 31, 2003 as compared to the nine
months ended December 31, 2002 was primarily the result of the write off in the
quarter ended September 30, 2002 of approximately $2.7 million in deferred
merger costs in connection with the termination of our proposed merger with
Reliant. However, there was an increase in personnel and insurance costs in
the nine months ended December 31, 2003 as compared to the same periods of the
prior year.

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

In connection with the restructuring program, we recorded charges of
approximately $6.5 million in the consolidated statements of operations and
comprehensive loss for the year ended March 31, 2003, which consisted of
approximately $1.5 million in employee separation costs, including

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severance
and related benefits, and approximately $5.0 million in facility consolidation
and closure costs, including significant estimates relating to a lease
cancellation fee, the length of time it will take to sublease certain of our
facilities and the lease rates at which we may negotiate sublease agreements
with third parties. As of December 31, 2003, we had paid an aggregate of
approximately $1.5 million and $3.3 million in employee separation costs and
facility closure costs, respectively.

The amounts in the accrual are expected to be paid through fiscal 2006.
Pursuant to the restructuring plan, the following charges and payments have
been recorded during the nine months ended December 31, 2003:

|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 
|------------------------- |  | ------------- | --------- | ---------- |  | ------------ | - | ------------ |  | -- | ---------- | - |  | -------- | --------- | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  | Balance,
|                          |  | Balance,      |           | Charge for |  | Payments for |   | December 31,
|Type of Liability         |  | April 1, 2003 |           | the Period |  | the Period   |   | 2003        
|                          |  |               |           |            |  |              |   |             
|Employee separation costs |  | $             | 16,547    |            |  | $            |  |              |  | ($ | 16,547     | ) |  | $        |          | 
|Facility closure costs    |  |               | 3,520,463 |            |  |              |  |              |  |    | (1,826,319 | ) |  |          | 1,694,144 | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 
|Total                     |  | $             | 3,537,010 |            |  | $            |  |              |  | ($ | 1,842,866  | ) |  | $        | 1,694,144 | 
|                          |  |               |           |            |  |              |   |              |  |    |            |   |  |          |           | 

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

Interest income was $1.0 million and $2.6 million for the three and nine months
ended December 31, 2003 as compared to $0.6 million and $3.0 million for the
same periods of the prior year. The increase for the three months ended
December 31, 2003 as compared to the same period of the prior year was
primarily the result of higher cash and investment balances held during the
three months ended December 31, 2003 compared to the three months ended
December 31, 2002, partially offset by a decline in interest rates. The
decrease for the nine months ended December 31, 2003 as compared to the nine
months ended December 31, 2002 was primarily the result of a decline in
interest rates, partially offset by higher cash and investment balances held
during the nine months ended December 31, 2003 compared to the nine months
ended December 31, 2002.

Other (expense) income, net was $(0.75) million and $1.8 million in the three
and nine months ended December 31, 2003 as compared to $0 and $0 for the three
and nine months ended December 31, 2002. Other (expense) income, net for the
three and nine months ended December 31, 2003 represents (expense) income
recognized on the changes in the fair value of warrants of public companies
held by us in connection with collaboration and licensing arrangements, which
are recorded as derivatives under the caption Other assets in the
consolidated balance sheets. The recorded value of such warrants can fluctuate
significantly based on fluctuations in the market value of the underlying
securities of the issuer of the warrants.

Derivative income (loss) related to convertible notes was $0.65 million and
$(4.0) million in the three and nine months ended December 31, 2003 as compared
to $0 and $0 for the three and nine months ended December 31, 2002. In June
2003, we announced that we had exercised our right

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to automatically convert the
6.52% Senior Notes into our common stock in July 2003. The 6.52% Senior Notes
contained a provision that if the automatic
conversion occurred on or prior to December 30, 2004 or if the holders
voluntarily converted prior to December 30, 2004, we would pay additional
interest equal to two full years of interest on the converted 6.52%
Senior Notes or the
Two-Year Interest Make-Whole, less any interest paid prior to conversion.
The Two-Year Interest Make-Whole represented an embedded derivative. The value
of the embedded derivative was increased by $3.8 million in the quarter ended
June 30, 2003 to reflect the full value of amounts to be paid pursuant to the
Two-Year Interest Make-Whole. The total value of the derivative was
approximately $17.1 million at June 30, 2003 and was reflected as a liability
in the consolidated balance sheets. In July 2003, upon the conversion of the
then outstanding 6.52% Senior Notes and payment of the Two-Year Interest
Make-Whole, the embedded derivative was settled in full and the balance was
reduced to zero.

In August and September 2003, we recorded a derivative liability related to the
issuance of the 21⁄2% Subordinated Notes. Pursuant to the terms of the
21⁄2% Subordinated Notes, we will pay additional interest equal to three full
years of interest on the 21⁄2% Subordinated Notes if the 21⁄2% Subordinated
Notes are automatically converted on or prior to September 1, 2006 (the
Three-Year Interest Make-Whole). The Three-Year Interest Make-Whole
represents an embedded derivative. At issuance of $125 million principal
amount of the 21⁄2% Subordinated Notes, the Three-Year Interest Make-Whole
had an estimated initial aggregate fair value of $3.9 million, which reduced
the amount of the outstanding debt and has been recorded as a current liability
in the consolidated balance sheets. The Three-Year Interest Make-Whole amount
is adjusted to its fair value on a quarterly basis until it expires or is paid
and such adjustments are charged to Derivative income (loss) related to
convertible notes in the consolidated statements of operations. In the three months ended December 31, 2003, we recorded income of $0.65
million under the caption Derivative income (loss) related to convertible
notes in the consolidated statements of operations to account for the decrease
of this derivative liability from September 30, 2003 through December 31, 2003.
The recorded value of the derivative liability related to the 21⁄2%
Subordinated Notes can fluctuate significantly based on fluctuations in the
market value of our common stock.

Interest expense was $1.2 million and $5.3 million for the three and nine
months ended December 31, 2003 as compared to $2.1 million and $6.2 million for
the three and nine months ended December 31, 2002. The decrease for the three
and nine months ended December 31, 2003 as compared to the prior year period
was primarily the result of a decrease in the outstanding average debt balance
as well as a lower interest rate payable on the convertible debt outstanding
during the respective periods.

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

Reliant

For the three and nine months ended December 31, 2003, the noncash charges
related to our equity in the losses of Reliant amounted to $0 and $0,
respectively, as compared to $24.5 million and $84.0 million for the same
periods of the prior year. The noncash charges were recorded in

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

Risperdal Consta

In August 2001, Janssen filed an NDA for Risperdal Consta with the FDA and
similar regulatory filings have been submitted to other drug regulatory
agencies worldwide. Risperdal Consta is a Medisorb long-acting formulation of
Janssens antipsychotic drug Risperdal®. On October 29, 2003, the FDA approved
Risperdal Consta for sale in the U.S. for the treatment of schizophrenia.
Janssen Pharmaceutica Products, L.P. launched Risperdal Consta in the U.S. on
December 3, 2003. Risperdal Consta has been approved in approximately 50
countries outside the U.S. and is in late-stage regulatory review in a number
of other countries.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were approximately $165.7
million at December 31, 2003 as compared to $136.1 million at March 31, 2003.
The increase in cash and short-term investments during the nine months ended
December 31, 2003 was primarily a result of the issuance of the
21⁄2%
Subordinated Notes issued in August and September 2003, with net proceeds of
approximately $121.0 million. The increase in cash and short-term investments
was offset by cash used to fund our operations, to acquire fixed assets and to
make interest and principal payments on our indebtedness. In September 2003,
we paid off in full (approximately $6.9 million) our outstanding notes payable
to a bank.

We invest in cash equivalents, U.S. Government obligations, high-grade
corporate notes and commercial paper, with the exception of our $100 million
investment in Reliant. Our investment objectives for our investments, other
than our investment in Reliant, are, first, to assure liquidity and
conservation of capital and, second, to obtain investment income. Investments
classified as long-term at December 31, 2003 consist of U.S. Government
obligations held as collateral under certain letters of credit, lease and loan
agreements.

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

In December 2002, we and Lilly expanded the collaboration for the development
of inhaled formulations of insulin and hGH based on our AIR pulmonary drug
delivery technology and Lilly purchased $30 million of our newly issued
Convertible Preferred Stock pursuant to a stock purchase agreement. We agreed
to use the proceeds from the Convertible Preferred Stock to fund the
development of inhaled insulin and hGH during calendar year 2003 and into
calendar year 2004. We will not record any research and development revenue
for these programs related to the $30 million in proceeds from the Convertible
Preferred Stock. To the extent that the $30 million is not used for purposes
specified in the agreement, Lilly will be entitled to credits for additional
research services in the future. In addition, the royalty rate payable to us
based on

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revenues of potential inhaled insulin products has been increased.
Lilly has the right to return the Convertible Preferred Stock to us in exchange
for a reduction in this royalty rate. The Convertible Preferred Stock is
convertible into our common stock at the market price at the time of conversion
at our option or automatically upon the filing of a new drug application with
the FDA for a pulmonary insulin product. The collaboration cannot terminate
without cause until January 2005. We will register for resale all of our
shares of common stock issued upon conversion of the Convertible Preferred
Stock. At December 31, 2003, approximately $18.8 million of the proceeds from
the sale of $30.0 million of our convertible preferred stock had been spent.
In December 2003, Lilly made payments to us totaling approximately $7.0 million
in order to fund an increase in the scope of our Lilly development programs.
This funding has been recorded as deferred revenue in the consolidated balance
sheets and we expect to recognize the $7.0 million as revenue after the
proceeds from the sale of $30.0 million of our convertible preferred stock have
been spent.

In August 2002, we announced the regulatory approval and expected commercial
launch of Risperdal Consta in Germany and the United Kingdom. Under our
agreements with Janssen and based on the foregoing, manufacturing revenues
relating to our sales of Risperdal Consta to Janssen under a manufacturing and
supply agreement are to be paid by Janssen to us in minimum annual amounts for
up to ten years beginning in calendar 2003. The actual amount of such minimum
manufacturing revenues will be determined by a formula and is currently
estimated to aggregate approximately $150 million. The minimum revenue
obligation will be satisfied upon receipt by us of manufacturing revenues
relating to our sales of Risperdal Consta equaling such aggregate amount of
minimum manufacturing revenues. In December 2002, Janssen prepaid the first
two years of minimum manufacturing revenues to us, totaling $23.9 million and
these amounts were recorded as deferred revenue. As of December 31, 2003,
approximately $13.5 million of this prepayment was unearned and was recorded as
a current liability under the caption deferred revenue in consolidated balance
sheets.

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

Capital expenditures were approximately $12.7 million for the nine months ended
December 31, 2003, principally reflecting equipment purchases and building
expansion and improvements. We expect our capital expenditures to total
approximately $14.0 million during fiscal year 2004, primarily to complete the
expansion of our facilities in both Massachusetts and Ohio and for general
purposes. During the nine months ended December 31, 2003, the expansion of our
Wilmington, Ohio and Chelsea, Massachusetts facilities were substantially
completed and validation is ongoing at both facilities. Our capital
expenditures for equipment, facilities and building improvements have been
financed to date primarily with proceeds from bank loans and the sales
of debt and equity securities. Under the provisions of the existing loans,
General Electric Capital Corporation (GECC) and Johnson & Johnson Finance
Corporation have security interests in certain of our assets.

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In June 2003, we announced that we had exercised our right to automatically
convert all of our outstanding 6.52% Senior Notes into shares of our common
stock in July 2003. During June and July 2003, $150,707,000 principal amount
of 6.52% Senior Notes were exchanged for, and $23,882,000 principal amount of
6.52% Senior Notes were converted into, the Companys common stock. In
aggregate, the Company issued 24,043,329 shares of common stock in connection
with the exchanges and conversion and paid approximately $2,300,000 in cash to
satisfy the Two-Year Interest Make-Whole payment. None of the 6.52% Notes are
currently outstanding and no gain or loss was recorded on the conversion of the
6.52% Senior Notes, which was done in accordance with the underlying indenture.

In August and September 2003, we issued an aggregate of $100 million and $25
million, respectively, principal amount of 21⁄2% Convertible Subordinated
Notes due 2023. The 21⁄2% Subordinated Notes are convertible into shares of
our common stock at a conversion price of $13.85 per share, subject to
adjustment in certain events. The 21⁄2% Subordinated Notes bear interest at
21⁄2% per year, payable semiannually on March 1 and September 1, commencing
on March 1, 2004 and are subordinated to existing and future senior
indebtedness of Alkermes.

We may elect to automatically convert the notes anytime the closing price of
our common stock has exceeded 150% of the conversion price ($20.78), for at
least 20 trading days during any 30-day trading period. We may redeem some or
all of the notes on or after September 6, 2006. Holders of the notes have the
right to require us to repurchase some or all of their notes on September 1,
2008, 2013, and 2018 and upon certain events, including a change in control.

If an automatic conversion occurs on or prior to September 1, 2006, we will pay
additional interest in cash or, at our option, in common stock, equal to three
full years of interest on the converted notes or Three-Year Interest
Make-Whole, less any interest actually paid or provided for on the notes prior
to automatic conversion. If we elect to pay the additional interest in common
stock, the shares of common stock will be valued at 97.5% of the average
closing price of our common stock for the five trading days immediately
preceding the second trading day prior to the conversion date.

As a part of the sale of the 21⁄2% Subordinated Notes, we incurred
approximately $4.0 million of offering costs, which were recorded as Other assets in
the consolidated balance sheets and are being amortized to interest expense
over five years through September 1, 2008, the first date on which holders of
the 21⁄2% Subordinated Notes have the right to require us to repurchase the
21⁄2% Subordinated Notes.

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

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future proprietary
products, the sales, marketing and promotion expenses associated with marketing
products.

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

Recent Accounting Pronouncements

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

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. The adoption of FASB 150 did not have a material impact on our
financial position and results 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 and long-term investments consist of U.S. Government
obligations, high-grade corporate notes and commercial paper. All of our
investments in debt securities are classified as available-for-sale and are
recorded at fair value. Our investments, excluding our investment in Reliant,
are subject to interest rate risk, and could decline in value if interest rates
increase. Due to the conservative nature of our short-term investments and
investments policy we do not believe that we have a material exposure to
interest rate risk. Although our investments, excluding our investment in
Reliant, are subject to credit risk, our investment policies specify credit
quality standards for our investments and limit the amount of credit exposure
from any single issue, issuer or type of investment.

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

A 10% increase or decrease in market interest rates on our 21⁄2% Subordinated
Notes and 3.75% Subordinated Notes would result in no material impact on our
notes.

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Item 4.  Controls and Procedures

We have established disclosure controls and procedures to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.

(a)  Evaluation of disclosure controls and procedures.Our management, with the
participation of our chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our
chief executive officer and chief financial officer concluded that these
disclosure controls and procedures are effective and designed to ensure that
the information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the requisite time periods.

(b)  Changes in internal controls.There was no change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) identified in connection with the
evaluation of our internal control performed during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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PART II.  OTHER INFORMATION




Item 1.  Legal Proceedings

Beginning in October 2003, the Company and certain of its current and former
officers and directors have been named as defendants in purported securities
class action lawsuits filed in the United States District Court for the
District of Massachusetts. The cases are captioned Bennett v. Alkermes, Inc.,
et. al., 1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc., et. al.,
1:03-CV-12184 (D. Mass.); Barry Family LP v. Alkermes, Inc., et. al.,
1:03-CV-12243 (D. Mass.); Waltzer v. Alkermes, Inc., et. al., 1:03-CV-12277 (D.
Mass.); Folkerts v. Alkermes, Inc., et. al., 1:03-CV-12386 (D. Mass.); and
Slavas v. Alkermes, Inc., et. al., 1:03-CV-12471 (D. Mass.). These actions
were allegedly filed on behalf of purchasers of the Companys common stock
during the period April 22, 1999 to July 1, 2002 and generally allege, among
other things, that, during such period, the defendants made misstatements to
the investing public relating to FDA approval of the Companys Risperdal Consta
product. The complaints seek unspecified damages. Although the Company
believes these allegations lack merit and intends to vigorously defend against
them, the litigation process is inherently uncertain and there can be no
guarantee as to the ultimate outcome of these matters.




Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

|            |  |                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                               
|            |  |                                                                                                                               
|31.1        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer.
|            |  |                                                                                                                               
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer.
|            |  |                                                                                                                               
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by Chief Executive Officer.   
|            |  |                                                                                                                               
|32.2        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by Chief Financial Officer.   

(b)  During the quarter ended December 31, 2003, the Company furnished a Current
Report on Form 8-K, dated November 5, 2003 under Item 12, filed two Current
Reports on Form 8-K, dated October 29, 2003 both under item 5 and filed a
Current Report on Form 8-K dated December 8, 2003 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: February 12, 2004 |  |  | By:                         | /s/ Richard F. Pops                             
|                        |  |  |                             |                                                 
|                        |  |  |                             | Richard F. Pops                                 
|                        |  |  |                             | Chief Executive Officer and                     
|                        |  |  |                             | Director                                        
|                        |  |  |                             | (Principal Executive Officer)                   
|                        |  |  |                             |                                                 
|Date: February 12, 2004 |  |  | By:                         | /s/ James M. Frates                             
|                        |  |  |                             |                                                 
|                        |  |  |                             | James M. Frates                                 
|                        |  |  |                             | Vice President, Chief                           
|                        |  |  |                             | Financial Officer and Treasurer                 
|                        |  |  |                             | (Principal Financial and     Accounting Officer)

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