##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended June 30, 2005                                                
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the transition period
    from           to                                             

Commission file number 1-14131


ALKERMES, INC.


(Exact name of registrant as specified in its charter)


|                                                                        |  |                                         
|----------------------------------------------------------------------- |  | ----------------------------------------
|PENNSYLVANIA                                                            |  | 23-2472830                              
|(State or other jurisdiction of
    incorporation or organization)      |  | (I.R.S. Employer
    Identification No.)
|                                                                       
|88 Sidney Street, Cambridge, MA(Address of principal executive offices) |  | 02139-4136(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)


þ o


þ o




|                                        |  |                      |            | 
|--------------------------------------- |  | -------------------- | ---------- | 
|Class                                   |  | As of August 1, 2005 |           
|                                        |  |                      |           
|Common Stock, $.01 par value            |  |                      | 90,171,883 | 
|Non-Voting Common Stock, $.01 par value |  |                      | 382,632    | 









---










ALKERMES, INC. AND SUBSIDIARIES


INDEX


|                                               |  |                                                                                                             |    |          |    | 
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                                               |  |                                                                                                             |    | Page No. |   
|                                               |  |                                                                                                             |    |          |   
|PART I  FINANCIAL
    INFORMATION            
|Item 1.                                        |  | Condensed Consolidated Financial
    Statements:                                                            |    |          |    | 
|                                               |  | Condensed Consolidated Balance
    Sheets  June 30, 2005 and March 31, 2005                                |    |          | 3  | 
|                                               |  | Condensed Consolidated Statements of
    Operations  For the Three Months Ended June 30,
    2005 and 2004 |    |          | 4  | 
|                                               |  | Condensed Consolidated Statements of Cash
    Flows  For the Three Months Ended June 30, 2005
    and 2004 |    |          | 5  | 
|                                               |  | Notes to Condensed Consolidated Financial
    Statements                                                    |    |          | 6  | 
|Item 2.                                        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                   |    |          | 12 | 
|Item 3.                                        |  | Quantitative and Qualitative Disclosures
    About Market Risk                                              |    |          | 21 | 
|Item 4.                                        |  | Controls and Procedures                                                                                     |    |          | 22 | 
|PART II  OTHER
    INFORMATION               
|Item 1.                                        |  | Legal Proceedings                                                                                           |    |          | 23 | 
|Item 6.                                        |  | List of Exhibits                                                                                            |    |          | 23 | 
|Signatures                                     |  |                                                                                                             | 24 |         
|Exhibit Index                                  |  |                                                                                                             | 25 |         
|EX-10.1 License and Collaboration Agreement   
|EX-10.2 Supply Agreement                      
|EX-31.1 Section 302 Certification of CEO      
|EX-31.2 Section 302 Certification of CFO      
|EX-32.1 Section 906 Certification of CEO & CFO



2



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##### Table of Contents






PART 1. FINANCIAL INFORMATION







|        |                                             
|------- | --------------------------------------------
|Item 1. | Condensed Consolidated Financial Statements:

ALKERMES, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |   |         |          |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------- | -------- | --------- | - | ------- | -------- | ------- | 
|                                                                                                                                                                    |                                                                                                                                                                                                 | June 30,                             |         |          | March 31, |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | 2005                                 |         |          | 2005      |  
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | (Unaudited)                          |         |          |          
|                                                                                                                                                                    |                                                                                                                                                                                                 | (In thousands, except                |        
|                                                                                                                                                                    |                                                                                                                                                                                                 | share and                            |        
|                                                                                                                                                                    |                                                                                                                                                                                                 | per share amounts)                   |        
|ASSETS                                                                                                                                                             
|CURRENT ASSETS:                                                                                                                                                     |                                                                                                                                                                                                 |                                      |         |          |           |   |         |         
|                                                                                                                                                                    | Cash and cash equivalents                                                                                                                                                                       |                                      | $       | 22,811   |           |   | $       | 47,485   |        
|                                                                                                                                                                    | Investments  short-term                                                                                                                                                                        |                                      |         | 316,236  |           |   |         | 155,082  |        
|                                                                                                                                                                    | Receivables, net                                                                                                                                                                                |                                      |         | 27,819   |           |   |         | 18,815   |        
|                                                                                                                                                                    | Inventory, net                                                                                                                                                                                  |                                      |         | 5,239    |           |   |         | 3,766    |        
|                                                                                                                                                                    | Prepaid expenses and other current assets                                                                                                                                                       |                                      |         | 1,883    |           |   |         | 2,580    |        
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | Total current assets                 |         |          | 373,988   |   |         |          | 227,728 | 
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                      |                                                                                                                                                                                                 |                                      |         |          |           |   |         |         
|                                                                                                                                                                    | Land                                                                                                                                                                                            |                                      |         | 301      |           |   |         | 269      |        
|                                                                                                                                                                    | Building                                                                                                                                                                                        |                                      |         | 19,251   |           |   |         | 19,150   |        
|                                                                                                                                                                    | Furniture, fixtures and equipment                                                                                                                                                               |                                      |         | 68,717   |           |   |         | 66,805   |        
|                                                                                                                                                                    | Equipment under capital lease                                                                                                                                                                   |                                      |         | 464      |           |   |         | 464      |        
|                                                                                                                                                                    | Leasehold improvements                                                                                                                                                                          |                                      |         | 45,998   |           |   |         | 45,991   |        
|                                                                                                                                                                    | Construction in progress                                                                                                                                                                        |                                      |         | 14,450   |           |   |         | 11,307   |        
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      | 149,181 |          |           |   | 143,986 |         
|                                                                                                                                                                    | Less accumulated depreciation and amortization                                                                                                                                                  |                                      |         | (51,271  | )         |   |         | (48,798  | )      
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | Property, plant and equipment  net  |         |          | 97,910    |   |         |          | 95,188  | 
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|RESTRICTED INVESTMENTS  Long-term                                                                                                                                  |                                                                                                                                                                                                 |                                      | 4,498   |          |           |   | 4,903   |         
|OTHER ASSETS                                                                                                                                                        |                                                                                                                                                                                                 |                                      | 11,053  |          |           |   | 11,055  |         
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|TOTAL ASSETS                                                                                                                                                        |                                                                                                                                                                                                 | $                                    | 487,449 |          |           | $ | 338,874 |         
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                   
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY                                                                                                                     
|CURRENT LIABILITIES:                                                                                                                                                |                                                                                                                                                                                                 |                                      |         |          |           |   |         |         
|                                                                                                                                                                    | Accounts payable and accrued expenses                                                                                                                                                           |                                      | $       | 18,030   |           |   | $       | 18,803   |        
|                                                                                                                                                                    | Accrued interest                                                                                                                                                                                |                                      |         | 4,027    |           |   |         | 2,248    |        
|                                                                                                                                                                    | Accrued restructuring costs                                                                                                                                                                     |                                      |         | 1,064    |           |   |         | 1,228    |        
|                                                                                                                                                                    | Derivative liability related to convertible subordinated notes                                                                                                                                  |                                      |         | 531      |           |   |         | 265      |        
|                                                                                                                                                                    | Unearned milestone revenue  current portion                                                                                                                                                    |                                      |         | 74,000   |           |   |         |         |        
|                                                                                                                                                                    | Deferred revenue                                                                                                                                                                                |                                      |         | 100      |           |   |         |         |        
|                                                                                                                                                                    | Long-term debt  current portion                                                                                                                                                                |                                      |         | 1,146    |           |   |         | 1,124    |        
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | Total current liabilities            |         |          | 98,898    |   |         |          | 23,668  | 
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES                                                                                                                      |                                                                                                                                                                                                 |                                      | 151,418 |          |           |   | 150,730 |         
|CONVERTIBLE SUBORDINATED NOTES                                                                                                                                      |                                                                                                                                                                                                 |                                      | 123,216 |          |           |   | 123,022 |         
|LONG-TERM DEBT                                                                                                                                                      |                                                                                                                                                                                                 |                                      | 2,438   |          |           |   | 2,733   |         
|UNEARNED MILESTONE REVENUE  LONG-TERM PORTION                                                                                                                      |                                                                                                                                                                                                 |                                      | 86,000  |          |           |   |        |         
|OTHER LONG-TERM LIABILITIES                                                                                                                                         |                                                                                                                                                                                                 |                                      | 4,559   |          |           |   | 4,609   |         
|CONVERTIBLE PREFERRED STOCK, par value, $.01 per share;
    authorized and issued, 3,000 shares at June 30, 2005
    and March 31, 2005 (at liquidation preference) |                                                                                                                                                                                                 |                                      | 30,000  |          |           |   | 30,000  |         
|SHAREHOLDERS (DEFICIT) EQUITY:                                                                                                                                     |                                                                                                                                                                                                 |                                      |         |          |           |   |         |         
|                                                                                                                                                                    | Capital stock, par value, $.01 per share; authorized,
    4,550,000 shares (includes 2,997,000 shares of
    preferred stock); issued, none                                                     |                                      |         |          |           |   |         |          |        
|                                                                                                                                                                    | Common stock, par value, $.01 per share; authorized,
    160,000,000 shares; issued and outstanding, 90,057,865 and
    89,999,526 shares at June 30, 2005 and March 31,
    2005, respectively |                                      |         | 901      |           |   |         | 900      |        
|                                                                                                                                                                    | Nonvoting common stock, par value, $.01 per share;
    authorized 450,000 shares; issued and outstanding,
    382,632 shares at June 30, 2005 and March 31, 2005                                |                                      |         | 4        |           |   |         | 4        |        
|                                                                                                                                                                    | Additional paid-in capital                                                                                                                                                                      |                                      |         | 631,192  |           |   |         | 630,492  |        
|                                                                                                                                                                    | Deferred compensation                                                                                                                                                                           |                                      |         | (292     | )         |   |         |         |        
|                                                                                                                                                                    | Accumulated other comprehensive loss                                                                                                                                                            |                                      |         | (85      | )         |   |         | (221     | )      
|                                                                                                                                                                    | Accumulated deficit                                                                                                                                                                             |                                      |         | (640,800 | )         |   |         | (627,063 | )      
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|                                                                                                                                                                    |                                                                                                                                                                                                 | Total shareholders (deficit) equity |         |          | (9,080    | ) |         |          | 4,112   | 
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY                                                                                                                |                                                                                                                                                                                                 | $                                    | 487,449 |          |           | $ | 338,874 |         
|                                                                                                                                                                    |                                                                                                                                                                                                 |                                      |         |          |           |  



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ALKERMES, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                            |                                                                          |                              |         |        |               |   |         |        |        | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ---------------------------- | ------- | ------ | ------------- | - | ------- | ------ | ------ | 
|                                                                            |                                                                          | Three Months                 |         |        | Three Months  |  
|                                                                            |                                                                          | Ended                        |         |        | Ended         |  
|                                                                            |                                                                          | June 30, 2005                |         |        | June 30, 2004 |  
|                                                                            |                                                                          |                              |         |        |               |  
|                                                                            |                                                                          | (Unaudited)                  |        
|                                                                            |                                                                          | (In thousands, except        |        
|                                                                            |                                                                          | per share amounts)           |        
|REVENUES:                                                                   |                                                                          |                              |         |        |               |   |         |       
|                                                                            | Manufacturing and royalty revenues                                       |                              | $       | 17,587 |               |   | $       | 7,965  |       
|                                                                            | Research and development revenue under collaborative arrangements        |                              |         | 7,251  |               |   |         | 3,509  |       
|                                                                            |                                                                          |                              |         |        |               |  
|                                                                            |                                                                          | Total revenues               |         |        | 24,838        |   |         |        | 11,474 | 
|                                                                            |                                                                          |                              |         |        |               |  
|EXPENSES:                                                                   |                                                                          |                              |         |        |               |   |         |       
|                                                                            | Cost of goods manufactured                                               |                              |         | 4,517  |               |   |         | 5,241  |       
|                                                                            | Research and development                                                 |                              |         | 21,622 |               |   |         | 24,132 |       
|                                                                            | Selling, general and administrative                                      |                              |         | 8,952  |               |   |         | 7,039  |       
|                                                                            | Restructuring                                                            |                              |         |       |               |   |         | 11,896 |       
|                                                                            |                                                                          |                              |         |        |               |  
|                                                                            |                                                                          | Total expenses               |         |        | 35,091        |   |         |        | 48,308 | 
|                                                                            |                                                                          |                              |         |        |               |  
|OPERATING LOSS                                                              |                                                                          |                              | (10,253 | )      |               |   | (36,834 | )     
|                                                                            |                                                                          |                              |         |        |               |  
|OTHER INCOME (EXPENSE):                                                     |                                                                          |                              |         |        |               |   |         |       
|                                                                            | Interest income                                                          |                              |         | 1,631  |               |   |         | 630    |       
|                                                                            | Derivative (losses) income related to convertible subordinated
    notes |                              |         | (266   | )             |   |         | 1,518  |       
|                                                                            | Interest expense                                                         |                              |         | (5,169 | )             |   |         | (1,188 | )     
|                                                                            | Other income (expense), net                                              |                              |         | 320    |               |   |         | (274   | )     
|                                                                            |                                                                          |                              |         |        |               |  
|                                                                            |                                                                          | Total other income (expense) |         |        | (3,484        | ) |         |        | 686    | 
|                                                                            |                                                                          |                              |         |        |               |  
|NET LOSS                                                                    |                                                                          | $                            | (13,737 | )      |               | $ | (36,148 | )     
|                                                                            |                                                                          |                              |         |        |               |  
|NET LOSS PER COMMON SHARE, BASIC AND DILUTED                                |                                                                          | $                            | (0.15   | )      |               | $ | (0.40   | )     
|                                                                            |                                                                          |                              |         |        |               |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND
    DILUTED |                                                                          |                              | 90,410  |        |               |   | 89,409  |       
|                                                                            |                                                                          |                              |         |        |               |  



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ALKERMES, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |         |          |         |        |        |         |  
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------- | --------------------------------------------------- | ------------- | ------- | -------- | ------- | ------ | ------ | ------- | -
|                                                |                                                                                               | Three Months                                                             |                                                         |                                                     | Three Months  |        
|                                                |                                                                                               | Ended                                                                    |                                                         |                                                     | Ended         |        
|                                                |                                                                                               | June 30, 2005                                                            |                                                         |                                                     | June 30, 2004 |        
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|                                                |                                                                                               | (Unaudited)                                                              |                                                        
|                                                |                                                                                               | (In thousands)                                                           |                                                        
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                                               |                                                                          |                                                         |                                                     |               |         |          |        
|                                                | Net loss                                                                                      |                                                                          | $                                                       | (13,737                                             | )             |         | $        | (36,148 | )     
|                                                | Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                                                          |                                                         |                                                     |               |         |          |         |       
|                                                |                                                                                               | Depreciation and amortization                                            |                                                         |                                                     | 2,578         |         |          |         | 2,940  |       
|                                                |                                                                                               | Restructuring charges                                                    |                                                         |                                                     |              |         |          |         | 11,897 |       
|                                                |                                                                                               | Other noncash charges                                                    |                                                         |                                                     | 1,361         |         |          |         | 581    |       
|                                                |                                                                                               | Derivative losses (income) related to convertible subordinated
    notes |                                                         |                                                     | 266           |         |          |         | (1,518 | )     
|                                                |                                                                                               | Loss (gain) on warrants held                                             |                                                         |                                                     | (308          | )       |          |         | 274    |       
|                                                |                                                                                               | Changes in assets and liabilities:                                       |                                                         |                                                     |               |         |          |         |        |       
|                                                |                                                                                               |                                                                          | Receivables, net                                        |                                                     |               | (9,004  | )        |         |        | 4,555  |        
|                                                |                                                                                               |                                                                          | Inventory, prepaid expenses and other current assets    |                                                     |               | (776    | )        |         |        | 322    |        
|                                                |                                                                                               |                                                                          | Accounts payable, accrued expenses and accrued interest |                                                     |               | 1,006   |          |         |        | 2,962  |        
|                                                |                                                                                               |                                                                          | Accrued restructuring costs                             |                                                     |               | (322    | )        |         |        | (446   | )      
|                                                |                                                                                               |                                                                          | Unearned milestone revenue                              |                                                     |               | 160,000 |          |         |        |       |        
|                                                |                                                                                               |                                                                          | Deferred revenue                                        |                                                     |               | 100     |          |         |        | (4,324 | )      
|                                                |                                                                                               |                                                                          | Other long-term liabilities                             |                                                     |               | 108     |          |         |        |       |        
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|                                                |                                                                                               |                                                                          |                                                         | Net cash provided by (used in) operating activities |               |         | 141,272  |         |        |        | (18,905 | )
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                                               |                                                                          |                                                         |                                                     |               |         |          |        
|                                                | Additions to property, plant and equipment                                                    |                                                                          |                                                         | (5,301                                              | )             |         |          | (4,129  | )     
|                                                | Proceeds from the sale of equipment                                                           |                                                                          |                                                         | 1                                                   |               |         |          |        |       
|                                                | Purchases of available-for-sale investments                                                   |                                                                          |                                                         | (326,173                                            | )             |         |          | (1,298  | )     
|                                                | Sales of available-for-sale investments                                                       |                                                                          |                                                         | 165,431                                             |               |         |          | 18,612  |       
|                                                | Decrease (increase) in other assets                                                           |                                                                          |                                                         | 18                                                  |               |         |          | (22     | )     
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|                                                |                                                                                               |                                                                          |                                                         | Net cash (used in) provided by investing activities |               |         | (166,024 | )       |        |        | 13,163  |  
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                                               |                                                                          |                                                         |                                                     |               |         |          |        
|                                                | Proceeds from issuance of common stock                                                        |                                                                          |                                                         | 351                                                 |               |         |          | 1,150   |       
|                                                | Payment of debt                                                                               |                                                                          |                                                         | (273                                                | )             |         |          | (20     | )     
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|                                                |                                                                                               |                                                                          |                                                         | Net cash provided by financing activities           |               |         | 78       |         |        |        | 1,130   |  
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|NET DECREASE IN CASH AND CASH EQUIVALENTS       |                                                                                               |                                                                          | (24,674                                                 | )                                                   |               |         | (4,612   | )      
|CASH AND CASH EQUIVALENTS  Beginning of period |                                                                                               |                                                                          | 47,485                                                  |                                                     |               |         | 9,899    |        
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|CASH AND CASH EQUIVALENTS  End of period       |                                                                                               | $                                                                        | 22,811                                                  |                                                     |               | $       | 5,287    |        
|                                                |                                                                                               |                                                                          |                                                         |                                                     |               |        
|SUPPLEMENTARY INFORMATION:                      |                                                                                               |                                                                          |                                                         |                                                     |               |         |          |        
|                                                | Cash paid for interest                                                                        |                                                                          | $                                                       | 2,057                                               |               |         | $        |        |       



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ALKERMES, INC. AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




|   |                                           
|-- | ------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                      
| | ---------------------
| | Basis of Presentation







Principles of Consolidation


Use of Estimates




| |                             
| | ----------------------------
| | New Accounting Pronouncement

Share-Based Payment Accounting for
Stock-Based Compensation




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ALKERMES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                                           
|-- | --------------------------------------------------------------------------
|2. | LICENSE AND COLLABORATION AGREEMENT AND SUPPLY AGREEMENT WITH
    CEPHALON











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ALKERMES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                   
|-- | ------------------
|3. | COMPREHENSIVE LOSS



|                                                   |  |                             |         |   |             |   |         |  
|-------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ------- | -
|                                                   |  | Three Months Ended June 30, |        
|                                                   |  |                             |        
|                                                   |  | 2005                        |         |   | 2004        |  
|                                                   |  |                             |         |   |             |  
|                                                   |  | (Unaudited)                 |         |   | (Unaudited) |  
|(In thousands)                                     |  |                             |        
|Net loss                                           |  | $                           | (13,737 | ) |             | $ | (36,148 | )
|Unrealized gains (losses) on marketable securities |  |                             | 136     |   |             |   | (453    | )
|                                                   |  |                             |         |   |             |  
|Comprehensive loss                                 |  | $                           | (13,601 | ) |             | $ | (36,601 | )
|                                                   |  |                             |         |   |             |  



|   |                          
|-- | -------------------------
|4. | NET LOSS PER COMMON SHARE





|                                                                          |  |               |            |  |               |  |            | 
|------------------------------------------------------------------------- |  | ------------- | ---------- |  | ------------- |  | ---------- | 
|                                                                          |  | June 30, 2005 |            |  | June 30, 2004 | 
|                                                                          |  |               |            |  |               | 
|                                                                          |  | (Unaudited)   |            |  | (Unaudited)   | 
|Stock options and awards                                                  |  |               | 17,780,394 |  |               |  | 15,145,346 | 
|Shares issuable on conversion of 2.5% Convertible
    Subordinated Notes  |  |               | 9,025,275  |  |               |  | 9,025,275  | 
|Shares issuable on conversion of 3.75% Convertible
    Subordinated Notes |  |               | 9,978      |  |               |  | 9,978      | 
|Shares issuable on conversion of Convertible Preferred Stock              |  |               | 2,285,714  |  |               |  | 2,268,774  | 
|                                                                          |  |               |            |  |               | 
|Total                                                                     |  |               | 29,101,361 |  |               |  | 26,449,373 | 
|                                                                          |  |               |            |  |               | 



|   |                         
|-- | ------------------------
|5. | STOCK-BASED COMPENSATION



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ALKERMES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                                                                                                                           |             |                    |         |       |             |   |         |       |  
|-------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------ | ------- | ----- | ----------- | - | ------- | ----- | -
|                                                                                                                           |             | Three Months Ended |        
|                                                                                                                           |             | June 30,           |        
|                                                                                                                           |             |                    |        
|                                                                                                                           |             | 2005               |         |       | 2004        |  
|                                                                                                                           |             |                    |         |       |             |  
|(In thousands, except per share amounts)                                                                                   |             | (Unaudited)        |         |       | (Unaudited) |  
|Net loss  as reported                                                                                                     |             | $                  | (13,737 | )     |             | $ | (36,148 | )    
|Add  stock-based compensation expense as reported in
    the consolidated statements of operations and comprehensive loss |             |                    | 58      |       |             |   | 78      |      
|Deduct  total stock-based compensation expense
    determined under fair-value method for all options and awards          |             |                    | (5,813  | )     |             |   | (4,545  | )    
|                                                                                                                           |             |                    |         |       |             |  
|Net loss  pro-forma                                                                                                       |             | $                  | (19,492 | )     |             | $ | (40,615 | )    
|                                                                                                                           |             |                    |         |       |             |  
|Basic and diluted loss per common share:                                                                                   |             |                    |         |       |             |   |         |      
|                                                                                                                           | As reported |                    | $       | (0.15 | )           |   | $       | (0.40 | )
|                                                                                                                           | Pro-forma   |                    |         | (0.22 | )           |   |         | (0.45 | )



|                                                                                   |  |                    |       |  |      |   |       | 
|---------------------------------------------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                                                                                   |  | Three Months Ended |      
|                                                                                   |  | June 30,           |      
|                                                                                   |  |                    |      
|                                                                                   |  | 2005               |       |  | 2004 |  
|                                                                                   |  |                    |       |  |      |  
|Expected life (years)                                                              |  |                    | 4     |  |      |   | 4     | 
|Risk-free interest rate                                                            |  |                    | 3.72% |  |      |   | 3.85% | 
|Expected stock price volatility                                                    |  |                    | 54%   |  |      |   | 72%   | 
|The weighted average fair value per share of options granted
    during the period |  | $                  | 5.33  |  |      | $ | 8.56  | 

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ALKERMES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |          
|-- | ---------
|6. | INVENTORY



|                |  |             |       |  |           |   |       | 
|--------------- |  | ----------- | ----- |  | --------- | - | ----- | 
|                |  | June 30,    |       |  | March 31, |  
|                |  | 2005        |       |  | 2005      |  
|                |  |             |       |  |           |  
|(In thousands)  |  | (Unaudited) |       |  |          
|Raw materials   |  | $           | 1,445 |  |           | $ | 1,667 | 
|Work-in-process |  |             | 797   |  |           |   | 992   | 
|Finished goods  |  |             | 2,997 |  |           |   | 1,107 | 
|                |  |             |       |  |           |  
|Total           |  | $           | 5,239 |  |           | $ | 3,766 | 
|                |  |             |       |  |           |  



|   |              
|-- | -------------
|7. | RESTRUCTURING







|                   |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |       |       | 
|------------------ | ------------------------- | --------- | ----- | ----- | ------- |  | -------- | ----------- | -------- | ---- | ---- | ---- | ---- | - | ----- | ----- | ----- | 
|                   |                           | Balance   |       |       |         |  |          |             | Balance  |     
|                   |                           | March 31, |       |       |         |  |          |             | June 30, |     
|Type of Liability  |                           | 2005      |       |       | Charges |  | Payments |             |          | 2005 |     
|                   |                           |           |       |       |         |  |          |             |          |      |     
|(In thousands)     |                           |           |       |       |         |  |          | (Unaudited) |         
|2004 Restructuring |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |      
|                   | Employee separation costs |           | $     | 9     |         |  | $        |            |          |      | $    |     |      |   | $     | 9     |      
|                   | Facility closure costs    |           |       | 2,965 |         |  |          |            |          |      |      | (155 | )    |   |       | 2,810 |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           |           | 2,974 |       |         |  |         |             |          |      | (155 | )    |      |   | 2,819 |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|2002 Restructuring |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |      
|                   | Employee separation costs |           |       |      |         |  |          |            |          |      |      |     |      |   |       |      |      
|                   | Facility closure costs    |           |       | 389   |         |  |          |            |          |      |      | (167 | )    |   |       | 222   |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           |           | 389   |       |         |  |         |             |          |      | (167 | )    |      |   | 222   |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           | Total     |       | $     | 3,363   |  |          | $           |         |      |      | $    | (322 | ) |       | $     | 3,041 | 
|                   |                           |           |       |       |         |  |          |             |          |      |      |     

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ALKERMES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |           
|-- | ----------
|8. | LITIGATION





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



Forward-Looking Statements






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License and Collaboration Agreement and Supply Agreement with
Cephalon








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Product Developments




| |            
| | -----------
| | AIR Insulin





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|                  |  |                           |  |              |  |               
|----------------- |  | ------------------------- |  | ------------ |  | --------------
|                  |  |                           |  |              |  | Collaborative 
|Product Candidate |  | Indication                |  | Stage(1)     |  | Partner       
|                  |  |                           |  |              |  |               
|Risperdal Consta® |  | Schizophrenia             |  | Marketed     |  | Janssen       
|Vivitrex®         |  | Alcohol Dependence        |  | NDA accepted |  | Cephalon      
|Vivitrex®         |  | Opioid Dependence         |  | Phase II     |  | Cephalon      
|AIR® Insulin      |  | Diabetes                  |  | Phase III    |  | Lilly         
|Exenatide LAR     |  | Diabetes                  |  | Phase II     |  | Amylin        
|AIR® hGH          |  | Growth Hormone Deficiency |  | Phase I      |  | Lilly         
|AIR® Epinephrine  |  | Anaphylaxis               |  | Phase I      |  | Not applicable
|Others            |  | Various                   |  | Preclinical  |  | Undisclosed   






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 preliminary evidence of efficacy.
    Phase III clinical trials indicates that the
    trial is being conducted in patients and is seeking statistical
    evidence of 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.

Critical Accounting Policies






| |   |                                                 
| | - | ------------------------------------------------
| |  | Revenue recognition;                            
|
| |  | Derivatives embedded in certain debt securities;
|
| |  | Warrant valuation;                              
|
| |  | Cost of goods manufactured;                     
|
| |  | Research and development expenses;              
|
| |  | Restructuring charges; and                      
|
| |  | Accrued expenses.                               

Revenue Recognition Policies


Revenues Related to the License and Collaboration
Agreement and Supply Agreement (together, the
Agreements) with Cephalon




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Manufacturing and Royalty Revenues


Research and Development Revenues


17



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Results of Operations


















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|                   |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |       |       | 
|------------------ | ------------------------- | --------- | ----- | ----- | ------- |  | -------- | ----------- | -------- | ---- | ---- | ---- | ---- | - | ----- | ----- | ----- | 
|                   |                           | Balance   |       |       |         |  |          |             | Balance  |     
|                   |                           | March 31, |       |       |         |  |          |             | June 30, |     
|Type of Liability  |                           | 2005      |       |       | Charges |  | Payments |             |          | 2005 |     
|                   |                           |           |       |       |         |  |          |             |          |      |     
|(In thousands)     |                           |           |       |       |         |  |          | (Unaudited) |         
|2004 Restructuring |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |      
|                   | Employee separation costs |           | $     | 9     |         |  | $        |            |          |      | $    |     |      |   | $     | 9     |      
|                   | Facility closure costs    |           |       | 2,965 |         |  |          |            |          |      |      | (155 | )    |   |       | 2,810 |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           |           | 2,974 |       |         |  |         |             |          |      | (155 | )    |      |   | 2,819 |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|2002 Restructuring |                           |           |       |       |         |  |          |             |          |      |      |      |      |   |       |      
|                   | Employee separation costs |           |       |      |         |  |          |            |          |      |      |     |      |   |       |      |      
|                   | Facility closure costs    |           |       | 389   |         |  |          |            |          |      |      | (167 | )    |   |       | 222   |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           |           | 389   |       |         |  |         |             |          |      | (167 | )    |      |   | 222   |      
|                   |                           |           |       |       |         |  |          |             |          |      |      |     
|                   |                           | Total     |       | $     | 3,363   |  |          | $           |         |      |      | $    | (322 | ) |       | $     | 3,041 | 
|                   |                           |           |       |       |         |  |          |             |          |      |      |     



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Liquidity and Capital Resources












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Contractual Obligations




Off-Balance Sheet Arrangements









|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures about Market
    Risk



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Foreign Currency Exchange Rate Risk











|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



|    |                                                 
|--- | ------------------------------------------------
|(a) | Evaluation of Disclosure Controls and Procedures



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|    |                                                    
|--- | ---------------------------------------------------
|(b) | Change in Internal Control over Financial Reporting






PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings










|        |                                 
|------- | --------------------------------
|Item 6. | Exhibits and Reports on Form 8-K



Exhibit Index


|        |    |     |  |                                                                                                                                                     
|------- | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    
|No.     |    |    
|        |    |    
|        | 10 | .1* |  | License and Collaboration Agreement between Alkermes, Inc. and
    Cephalon, Inc. dated as of June 23, 2005 (filed herewith).                       
|       
|        | 10 | .2* |  | Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated
    as of June 23, 2005 (filed herewith).                                          
|       
|        | 31 | .1  |  | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).                                                                                        
|       
|        | 31 | .2  |  | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).                                                                                        
|       
|        | 32 | .1  |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (furnished herewith).






|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential treatment requested for portions of this document
    and is pending clearance with the Securities and Exchange
    Commission (the Commission). Such provisions have
    been filed separately with the Commission.

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SIGNATURES






| |               
| | --------------
| | ALKERMES, INC.
| | (Registrant)  



| |     |                    
| | --- | -------------------
| | By: | /s/ Richard F. Pops

| |                                     
| | ------------------------------------
| |                                     
| | Richard F. Pops                     
| | Chief Executive Officer and Director
| | (Principal Executive Officer)       





| |     |                    
| | --- | -------------------
| | By: | /s/ James M. Frates

| |                                             
| | --------------------------------------------
| |                                             
| | James M. Frates                             
| | Vice President, Chief Financial Officer     
| | and Treasurer                               
| | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX


|        |    |     |  |                                                                                                                                                     
|------- | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    
|No.     |    |    
|        |    |    
|        | 10 | .1* |  | License and Collaboration Agreement between Alkermes, Inc. and
    Cephalon, Inc. dated as of June 23, 2005 (filed herewith).                       
|       
|        | 10 | .2* |  | Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated
    as of June 23, 2005 (filed herewith).                                          
|       
|        | 31 | .1  |  | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).                                                                                        
|       
|        | 31 | .2  |  | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).                                                                                        
|       
|        | 32 | .1  |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (furnished herewith).






|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential treatment requested for portions of this document
    and is pending clearance with the Securities and Exchange
    Commission (the Commission). Such provisions have
    been filed separately with the Commission.

25