UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the Transition period from______ to ______
Commission file number 1-14131

ALKERMES, INC.

(617) 494-0171
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Series A Junior Participating Preferred Stock Purchase Rights
3¾% Convertible Subordinated Notes due 2007
2½% Convertible Subordinated Notes due 2023

(Title of Class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

     As of September 30, 2003 (the last business day of the second fiscal quarter) the aggregate market value of the 87,006,366 outstanding shares of voting and non-voting common equity held by non-affiliates of the registrant was $1,193,727,342. Such aggregate value was computed by reference to the closing price of the common stock reported on the NASDAQ National Market on September 30, 2003.

     As of June 3, 2004, 89,536,941 shares of the Registrant’s common stock were issued and outstanding, and 382,632 shares of the Registrant’s non-voting common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Definitive Proxy Statement to be filed within 120 days after March 31, 2004 for the Registrant’s Annual Shareholders’ Meeting are incorporated by reference into Part III of this Report on Form 10-K.

Table of Contents

PART I

Item 1. Business

     The following Business section contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

General

     Alkermes, Inc. (together with its subsidiaries, referred to as “we”, “us”, “our” or the “Registrant”), a Pennsylvania corporation organized in 1987, is a pharmaceutical company that develops products based on sophisticated drug delivery technologies to enhance therapeutic outcomes in major diseases. Our lead commercial product, Risperdal^® Consta™ [(risperidone) long-acting injection], is the first and only long-acting atypical antipsychotic medication approved for use in schizophrenia, and is marketed worldwide by Janssen-Cilag (“Janssen”), a division of Johnson & Johnson. Our lead proprietary product candidate, Vivitrex^® [(naltrexone) long-acting injection], is a once-a-month injection for the treatment of alcohol dependence. We have a pipeline of extended-release injectable and pulmonary drug products based on our proprietary technologies and expertise, ProLease and Medisorb for extended-release of injectable drug products, and AIR^® technology for inhaled drug products. Our product development strategy is twofold: we partner our proprietary technology systems and drug delivery expertise with leading pharmaceutical and biotechnology companies and we also develop novel, proprietary drug candidates for our own account. Our headquarters are in Cambridge, Massachusetts, and we operate research and manufacturing facilities in Massachusetts and Ohio.

Our Strategy

     We are leveraging our unique drug delivery capabilities and technologies as the means to develop our commercial products that enhance therapeutic outcomes — both with partners and on our own. The key elements to our strategy are to:

     Collaborate with pharmaceutical and biotechnology companies to develop and finance product candidates. We have entered into multiple collaborations with pharmaceutical and biotechnology companies to develop product candidates incorporating our technologies, to provide us with funding for product development independent of capital markets and to share development risk.

     Apply drug delivery systems to both approved drugs and drugs in development. We are applying our drug delivery technologies to novel applications and formulations of pharmaceutical products that have already been approved by the U.S. Food and Drug Administration (the “FDA”) or other regulatory authorities. In such cases, we and our partners may develop a novel dosage form or application with the knowledge of a drug’s safety and efficacy profile and a body of clinical experience from which to draw information for the design of clinical trials and for regulatory submissions. We also apply our technologies to pharmaceuticals in development that could benefit from one of our delivery systems.

     Establish independent product development capabilities and infrastructure. Based upon the knowledge we have learned and the best practices we have adopted from our collaborators, our experienced scientists have built an in-house product development organization that enables us to develop product candidates for our collaborators and for ourselves. Our product development experience and infrastructure give us flexibility in structuring development programs and the ability to conduct both feasibility studies and clinical development programs for our collaborators and for ourselves.

2

     Expand our pipeline with additional product candidates for our own account. We develop product candidates for our own account by applying our drug delivery technologies to certain off-patent pharmaceuticals. For example, we have completed a Phase III clinical trial for Vivitrex, an extended release formulation of naltrexone, for the treatment of alcohol dependence and our intention is to file a New Drug Application (“NDA”) with the FDA in the first half of calendar year 2005. We are also developing inhaled epinephrine based on our AIR pulmonary drug delivery system for the treatment of anaphylaxis. In addition, we may in-license or acquire certain compounds to develop on our own.

     Establish our specialized sales and marketing capabilities. We plan to establish expertise in sales and marketing for our lead proprietary product candidate. We are in discussions with potential marketing partners to assist us in the commercialization of Vivitrex, while we establish our own focused capabilities. We may then seek to augment our salesforce with additional products by partnerships and acquisitions in order to expand our commercial capabilities.

Products and Product Candidates in Development

     The following table summarizes the primary indications, technology, development stage and collaborative partner, if any, for our products and product candidates. This table is qualified in its entirety by reference to the more detailed descriptions appearing elsewhere in this Form 10-K. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials and there can be no assurance that our, or our collaborators’, clinical trials will demonstrate the safety and efficacy of any product candidates necessary to obtain regulatory approval.

3

Products and Development Programs

     Risperdal Consta. We have developed a Medisorb long-acting formulation, known as Risperdal Consta, of Janssen’s anti-psychotic drug Risperdal. Risperdal Consta is marketed in more than 30 countries around the world including the U.S., U.K., Spain and Germany. In addition, the product has been approved in more than 50 countries as Janssen continues to launch the product around the world. Risperdal is the most commonly prescribed drug for the treatment of schizophrenia and had sales of over $2.5 billion worldwide in 2003. Risperdal Consta is approved for the treatment of schizophrenia and is administered via injection every two weeks. Risperdal tablets are currently administered daily for relief of symptoms associated with schizophrenia and bipolar disorder. Schizophrenia is a brain disorder the symptoms of which include disorganized thinking, delusions and hallucinations. We are the exclusive manufacturer of Risperdal Consta for Janssen.

     We earn both manufacturing fees and royalties from Janssen. Under our manufacturing and supply agreement with Janssen, we record manufacturing revenues upon shipment of product by us to Janssen based on a percentage of Janssen’s net selling price. These percentages are based on the volume of units shipped to Janssen in any given calendar year, with a minimum manufacturing fee of 7.5%. In fiscal 2004, our manufacturing revenues were based on an average of 9.8% of Janssen’s net sales price for Risperdal Consta compared to 12.3% in fiscal 2003. Under our license agreements with Janssen, we also record royalty revenues equal to 2.5% of Janssen’s net sales of Risperdal Consta in the quarter when the product is sold by Janssen.

     Under our manufacture and supply agreement with Janssen, Janssen is required to pay us certain minimum amounts of manufacturing revenues relating to our sales of Risperdal Consta to Janssen. The actual amount of such minimum manufacturing revenues will be determined by a formula and is currently estimated to aggregate approximately $150.0 million. As of March 31, 2004, we had recognized approximately $38.0 million of cumulative manufacturing revenues against the estimated $150.0 million minimum. Janssen’s minimum revenue obligation will be satisfied when Alkermes reaches approximately $150.0 million in cumulative manufacturing revenues earned from sales of Risperdal Consta to Janssen. While the manufacture and supply agreement with Janssen specifies annual minimum revenues expected to be paid to Alkermes over a ten year period beginning in calendar 2003, we expect our annual manufacturing revenues to exceed those annual minimums. In December 2002, Janssen prepaid the first two years of minimum manufacturing revenues to us, totaling $23.9 million and these amounts were recorded as deferred revenue in our consolidated balance sheets. As of March 31, 2004, approximately $10.1 million of this prepayment was unearned and was recorded as a current liability under the caption deferred revenue in our consolidated balance sheets.

     The anti-psychotic market is highly competitive and the revenues received from the sale of Risperdal Consta may not be significant and will depend on numerous factors outside of our control. Additionally, we cannot provide any assurance that we will be able to manufacture Risperdal Consta on a commercial scale or economically. In addition we may be unable to meet Janssen’s product demands in a timely manner. Any failure to obtain pricing approvals, third-party payor reimbursement, additional successful product launches, market share or significant revenues or manufacture at commercial scale or economically would have a material adverse effect on our business and financial position. See “Risk Factors – Our manufacturing experience is limited.”

     Vivitrex. We are developing a Medisorb formulation of naltrexone, an FDA-approved drug for the treatment of alcohol and opioid dependence, which is currently available in daily oral dosage form. It is estimated that there are currently 2.3 million people in the U.S. who are receiving treatment for alcoholism. We believe there is a significant need for a product that will offer a new treatment option and help improve compliance in this patient population. Vivitrex, which is our most advanced proprietary

4

product, is based on our Medisorb injectable extended-release technology and is designed to provide once-a-month dosing to enhance patient adherence and improve therapeutic outcomes by removing the need for daily dosing. In December 2003 we completed a 624 patient, double blind placebo controlled Phase III trial for Vivitrex in which patients received psycho-social therapy and once monthly injections of Vivitrex or placebo for a six-month period. The study showed a statistically significant reduction relative to placebo in heavy drinking days. We presented the data at the American Society of Addiction Medicine (“ASAM”) Conference in April 2004. In March 2004, we announced the completion of enrollment of a one year safety study for Vivitrex with more than 400 patients. Our intention is to file an NDA in the first half of calendar year 2005 and rely on data from the original approval of oral naltrexone under section 505(b)(2) of the Federal Food, Drug and Cosmetic Act. Prior to filing we must complete certain scale up, validation, preclinical and clinical work. There can be no assurance that these will be completed successfully or on the timeline we expect. We plan to manufacture Vivitrex for both clinical trials and commercial sales, if any. We plan to commercialize Vivitrex using a specialty sales force to call on addiction specialists and substance abuse centers. We are in discussions with potential partners to assist us in marketing Vivitrex in the U.S. and around the world.

     Inhaled insulin. We have a collaboration with Eli Lilly and Company (“Lilly”) to develop inhaled formulations of insulin and other potential products for the treatment of diabetes based on our AIR pulmonary drug delivery technology. Multiple early stage clinical trials have been completed for a short-acting formulation, which is currently in Phase II clinical development. Lilly is responsible for clinical trials and we will manufacture the formulations of insulin for clinical trials. We will manufacture any such products for clinical trials and both we and Lilly will manufacture such products for commercial sales, if any.

     In December 2002, we expanded our collaboration with Lilly following the achievement of development milestones relating to clinical progress, and scale-up and manufacturing activities for our insulin dry powder aerosols and inhalers. In connection with the expansion, Lilly purchased $30.0 million of our convertible preferred stock. We used a significant portion of the proceeds from the sale of the preferred stock to fund the joint development program, including certain clinical trials, during calendar year 2003 and will continue to use the proceeds into calendar year 2004. In addition the royalty rate payable to us based on revenues of potential inhaled insulin products has been increased. Lilly has the right to exchange the preferred shares for a reduction in the royalty rate payable to us. The preferred stock is convertible into our common stock at market price at our option and automatically upon filing of an NDA with the FDA for a pulmonary insulin product. The collaboration cannot terminate without cause until January 2005. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our insulin and hGH development programs with Lilly. This funding has been recorded as deferred revenue in the consolidated balance sheets and we expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent.

     Exenatide LAR (formerly AC2993 LAR). We are developing a Medisorb formulation of Amylin Pharmaceutical, Inc.’s (“Amylin”) Exenatide LAR, a drug being developed for use in the treatment of type 2 diabetes. Amylin has entered into a collaboration agreement with Lilly for the development and commercialization of exenatide, including exenatide LAR. Phase I clinical trials have been completed for our Medisorb formulation of exenatide LAR and Phase II clinical trials have commenced. In March 2003, we, Amylin and Lilly released preliminary pharmacokinetic results from the first Phase II trial that verify sustained levels of exenatide are possible and support the continuation of the Phase II trial program. Additional activities are underway to optimize the formulation and manufacturing process. An additional Phase II clinical trial is currently underway and we expect to have results in the second half of calendar year 2004. Amylin is responsible for clinical trials and we will manufacture the Medisorb formulation of exenatide LAR for both clinical trials and initial commercial sales, if any.

5

     r-hFSH (recombinant human follicle stimulating hormone). We are developing a ProLease formulation of r-hFSH with Serono S.A. (“Serono”) for the treatment of infertility. This long-acting formulation is designed to provide patients with an alternative to multiple daily injections. A Phase I clinical trial for this product candidate has been completed. Serono conducted a Phase Ib study of r-hFSH and based on results from that study plans to move forward with a Phase II clinical program. Serono is responsible for clinical studies for this program. We will manufacture the long-acting formulation of r-hFSH for clinical trials. Serono has informed us of their intent to manufacture commercial product, if approved for sale.

     Inhaled human growth hormone. We are working with Lilly to develop an inhaled formulation of human growth hormone based on our AIR pulmonary drug delivery technology. In January 2002, we announced the decision to move forward with multiple-dose Phase I clinical studies for inhaled human growth hormone following the successful completion of a single dose Phase I trial. In connection with the December 2002 preferred stock transaction, we agreed to use a portion of the proceeds to fund the hGH development program, including certain clinical trials, during calendar year 2003 and into 2004. Lilly is responsible for clinical trials and we will manufacture the formulation of human growth hormone for both clinical trials and commercial sales, if any. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our insulin and hGH development programs with Lilly. This funding has been recorded as deferred revenue in the consolidated balance sheets and we expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent.

     Inhaled epinephrine. We are developing an inhaled formulation of epinephrine for the treatment of anaphylaxis, which is a sudden, often severe, systemic allergic reaction. Inhaled epinephrine is a proprietary product based on our AIR pulmonary delivery technology. Currently, patients self-administer epinephrine by intramuscular injection. We believe that an inhaled dosage form of epinephrine may offer patients significant advantages over injections, such as ease of use and direct topical treatment of airway obstruction. In 2003, we completed our third Phase I study of inhaled epinephrine and have recently met with the FDA to review the clinical requirements for approval. We are currently formulating our clinical plans in response to discussions with the FDA and will be reviewing our plans with the FDA prior to the initiation of additional clinical trials.

     Nutropin Depot. We have developed and manufactured a ProLease formulation of Genentech, Inc.’s (“Genentech”) recombinant human growth hormone (rhGH) Nutropin, known as Nutropin Depot, in collaboration with Genentech. rhGH is approved for use in the treatment of children with growth hormone deficiency, or GHD, which results in short stature and potentially other developmental deficits, Turner’s syndrome, chronic renal insufficiency and other indications. Our extended-release formulation, approved by the FDA in December 1999 for use in children with GHD and commercially launched by Genentech in June 2000, requires only one or two doses a month (which may require more than one injection per dose) compared to current growth hormone therapies that require multiple doses per week.

     On June 1, 2004, Alkermes and Genentech announced the decision to stop commercialization of Nutropin Depot. The decision was based on the significant resources required by both companies to continue manufacturing and commercializing the product. In connection with this decision, we will cease commercial manufacturing of Nutropin Depot and record restructuring charges in the quarter ended June 30, 2004 currently estimated to aggregate between $15.0 and $20.0 million. These restructuring charges will include the write-off of equipment, inventory and leasehold improvements related to the manufacturing of Nutropin Depot as well as employee separation costs, including severance and related benefits. The restructuring charges will also include lease costs and significant estimates related to the costs to maintain the facility in which Nutropin Depot was produced through the end of its lease term, August 2008. A portion of the restructuring charges will be recorded under the caption cost of goods

6

manufactured in the consolidated statements of operations and comprehensive loss and relate to a one time write-off of Nutropin Depot inventory.

Collaborative Arrangements

     Our business strategy includes forming collaborations to provide technological, financial, marketing, manufacturing and other resources. We have entered into several corporate collaborations.

Janssen

     Pursuant to a development agreement, we collaborated with Janssen for the development of Risperdal Consta, an extended-release formulation of Risperdal utilizing our Medisorb technology. Under the development agreement, Janssen provided development funding to us for the development of Risperdal Consta and is responsible for securing all necessary regulatory approvals. Since August 2001, Janssen and its affiliates have submitted an NDA to the FDA and similar filings to other drug regulatory agencies in over 60 countries around the world. Risperdal Consta has been approved in the U.S. and in more than 50 other countries. Risperdal Consta has been launched in more than 30 countries, including the U.S. We manufacture Risperdal Consta for commercial sale and receive manufacturing revenues when product is shipped and royalties upon the sale of product.

     Under related license agreements, Janssen and an affiliate have exclusive worldwide licenses from us to use and sell Risperdal Consta. Under the license agreements, Janssen is required to pay us certain royalties with respect to all Risperdal Consta sold to customers. Janssen can terminate the license agreements upon 30 days’ prior written notice.

     Pursuant to a manufacture and supply agreement, Janssen has appointed us as the exclusive supplier of Risperdal Consta for commercial sales. The agreement terminates on expiration of the license agreements. In addition, either party may terminate the agreement upon a material breach by the other party which is not resolved within 60 days’ written notice or upon written notice in the event of the other party’s insolvency or bankruptcy. Janssen may terminate the agreement upon six-months’ written notice after such event; provided, however, Janssen cannot terminate the agreement without good cause during the two-year period following commencement of commercial manufacturing unless it also terminates the license agreements. Janssen also has certain minimum revenue obligations to us which are described in the “Products and Development Programs” section in this Form 10-K.

Lilly

Insulin

     We entered into a development and license agreement with Lilly in April 2001 for the development of inhaled formulations of insulin and other potential products for the treatment of diabetes, based on our AIR pulmonary drug delivery technology. Pursuant to the agreement, we are responsible for formulation and preclinical testing as well as development of a device to use in connection with any products. Lilly has paid or will pay to us certain initial fees, research funding and milestone payments upon achieving certain development and commercialization goals. Lilly has exclusive worldwide rights to make, use and sell products resulting from such development. Lilly will be responsible for clinical trials, obtaining all regulatory approvals and marketing any insulin products. We manufacture such product candidates for clinical trials and both we and Lilly will manufacture such products for commercial sales, if any. We will receive certain royalties and commercial manufacturing fees based upon such product sales, if any.

7

     Lilly has the right to terminate the agreement upon 90 days’ written notice at any time prior to the first commercial launch of a product, or upon six months’ written notice at any time after such first commercial launch. In addition, either party may terminate the agreement upon a material breach or default by the other party which is not cured within 90 days’ written notice.

     We entered into an agreement with Lilly in February 2002 that provided for an investment by Lilly in our commercial-scale production facility for inhaled pharmaceutical products based on our AIR pulmonary drug delivery technology. This new facility in Chelsea, Massachusetts is designed to accommodate the manufacturing of multiple products. Construction of a portion of the facility is complete and validation is underway. Lilly’s investment was used to fund pulmonary insulin production and packaging capabilities. This funding is secured by Lilly’s ownership of specific equipment located and used in the facility. We have the right to purchase the equipment from Lilly, at any time, at the then-current net book value.

     In December 2002, we expanded our collaboration with Lilly following the achievement of development milestones relating to clinical progress, and scale-up and manufacturing activities for our insulin dry powder aerosols and inhalers. In connection with the expansion, Lilly purchased $30.0 million of our convertible preferred stock. We used a significant portion of the proceeds from the sale of the preferred stock to fund the joint development program during calendar year 2003 and will continue to use the proceeds into calendar year 2004. In addition the royalty rate payable to us based on revenues of potential inhaled insulin products has been increased. Lilly has the right to exchange the preferred shares for a reduction in the royalty rate payable to us. The preferred stock is convertible into our common stock at market price at our option and automatically upon filing of a new drug application with the FDA for a pulmonary insulin product. The collaboration cannot terminate without cause until January 2005. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our insulin and hGH development programs with Lilly. This funding has been recorded as deferred revenue in the consolidated balance sheets and we expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent.

hGH

     We entered into a development and license agreement with Lilly in February 2000 for the development of an inhaled formulation of human growth hormone based on our AIR pulmonary drug delivery technology. Pursuant to the agreement, we are responsible for formulation and preclinical testing as well as development of a device to use in connection with any products. Lilly has paid or will pay to us certain initial fees, research funding and milestone payments upon achieving certain development and commercialization goals and we will also receive royalty payments based on product sales, if any. In connection with the December 2002 preferred stock transaction, we agreed to use a portion of the proceeds to fund the hGH development program during calendar year 2003 and into 2004. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our insulin and hGH development programs with Lilly. This funding has been recorded as deferred revenue in the consolidated balance sheets and we expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent. Lilly has exclusive worldwide rights to make, use and sell products resulting from such development. Lilly will be responsible for clinical trials, obtaining all regulatory approvals and marketing any products. We will manufacture any such products for clinical trials and commercial sales and receive manufacturing revenues and royalties on product sales, if any.

     Lilly has the right to terminate the agreement upon 90 days’ written notice at any time prior to the first commercial launch of a product, or upon six months’ written notice at any time after such first

8

commercial launch. In addition, either party may terminate the agreement upon a material breach or default by the other party which is not cured within 90 days’ written notice.

Amylin

     We entered into a development and license agreement with Amylin in May 2000 for the development of a Medisorb formulation of exenatide LAR (formerly AC2993) for the treatment of type 2 diabetes.

     Pursuant to the development agreement, Amylin has an exclusive, worldwide license to the Medisorb technology for the development and commercialization of injectable extended-release formulations of exendins and other related compounds that Amylin may develop. Amylin has entered into a collaboration agreement with Lilly for the development and commercialization of exenatide, including exenatide LAR. We receive funding for research and development and milestone payments comprised of cash and warrants for Amylin common stock upon achieving certain development and commercialization goals and will also receive a combination of royalty payments and manufacturing fees based on any future product sales. We are initially responsible for developing and testing several formulations, manufacturing for clinical trials and for initial commercial manufacturing of any products that may be developed pursuant to the agreement. Amylin is responsible for conducting clinical trials, securing regulatory approvals and marketing any products resulting from the collaboration on a worldwide basis.

     Amylin may terminate the development agreement for any reason on 90 days’ written notice if such termination occurs before filing an NDA with the FDA or six months’ written notice after such event. In addition, either party may terminate the development agreement upon a material default or breach by the other party that is not cured within 60 days’ written notice.

Serono

     Pursuant to a development agreement dated December 1999, we are collaborating with Serono for the development of a ProLease formulation of r-hFSH (recombinant human follicle stimulating hormone) for the treatment of infertility. Serono provides us with research and development funding and milestone payments. We are responsible for formulation and preclinical testing and Serono will be responsible for conducting clinical trials and securing regulatory approvals and, together with its affiliates, for the marketing of any products that result from the collaboration. We will manufacture any such products for clinical trials. Serono has informed us of their intent to manufacture commercial product, if approved for sale.

     Serono may terminate the development agreement for any reason, upon 90 days’ written notice if such termination notice occurs prior to the first commercial launch of a product under the development agreement, or upon six months’ written notice if such notice occurs subsequent to such event. In addition, either party may terminate the development agreement upon a material breach by the other party of such agreement which is not cured within 60 days’ written notice.

Genentech

     In April 1999, we and Genentech amended and restated the November 1996 license agreement to expand our collaboration for Nutropin Depot, an injectable long-acting formulation of Genentech’s recombinant human growth hormone based upon our ProLease drug delivery system. Nutropin Depot for pediatric use was launched in the U.S. in June 2000 by Genentech. Under the agreement, we and

9

Genentech have been conducting expanded development activities, including clinical trials in an additional indication (adult growth hormone deficiency), process development and manufacturing.

     We executed a Manufacture and Supply Agreement with Genentech in April 2001 for the manufacture and supply of Nutropin Depot to Genentech for commercial sales. Pursuant to the terms of the agreement we are the sole supplier and manufacturer of Nutropin Depot.

     On June 1, 2004, Alkermes and Genentech announced the decision to stop commercialization of Nutropin Depot. The decision was based on the significant resources required by both companies to continue manufacturing and commercializing the product. In connection with this decision, we will cease commercial manufacturing of Nutropin Depot and record restructuring charges in the quarter ended June 30, 2004 currently estimated to aggregate between $15.0 and $20.0 million. These restructuring charges will include the write-off of equipment, inventory and leasehold improvements related to the manufacturing of Nutropin Depot, as well as employee separation costs, including severance and related benefits. The restructuring charges will also include lease costs and significant estimates related to the costs to maintain the facility in which Nutropin Depot was produced through the end of its lease term, August 2008. A portion of the restructuring charges will be recorded under the caption cost of goods manufactured in the consolidated statements of operations and comprehensive loss and relate to a one time write-off of Nutropin Depot inventory.

Clinical Partners

     In 1992, Alkermes Clinical Partners, L.P. (“Clinical Partners”) was formed as a vehicle to raise money to fund the further development of Cereport. Cereport is a synthetic analog of bradykinin developed to increase transiently the permeability of the blood-brain barrier so that drug molecules in the bloodstream can diffuse into the brain in greater concentrations. In connection with that transaction, we transferred substantially all of our rights to Cereport to Clinical Partners, entered into a product development agreement and interim license with Clinical Partners and acquired the right to purchase all of the limited partnership interests in Clinical Partners. In total, Clinical Partners raised $46.0 million from a private placement, which was substantially expended by June 1996. If Cereport were ever approved by the FDA, we would have to pay certain milestone and royalty payments to the limited partners whether or not we exercise our purchase option. We entered into an agreement with ALZA Corporation in October 1997 relating to the development and commercialization of Cereport which was mutually terminated in December 2002. As a result of the difficulties encountered in the development of Cereport, including clinical trial results and the termination of the agreement with ALZA, we determined that development of Cereport is not economically feasible and, therefore, we would not commit additional funds to the development of Cereport. We also abandoned patent rights relating to Cereport and receptor mediated permeabilizers (“RMPs”) outside the U.S. and Canada. On December 17, 2003, the limited partners of Clinical Partners approved the termination of the partnership, and the partnership was subsequently dissolved.

Drug Delivery Technology

     Our current focus is on the development of products that improve clinical outcomes based on our broadly applicable, proprietary drug delivery technologies addressing several important drug delivery opportunities, including injectable extended-release of proteins, peptides and small molecule pharmaceutical compounds and the pulmonary delivery of both small molecules and proteins and peptides. We partner our proprietary technology systems and drug delivery expertise with leading pharmaceutical and biotechnology companies and we also develop novel, proprietary drug candidates for our own account.

10

Medisorb: injectable extended-release of traditional small molecule pharmaceuticals

     Medisorb is our proprietary technology for encapsulating traditional small molecule pharmaceuticals in microspheres made of common medical polymers. Medisorb is designed to enable novel formulations of pharmaceuticals by providing controlled, extended-release over time. We believe Medisorb is suitable for encapsulating stable, small molecule pharmaceuticals and certain peptides at a large scale. We believe that Medisorb formulations may have superior features of safety, efficacy, compliance and ease of use for drugs currently administered by frequent injection or administered orally. Drug release from the microsphere is controlled by diffusion of the pharmaceutical through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables, including drug substance and microsphere particle sizing and choice of polymers and excipients.

     The Medisorb drug delivery system utilizes a manufacturing process that consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed with an external or aqueous phase to form liquid microspheres which solidify as the polymer solvent diffuses out the microspheres. Third, the microspheres are collected and dried to produce finished product. The microspheres are suspended in a small volume of liquid prior to use and are administered to a patient by injection under the skin or into a muscle. We believe drug release from the Medisorb system can be controlled to last from a few days to several months.

ProLease: injectable extended-release of fragile proteins and peptides

     ProLease is our proprietary technology for the stabilization and encapsulation of fragile proteins and peptides in microspheres made of common medical polymers. Our proprietary expertise in this field lies in our ability to preserve the biological activity of fragile drugs over an extended period of time and to manufacture these formulations using components and processes believed to be suitable for human pharmaceutical use. ProLease is designed to enable novel formulations of proteins and peptides by replacing frequent injections with controlled, extended-release over time. We believe ProLease formulations have the potential to improve patient compliance and ease of use by reducing the need for frequent self-injection, to lower costs by reducing the need for frequent office visits and to improve safety and efficacy by reducing both the variability in drug levels inherent in frequent injections and the aggregate amount of drug given over the course of therapy. In addition, ProLease may provide access to important new markets currently inaccessible to drugs that require frequent injections or are administered orally.

     The ProLease formulation process has been designed to assure stability of fragile compounds during the manufacturing process, during storage and throughout the release phase in the body. The formulation and manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated in the polymer at very low temperatures. Incorporation of the drug substance as a stabilized solid under very low temperatures is critical to protecting fragile molecules from degradation during the manufacturing process and is a key element of the ProLease technology. The microspheres are suspended in a small volume of liquid prior to administration to a patient by injection under the skin or into a muscle. We believe drug release from the ProLease drug delivery system can be controlled to last from a few days to several months.

     Drug release from the microsphere is controlled by diffusion of the drug through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables, including drug substance and microsphere particle sizing and choice of polymers and excipients.

11

     Our experience with the application of ProLease to a wide range of proteins and peptides has shown that high incorporation efficiencies and high drug loads can be achieved. Proteins and peptides incorporated into ProLease microspheres have maintained their integrity, stability and biological activity when tested for up to 30 days in in vitro experiments conducted on formulations manufactured at the preclinical, clinical and commercial scale.

AIR: pulmonary drug delivery

     The AIR technology is our proprietary pulmonary delivery system that enables the delivery of both small molecules and macromolecules to the lungs. Our proprietary technology allows us to formulate drugs into dry powders made up of highly porous particles with low mass density. These particles can be efficiently delivered to the deep lung by a small, simple inhaler. The AIR technology is useful for small molecules, proteins or peptides and allows for both local delivery to the lungs and systemic delivery via the lungs.

     AIR particles can be aerosolized and inhaled efficiently with simple inhaler devices because low forces of cohesion allow the particles to deaggregate easily. We are developing a family of relatively inexpensive, compact, easy to use inhalers. The AIR devices are breath activated and made from injection molded plastic. The powders are designed to quickly discharge from the device over a range of inhalation flow rates, which may lead to low patient-to-patient variability and high lung deposition of the inhaled dose. By varying the ratio and type of excipients used in the formulation, we believe we can deliver a range of drugs from the device that may provide both immediate and extended release.

Manufacturing

     We currently have manufacturing facilities in Massachusetts and Ohio. The manufacture of our product candidates for clinical trials and commercial purposes is subject to current good manufacturing practices (cGMP) and other agency regulations. We have limited experience operating an FDA-approved commercial manufacturing facility. There can be no assurance that we will maintain the necessary approvals for commercial manufacturing or obtain approvals for any additional facilities.

     If we are not able to develop and maintain manufacturing capacity and experience, or to continue to contract for manufacturing capabilities on acceptable terms, our ability to supply product for commercial sales, clinical trials and preclinical testing will be compromised. In addition, delays in obtaining regulatory approvals might result, as well as delays of commercial sales if approvals are not obtained on a timely basis. Such delays could materially adversely affect our competitive position and our business, financial condition and results of operations.

Medisorb

     The Medisorb manufacturing process is based on a method of encapsulating small molecule drugs in polymers using a large-scale emulsification. The Medisorb manufacturing process consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed with an exterrnal or aqueous phase to form liquid microspheres which solidify as the polymer solvent diffuses out the microsphers. Third, the microspheres are collected and dried to produce finished product.

     We operate a 50,000 square foot cGMP manufacturing facility for commercial scale Medisorb manufacturing in Wilmington, Ohio. We manufacture Risperdal Consta for Janssen at this facility. The facility has been inspected by regulatory authorities and is producing product for commercial sales. At this site, we have completed construction of a 50,000 square foot manufacturing expansion which is being

12

validated in preparation for additional commercial manufacture capacity for Risperda Consta and other Medisorb technology product candidates, including Vivitrex.

ProLease

     ProLease manufacturing involves microencapsulation of drug substances provided to us by our collaborators in small polymeric microspheres using extremely cold processing conditions suitable for fragile molecules. The ProLease manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated in polymer at very low temperatures.

     We have a commercial scale ProLease manufacturing facility of approximately 32,000 square feet in Cambridge, Massachusetts. The facility has had successful pre-approval and one post-approval inspection by the FDA for the manufacture of Nutropin Depot.

     On June 1, 2004, Alkermes and Genentech announced the decision to stop commercialization of Nutropin Depot. The decision was based on the significant resources required by both companies to continue manufacturing and commercializing the product. In connection with this decision, we will cease commercial manufacturing of Nutropin Depot and record restructuring charges in the quarter ended June 30, 2004 currently estimated to aggregate between $15.0 and $20.0 million. These restructuring charges will include the write-off of equipment, inventory and leasehold improvements related to the manufacturing of Nutropin Depot, as well as employee separation costs, including severance and related benefits. The restructuring charges will also include lease costs and significant estimates related to the costs to maintain the facility in which Nutropin Depot was produced through the end of its lease term, August 2008. A portion of the restructuring charges will be recorded under the caption cost of goods manufactured in the consolidated statements of operations and comprehensive loss and relate to a one time write-off of Nutropin Depot inventory.

     We have a clinical production facility that is being validated for manufacturing in accordance with cGMPs. The facility was and will be used to manufacture product candidates incorporating our ProLease extended-release delivery system for use in clinical trials.

AIR

     The AIR manufacturing process uses spray drying. We take drugs provided by our partners or purchased from generic manufacturers, combine the drugs with certain excipients commonly used in other aerosol formulations and spray dry the solution in commercial spray dryers. During the manufacturing process, solutions of drugs and excipients are spray dried to form a free flowing powder and the powder is filled and packaged into final dosage units. We have a clinical manufacturing facility, where powders and final dosage units are prepared under cGMP for use in clinical trials. Our current clinical manufacturing facility and equipment are at a scale equivalent to commercial manufacturing for certain product candidates. This clinical production facility is in the process of being validated. In February 2002, we entered into an agreement with Lilly that provided for an investment by Lilly in our large-scale production facility for inhaled pharmaceutical products based on our AIR pulmonary drug delivery technology. This new 90,000 square foot facility is designed to accommodate the manufacturing of multiple products. Construction of 40,000 square feet of this facility in Chelsea, Massachusetts is complete and validation is underway. AIR’s inhalation devices are produced under cGMPs at a contract manufacturer in the U.S.

13

Marketing

     We have entered into development agreements, which include sales and marketing arrangements, for ProLease product candidates with Genentech and Serono, for Medisorb product candidates with Janssen and Amylin and for AIR product candidates with Lilly. For Vivitrex, our first proprietary product candidate, we plan to commercialize Vivitrex using a specialty sales force to call on addiction specialists and substance abuse centers. We may commercialize Vivitrex alone or with a collaborative partner.

     Alkermes is building the infrastructure necessary for commercialization of our proprietary products. We have increased our manufacturing capacity, we are expanding our product portfolio and we are beginning to develop the capabilities for marketing and selling our own products.

     We currently have no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any product candidate approved by the FDA or other regulatory authorities, we must either develop a marketing and sales force or enter into arrangements with third parties to market and sell our products. There can be no assurance that we will successfully develop such experience or that we will be able to enter into marketing and sales agreements with others on acceptable terms, if at all. If we develop our own marketing and sales capability, we will compete with other companies that currently have experienced and well-funded marketing and sales operations. To the extent we enter into co-promotion or other sales and marketing arrangements with other companies, any revenues received by us will be dependent on the efforts of others, and there can be no assurance that such efforts will be successful.

Competition

     The biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. We face, and will continue to face, intense competition in the development, manufacturing, marketing and commercialization of our products and product candidates from academic institutions, government agencies, research institutions, biotechnology and pharmaceutical companies, including our collaborators, and other drug delivery companies. There can be no assurance that developments by others will not render our products or product candidates or our technologies obsolete or noncompetitive, or that our collaborators will not choose to use competing drug delivery methods. At the present time, we have no sales force or marketing experience and we have only limited commercial manufacturing experience. In addition, many of our competitors and potential competitors have substantially greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we do. Many of these competitors also have significantly greater experience than we do in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals.

     With respect to Medisorb and ProLease, we are aware that there are other companies developing extended-release delivery systems for pharmaceutical products. With respect to AIR, we are aware that there are other companies marketing or developing pulmonary delivery systems for pharmaceutical products. In many cases, there are products on the market or in development that may be in direct competition with our product candidates. In addition, other companies are developing new chemical entities or improved formulations of existing products which, if developed successfully, could compete against our formulations of any products we develop or those of our collaborators. These chemical entities are being designed to have different mechanisms of action or improved safety and efficacy. In addition, our collaborators may develop, either alone or with others, products that compete with the development and marketing of our product candidates.

14

     There can be no assurance that we will be able to compete successfully with such companies. The existence of competitive products developed by our competitors or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by us.

Patents and Proprietary Rights

     Our success will be dependent, in part, on our ability to obtain patent protection for our product candidates and those of our collaborators, maintaining trade secret protection and operating without infringing upon the proprietary rights of others.

     We have a proprietary portfolio of patent rights and exclusive licenses to patents and patent applications. We have filed numerous U.S. and international patent applications directed to composition of matter as well as processes of preparation and methods of use, including applications relating to each of our delivery technologies. We own approximately 103 issued U.S. patents. No U.S. patent issued to us that is currently material to our business will expire prior to 2013. In the future, we plan to file further U.S. and foreign patent applications directed to new or improved products and processes. We intend to file additional patent applications when appropriate and defend our patent position aggressively.

     We have exclusive rights through licensing agreements with third parties to approximately 38 issued U.S. patents, a number of U.S. patent applications and corresponding foreign patents and patent applications in many countries, subject in certain instances to the rights of the U.S. government to use the technology covered by such patents and patent applications. No issued U.S. patent to which we have licensed rights and which is currently material to our business will expire prior to 2016. Under certain licensing agreements, we currently pay annual license fees and/or minimum annual royalties. During the fiscal year ended March 31, 2004, these fees totaled $180,000. In addition, under these licensing agreements, we are obligated to pay royalties on future sales of products, if any, covered by the licensed patents.

     We know of several U.S. patents issued to other parties that relate to our products and product candidates. One party has asked us to compare our Medisorb technology to that party’s patented technology. Another party has asked a collaborative partner to substantiate how our ProLease microspheres are different from that party’s patented technology. The manufacture, use, offer for sale, sale or importing of some of our product candidates might be found to infringe on the claims of these patents. A party might file an infringement action against us. Our cost of defending such an action is likely to be high and we might not receive a favorable ruling.

     We also know of patent applications filed by other parties in the U.S. and various foreign countries that may relate to some of our product candidates if issued in their present form. If patents are issued to any of these applicants, we or our collaborators may not be able to manufacture, use, offer for sale, or sell some of our product candidates without first getting a license from the patent holder. The patent holder may not grant us a license on reasonable terms or it may refuse to grant us a license at all. This could delay or prevent us from developing, manufacturing or selling those of our product candidates that would require the license.

     We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of biopharmaceutical companies involves complex legal and factual questions, enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they

15

may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed outside the scope of our patents. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the U.S.

     We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, results of operations and financial condition could be adversely affected.

Government Regulation

     Prior to marketing, any product developed by us or our collaborators must undergo an extensive regulatory approval process, which includes preclinical testing and clinical trials of such product candidate to demonstrate safety and efficacy. The manufacture and marketing of pharmaceutical products in the U.S. require the approval of the FDA under the Federal Food, Drug and Cosmetic Act. Similar approvals by comparable agencies are required in most foreign countries. The FDA has established mandatory procedures and safety standards which apply to the preclinical testing and clinical trials, manufacture and marketing of pharmaceutical products. Pharmaceutical manufacturing facilities are also regulated by state, local and other authorities.

     As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animal models to assess the drug’s efficacy and to identify potential safety problems. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application (“IND”), which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. Phase I trials are conducted with a small number of subjects and are designed to provide information about both product safety and the expected dose of the drug. Phase II trials are designed to provide additional information on dosing and preliminary evidence of product efficacy. Phase III trials are large-scale studies designed to provide statistical evidence of efficacy and safety in humans. The results of the preclinical testing and clinical trials of a pharmaceutical product are then submitted to the FDA in the form of an NDA, or for a biological product in the form of a Product License Application (“PLA”), for approval to commence commercial sales. Preparing such applications involves considerable data collection, verification, analysis and expense. In responding to an NDA or PLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria.

     This regulatory process can require many years and the expenditure of substantial resources. Data obtained from preclinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent FDA approval. In addition, changes in FDA approval policies or requirements may occur or new regulations may be promulgated which may result in delay or failure to receive FDA approval. Similar delays or failures may be encountered in foreign countries. Delays, increased costs and failures in obtaining regulatory approvals could have a material adverse effect on our business, financial condition and results of operations.

     Among the conditions for NDA or PLA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform on an ongoing basis with GMP. Before approval of an NDA or PLA, the FDA will perform a pre-approval inspection of the facility to

16

determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. After the establishment is licensed, it is subject to periodic inspections by the FDA.

     The requirements which we must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of our product candidates in such countries can be as rigorous and costly as those described above.

     We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, experimental use of animals and use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on capital expenditures, earnings or our competitive position. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted.

Employees

     As of June 3, 2004, we had approximately 490 full-time employees. A significant number of our management and professional employees have prior experience with pharmaceutical, biotechnology or medical product companies. We believe that we have been successful in attracting skilled and experienced scientific and senior management personnel; however, competition for such personnel is intense. None of our employees are covered by a collective bargaining agreement. We consider our relations with employees to be good.

Available Information

     Our internet address is www.alkermes.com, at which you can find, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q and all other reports filed with the SEC. All such filings are available on the website as soon as reasonably practicable after filing.

17

RISK FACTORS

     If any of the following risks actually occur, they could materially adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline.

Risperdal Consta, Vivitrex and our other product candidates may not generate significant revenues.

     Even if a product candidate receives regulatory approval for commercial sale, the revenues received or to be received from the sale of the product may not be significant and will depend on numerous factors many of which are outside of our control, including our collaborators’ decisions on the timing of product launches, pricing and discounting; the timing and nature of third party and government reimbursement for the product; the market size for the product; the reaction of companies that market competitive products; our reliance on third party marketing partners; and general market conditions. In addition, the costs to manufacture our products may be higher than anticipated.

Risperdal Consta

     In December 2003, Janssen launched Risperdal Consta in the U.S. for the treatment of schizophrenia. The success of the launch in the U.S. and other countries throughout the world is uncertain and the revenues received from the sale of Risperdal Consta may not meet our partner’s expectations, each for reasons outside of our control, including those outlined above. Our revenues also depend heavily on manufacturing fees we receive from our partner for Risperdal Consta. Our revenues will fluctuate from quarter to quarter based on a number of factors, including our partner’s orders, the timing of shipments, our yield and our production schedule. In order to meet our financial plans, we will need to bring additional manufacturing capacity on-line on the timeline we expect. In addition, the costs to manufacture Risperdal Consta may be higher than anticipated if certain volume levels are not achieved and we may not be able to supply the product in a timely manner. If Risperdal Consta does not produce significant revenues, if manufacturing costs are higher than anticipated or if we are unable to supply our partner’s requirements, our business, results of operations and financial condition would be materially adversely affected.

Vivitrex

     In December 2003 we announced results of a Phase III clinical trial in alcohol-dependent patients testing the safety and efficacy of repeat doses of Vivitrex, an injectable extended-release formulation of naltrexone. We plan to submit an NDA to the FDA for Vivitrex, however, there can be no assurance that the FDA will accept our submission, that they will interpret the data in the same manner as we do or that the NDA will be approved. We are relying on data from the original approval of oral naltrexone under Section 505(b)(2) of the U.S. Food, Drug and Cosmetic Act. While we believe only one Phase III efficacy study will be required for approval, the FDA may not agree. Prior to filing our NDA, we must complete ongoing clinical safety studies, manufacturing scale-up, stability and certain non-clinical studies. There can be no assurance that the Phase III clinical trial results and other clinical and pre-clinical data will be sufficient to obtain regulatory approvals elsewhere in the world. Even if regulatory approvals are received in other countries, we will have to market Vivitrex ourselves or enter into co-promotion or sales and marketing arrangements with other companies. We currently have no sales force or any marketing experience and arrangements with other companies may result in dependence on such other companies for revenues. In either event, a market for Vivitrex may not develop as expected.

18

Our manufacturing experience is limited.

     We currently manufacture Risperdal Consta and all of our product candidates. The manufacture of drugs for clinical trials and for commercial sale is subject to regulation by the FDA under cGMP regulations and by other regulators under other laws and regulations. We have manufactured product candidates for use in clinical trials but have limited experience manufacturing products for commercial sale. We cannot assure you that we can successfully manufacture our products under cGMP regulations or other laws and regulations in sufficient quantities for commercial sale, or in a timely or economical manner.

     Our manufacturing facilities in Massachusetts and Ohio require specialized personnel and are expensive to operate and maintain. Any delay in the regulatory approval or market launch of product candidates to be manufactured in these facilities will require us to continue to operate these expensive facilities and retain specialized personnel, which may increase our expected losses.

     We have two manufacturing plants; one in Ohio and one in Massachusetts. Our plant in Ohio includes one cGMP validated production line for Risperdal Consta and two additional commercial scale manufacturing lines; one for Risperdal Consta and the other for Vivitrex. Construction of these two additional production lines in Ohio was recently completed and validation is underway. Our plant in Massachusetts includes commercial scale manufacturing capabilities for our AIR pulmonary drug delivery candidates. Construction of a portion of this facility was recently completed and validation is underway. Validation is a lengthy process that must be completed before we can manufacture under cGMP guidelines.

     The FDA and a European regulatory authority have inspected and approved our existing manufacturing facility for Risperdal Consta. We cannot guarantee that the FDA or any foreign regulatory agencies will approve our other facilities or, once approved, that any such facilities will remain in compliance with cGMP regulations.

     The manufacture of pharmaceutical products is a highly complex process in which a variety of difficulties may arise from time to time. We may not be able to resolve any such difficulties in a timely fashion, if at all. We are currently the sole manufacturer of Risperdal Consta and are planning significantly higher production volume for Risperdal Consta in the coming year. If anything were to interfere with the continuing manufacturing operations in any of our facilities, it could materially adversely affect our business and financial condition.

     If more of our product candidates progress to mid- to late-stage development, we will incur significant expenses in the expansion and/or construction of manufacturing facilities and increases in personnel in order to manufacture product candidates. For example, we have begun an expansion at our site in Wilmington of a scaled up commercial line of our partnered product Exenatide LAR. The development of a commercial-scale manufacturing process is complex and expensive. We cannot assure you that we have the necessary funds or that we will be able to develop this manufacturing infrastructure in a timely or economical manner, or at all.

Currently, many of our product candidates, including Vivitrex, are manufactured in small quantities for use in clinical trials. We cannot assure you that we will be able to successfully scale-up the manufacture of each of our product candidates in a timely or economical manner, or at all. If any of these product candidates are approved by the FDA or other drug regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. If we are unable to successfully scale-up our manufacturing capacity, the regulatory approval or commercial launch of such product candidate may be delayed, there may be a shortage in supply of such product candidate or our margins may become

19

uneconomical. In addition, we are responsible for the entire supply chain for Vivitrex, including the sourcing of raw materials and active pharmaceutical agents from third parties. We have no previous experience in managing a complex, cGMP supply chain and issues with our supply sources may have a materially adverse effect on our business and financial condition.

     If we fail to develop manufacturing capacity and experience, fail to continue to contract for manufacturing on acceptable terms, or fail to manufacture our product candidates economically on a commercial scale or in accordance with cGMP regulations, our development programs will be materially adversely affected. This may result in delays in receiving FDA or foreign regulatory approval for one or more of our product candidates or delays in the commercial production of a product that has already been approved. Any such delays could materially adversely affect our business and financial condition.

We rely heavily on collaborative partners.

     Our arrangements with collaborative partners are critical to our success in bringing our products and product candidates to the market and promoting such marketed products profitably. We rely on these parties in various respects, including to conduct preclinical testing and clinical trials, to provide funding for product candidate development programs, raw materials, product forecasts, and sales and marketing services, or to participate actively in or to manage the regulatory approval process. Most of our collaborative partners can terminate their agreements with us for no reason and on limited notice. We cannot guarantee that any of these relationships will continue. Failure to make or maintain these arrangements or a delay in a collaborative partner’s performance may materially adversely affect our business and financial condition.

     We cannot control our collaborative partners’ performance or the resources they devote to our programs. Consequently, programs may be delayed or terminated or we may have to use funds, personnel, laboratories and other resources that we have not budgeted. A program delay or termination or unbudgeted use of our resources may materially adversely affect our business and financial condition.

     Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns the technology that is developed during a collaboration or other issues arising out of the collaborative agreements. Such a dispute could delay the program on which the collaborative partner or we are working. It could also result in expensive arbitration or litigation, which may not be resolved in our favor.

     A collaborative partner may choose to use its own or other technology to develop a way to deliver its drug and withdraw its support of our product candidate.

     Our collaborative partners could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us.

     None of our drug delivery systems can be commercialized as stand-alone products but must be combined with a drug. To develop any new proprietary product candidate using one of these drug delivery systems, we must obtain the drug substance from another party. We cannot assure you that we will be able to obtain any such drug substance on reasonable terms, if at all.

Our delivery technologies or product development efforts may not produce safe, efficacious or commercially viable products.

     Many of our product candidates require significant additional research and development, as well as regulatory approval. To be profitable, we must develop, manufacture and market our products, either

20

alone or by collaborating with others. It can take several years for a product candidate to be approved and we may not be successful in bringing additional product candidates to the market. A product candidate may appear promising at an early stage of development or after clinical trials and never reach the market, or it may reach the market and not sell, for a variety of reasons. The product candidate may:

•		be shown to be ineffective or to cause harmful side effects during preclinical testing or clinical trials;
•		fail to receive regulatory approval on a timely basis or at all;
•		be difficult to manufacture on a large scale;
•		be uneconomical;
•		not be prescribed by doctors or accepted by patients;
•		fail to receive a sufficient level of reimbursement from government or third-party payors; or
•		infringe on proprietary rights of another party.

     If our delivery technologies or product development efforts fail to generate product candidates that lead to the successful development and commercialization of products, if our collaborative partners decide not to pursue our product candidates or if new products do not perform as anticipated, our business and financial condition will be materially adversely affected.

Clinical trials for our product candidates are expensive and their outcome is uncertain.

     Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we or our partners must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred, and we will continue to incur, substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials.

     Historically, the results from preclinical testing and early clinical trials often have not predicted results of later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Clinical trials conducted by us, by our collaborative partners or by third parties on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for our product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates and it may be difficult to design efficacy studies for product candidates in new indications.

     Clinical trials of each of our product candidates involve a drug delivery technology and a drug. This makes testing more complex because the outcome of the trials depends on the performance of technology in combination with a drug.

     We have other product candidates in preclinical development. We or our collaborative partners have not submitted Investigational New Drug Applications, or INDs, or begun clinical trials for these product candidates. Preclinical and clinical development efforts performed by us may not be successfully

21

completed. We may not file further INDs. We or our collaborative partners may not begin clinical trials as planned.

     Completion of clinical trials may take several years or more. The length of time can vary substantially with the type, complexity, novelty and intended use of the product candidate. The commencement and rate of completion of clinical trials may be delayed by many factors, including the:

•		potential delay by a collaborative partner in beginning the clinical trial;
•		inability to recruit clinical trial participants at the expected rate;
•		failure of clinical trials to demonstrate a product candidate’s safety or efficacy;
•		inability to follow patients adequately after treatment;
•		unforeseen safety issues;
•		inability to manufacture sufficient quantities of materials used for clinical trials; and
•		unforeseen governmental or regulatory delays.

     If a product candidate fails to demonstrate safety and efficacy in clinical trials, this failure may delay development of other product candidates and hinder our ability to conduct related preclinical testing and clinical trials. As a result of these failures, we may also be unable to find additional collaborative partners or to obtain additional financing. Our business and financial condition may be materially adversely affected by any delays in, or termination of, our clinical trials.

We may not become profitable.

     We have had net operating losses since being founded in 1987. At March 31, 2004, our accumulated deficit was $553.1 million. There can be no assurance we will achieve profitability.

     A major component of our revenue is dependent on our partners ability to sell, and our ability to manufacture economically, our marketed products, particularly Risperdal Consta.

     In addition, our future profitability depends, in part, on our ability to:

•		obtain and maintain regulatory approval for our products and product candidates in the U.S. and in foreign countries;
•		support the commercial launch of Risperdal Consta by our partner Janssen;
•		enter into agreements to develop and commercialize our products and product candidates;
•		develop and expand our capacity to manufacture and market our products and product candidates;
•		obtain adequate reimbursement coverage for our products from insurance companies, government programs and other third party payors;

22

•		obtain additional research and development funding from collaborative partners or funding for our proprietary product candidates; and
•		achieve certain product development milestones.

     In addition, the amount we spend will impact our ability to become profitable and this will depend, in part, on:

•		the progress of our research and development programs for proprietary and collaborative product candidates, including clinical trials;
•		the time and expense that will be required to pursue FDA or foreign regulatory approvals for our product candidates and whether such approvals are obtained;
•		the cost of building, operating and maintaining manufacturing and research facilities;
•		how many product candidates we pursue, particularly proprietary product candidates;
•		the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;
•		how competing technological and market developments affect our product candidates;
•		the cost of possible acquisitions of drug delivery technologies, compounds, product rights or companies; and
•		the cost of obtaining licenses to use technology owned by others for proprietary products and otherwise.

     We may not achieve any or all of these goals and, thus, we cannot provide assurances that we will ever be profitable or achieve significant revenues. Even if we do achieve some or all of these goals, we may not achieve significant commercial success.

We may require additional funds to complete our programs and such funding may not be available on commercially favorable terms and may cause dilution to our existing shareholders.

     We may require additional funds to complete any of our programs, and may seek funds through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. If we are unable to raise additional funds on terms that are favorable to us, we may have to cut back significantly on one or more of our programs, give up some of our rights to our technologies, product candidates or licensed products or agree to reduced royalty rates from collaborative partners. If we issue additional equity securities or securities convertible into equity securities to raise funds, our shareholders will suffer dilution of their investment and it may adversely affect the market price of our common stock.

The FDA or foreign regulatory agencies may not approve our product candidates.

     Approval from the FDA is required to manufacture and market pharmaceutical products in the U.S. Regulatory agencies in foreign countries have similar requirements. The process that pharmaceutical products must undergo to obtain this approval is extensive and includes preclinical testing

23

and clinical trials to demonstrate safety and efficacy and a review of the manufacturing process to ensure compliance with cGMP regulations. We are currently in the process of completing the work we believe is required before we file an NDA for Vivitrex, including ongoing clinical safety studies, manufacturing scale-up, stability and certain non-clinical studies. See “Risperdal Consta, Vivitrex and our other product candidates may not generate significant revenues.”

     This process can last many years and be very costly and still be unsuccessful. FDA or foreign regulatory approval can be delayed, limited or not granted at all for many reasons, including:

•		a product candidate may not be safe or effective;
•		data from preclinical testing and clinical trials may be interpreted by the FDA or foreign regulatory agencies in different ways than we or our partners interpret it;
•		the FDA or foreign regulatory agencies might not approve our manufacturing processes or facilities;
•		the FDA or foreign regulatory agencies may change their approval policies or adopt new regulations;
•		a product candidate may not be approved for all the indications we or our partners request; and
•		the FDA may not agree with our or our partners’ regulatory approval strategies or components of our or our partners’ filings, such as clinical trial designs.

     For some product candidates, the drug used has not been approved at all or has not been approved for every indication it is targeting. Any delay in the approval process for any of our product candidates will result in increased costs that could materially adversely affect our business and financial condition.

     Regulatory approval of a product candidate generally is limited to specific therapeutic uses for which the product has demonstrated safety and efficacy in clinical testing. Approval of a product candidate could also be contingent on post-marketing studies. In addition, any marketed drug and its manufacturer continue to be subject to strict regulation after approval. Any unforeseen problems with an approved drug or any violation of regulations could result in restrictions on the drug, including its withdrawal from the market.

If and when approved, the commercial use of our products may cause unintended side effects or adverse reactions or incidence of misuse may appear.

     We cannot predict whether the commercial use of products (or product candidates in development, if and when they are approved for commercial use) will produce undesirable or unintended side effects that have not been evident in the use of, or clinical trials conducted for, such products (and product candidates) to date. Additionally, incidents of product misuse may occur. These events, among others, could result in product recalls, product liability actions or withdrawals or additional regulatory controls.

24

Patent protection for our products is important and uncertain.

     The following factors are important to our success:

•		receiving and maintaining patent protection for our products and product candidates and for those of our collaborative partners;
•		maintaining our trade secrets;
•		not infringing the proprietary rights of others; and
•		preventing others from infringing our proprietary rights.

     Patent protection only provides rights of exclusivity for the term of the patent. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

     We know of several U.S. patents issued to third parties that relate to our product candidates. One of those third parties has asked us to compare our Medisorb technology to that third party’s patented technology. Another such third party has asked a collaborative partner to substantiate how our ProLease microspheres are different from that third party’s patented technology. The manufacture, use, offer for sale, sale or importing of any of these product candidates might be found to infringe the claims of these third party patents. A third party might file an infringement action against us. Our cost of defending such an action is likely to be high and we might not receive a favorable ruling.

     We also know of patent applications filed by other parties in the U.S. and various foreign countries that may relate to some of our product candidates if such patents are issued in their present form. If patents are issued to any of these applicants, we may not be able to manufacture, use, offer for sale or sell some of our product candidates without first getting a license from the patent holder. The patent holder may not grant us a license on reasonable terms or it may refuse to grant us a license at all. This could delay or prevent us from developing, manufacturing or selling those of our product candidates that would require the license.

     We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of pharmaceutical and biotechnology companies involves complex legal and factual questions, enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, together with those we may file in the future, or those we may license from third parties, may not result in patents being issued. Even if issued, such patents may not provide us with sufficient proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the U.S.

     We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our collaborative partners, licensors, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other

25

technology not protected by a patent were to be disclosed to, or independently developed by, a competitor, our business and financial condition could be materially adversely affected.

We are exposed to product liability claims and recalls.

     We may be exposed to liability claims arising from the commercial sale of our products, Nutropin Depot or Risperdal Consta, or the use of our product candidates in clinical trials and those awaiting regulatory approval. These claims may be brought by consumers, clinical trial participants, our collaborative partners or third parties selling the products. We currently carry product liability insurance coverage in such amounts as we believe are sufficient for our business. However, we cannot provide any assurance that this coverage will be sufficient to satisfy any liabilities that may arise. As our development activities progress and we continue to have commercial sales, this coverage may be inadequate; we may be unable to obtain adequate coverage at an acceptable cost or we may be unable to get adequate coverage at all. This could prevent or limit our commercialization of our product candidates or commercial sales of our products. Even if we are able to maintain insurance that we believe is adequate, our financial condition may be materially adversely affected by a product liability claim.

     Additionally, product recalls may be issued at our discretion or at the direction of the FDA, other government agencies or other companies having regulatory control for pharmaceutical product sales. We cannot assure you that product recalls will not occur in the future or that, if such recalls occur, such recalls will not adversely affect our business, financial condition or reputation.

We may not be successful in the development of products for our own account.

     In addition to our development work with collaborative partners, we are developing proprietary product candidates for our own account by applying drug delivery technologies to off-patent drugs. Because we will be funding the development of such programs, there is a risk that we may not be able to continue to fund all such programs to completion or to provide the support necessary to perform the clinical trials, obtain regulatory approvals or market any approved products on a worldwide basis. We expect the development of products for our own account to consume substantial resources. If we are able to develop commercial products on our own, the risks associated with these programs may be greater than those associated with our programs with collaborative partners.

If we are not able to develop new products, our business may suffer.

     We compete with other pharmaceutical companies, including large pharmaceutical companies with financial resources and capabilities substantially greater than our resources and capabilities, in the development of new products. We cannot assure you that we will be able to:

•		develop or successfully commercialize new products on a timely basis or at all; or
•		develop new products in a cost effective manner.

     Further, other companies may develop products or may acquire technology for the development of products that are the same as or similar to our platform technologies or the product candidates we have in development. Because there is rapid technological change in the industry and because other companies have more resources than we do, other companies may:

•		develop their products more rapidly than we can;
•		complete any applicable regulatory approval process sooner than we can; or

26

•

offer their newly developed products at prices lower than our prices.

     Any of the foregoing may negatively impact our sales of newly developed products. Technological developments or the FDA’s approval of new therapeutic indications for existing products may make our existing products or those product candidates we are developing obsolete or may make them more difficult to market successfully, any of which could have a material adverse effect on our business and financial condition.

Foreign currency exchange rates may affect revenue.

     To the extent that significant revenues from Risperdal Consta are derived from foreign countries, such revenues may fluctuate when translated to U.S. dollars as a result of changes in foreign currency exchange rates.

We face competition in the biotechnology and pharmaceutical industries.

     We can provide no assurance that we will be able to compete successfully in developing our products and product candidates.

     We face intense competition from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies, including other drug delivery companies. Some of these competitors are also our collaborative partners. These competitors are working to develop and market other drug delivery systems, pharmaceutical products, vaccines and other methods of preventing or reducing disease, and new small-molecule and other classes of drugs that can be used without a drug delivery system.

     There are other companies developing extended-release drug delivery systems and pulmonary delivery systems. In many cases, there are products on the market or in development that may be in direct competition with our products or product candidates. In addition, we know of new chemical entities that are being developed that, if successful, could compete against our product candidates. These chemical entities are being designed to work differently than our product candidates and may turn out to be safer or to be more effective than our product candidates. Among the many experimental therapies being tested in the U.S. and Europe, there may be some that we do not now know of that may compete with our drug delivery systems or product candidates. Our collaborative partners could choose a competing drug delivery system to use with their drugs instead of one of our drug delivery systems and could develop products that compete with our products.

     Many of our competitors have much greater capital resources, manufacturing, research and development resources and production facilities than we do. Many of them also have much more experience than we do in preclinical testing and clinical trials of new drugs and in obtaining FDA and foreign regulatory approvals.

     Major technological changes can happen quickly in the biotechnology and pharmaceutical industries, and the development of technologically improved or different products or drug delivery technologies may make our product candidates or platform technologies obsolete or noncompetitive.

     Further, our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any product candidates that we develop will depend on a number of factors, including:

•

demonstration of their safety and clinical efficacy;

27

•		their cost-effectiveness;
•		their potential advantage over alternative treatment methods;
•		the marketing and distribution support they receive; and
•		reimbursement policies of government and third-party payors.

     Our product candidates, if successfully developed and approved for commercial sale, will compete with a number of drugs and therapies currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our product candidates may also compete with new products currently under development by others or with products which may cost less than our product candidates. Physicians, patients, third-party payors and the medical community may not accept or utilize any of our product candidates that may be approved. If our products do not achieve significant market acceptance, our business and financial condition will be materially adversely affected.

We may not be able to retain our key personnel.

     Our success depends largely upon the continued service of our management and scientific staff and our ability to attract, retain and motivate highly skilled technical, scientific, management, regulatory compliance and marketing personnel. The loss of key personnel or our inability to hire and retain personnel who have technical, scientific or regulatory compliance backgrounds could materially adversely affect our research and development efforts and our business.

If we issue additional common stock, you may suffer dilution of your investment and a decline in stock price.

     As discussed above under “We may require additional funds to complete our programs and such funding may not be available on commercially favorable terms and may cause dilution to our existing shareholders,” we may issue additional equity securities or securities convertible into equity securities to raise funds, thus reducing the ownership share of the current holders of our common stock, which may adversely affect the market price of the common stock. In addition, we were obligated, at March 31, 2004, to issue 15,517,102 shares of common stock upon the vesting and exercise of stock options and vesting of stock awards, 9,978 shares of common stock issuable upon conversion of the 3.75% Subordinated Notes, 2,020,474 shares of common stock issuable upon conversion of the Convertible Preferred Stock and 9,025,275 shares of common stock issuable upon conversion of the 2½% Convertible Subordinated Notes. Any of our shareholders could sell all or a large number of their shares, which could adversely affect the market price of our common stock.

Our common stock price is highly volatile.

     The realization of any of the risks described in these “Risk Factors” or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that were unrelated to the operating performance of any one company. In particular and in addition to circumstances described elsewhere under “Risk Factors,” the following factors can adversely affect the market price of our common stock:

•		non-approval, set-backs or delays in the development of our product candidates and success of our research and development programs;
•		public concern as to the safety of drugs developed by us or others;

28

•		announcements of issuances of common stock or acquisitions by Alkermes;
•		developments of our corporate partners;
•		announcements of technological innovations or new therapeutic products or drug delivery methods by us or others;
•		changes in government regulations or policies or patent decisions;
•		failure to meet our financial expectations or changes in opinions of analysts who follow our stock; and
•		general market conditions.

Anti-takeover provisions may not benefit shareholders.

     We are a Pennsylvania corporation and Pennsylvania law contains strong anti-takeover provisions. In February 2003, our board of directors adopted a shareholder rights plan. The shareholder rights plan provides for a dividend of one preferred share purchase right on each outstanding share of our common stock. Each right entitles shareholders to buy 1/1000^th of a share of our Series A Junior Participating Preferred Stock at an exercise price of $80.00. Each right will become exercisable following the tenth day after a person or group announces an acquisition of or commences a tender offer to purchase 15% or more of our common stock. We will be entitled to redeem the rights at $0.001 per right at any time on or before the close of business on the tenth day following acquisition by a person or group of 15% or more of our common stock. The shareholder rights plan and Pennsylvania law could make it more difficult for a person or group to, or discourage a person or group from attempting to, acquire control of us, even if the change in control would be beneficial to shareholders. Our articles of incorporation and bylaws also contain certain provisions that could have a similar effect. The articles provide that our board of directors may issue, without shareholder approval, preferred stock having such voting rights, preferences and special rights as the board of directors may determine. The issuance of such preferred stock could make it more difficult for a third party to acquire us.

We may not recoup any of our $100 million investment in Reliant.

     In December 2001, we made a $100.0 million investment in Series C convertible, redeemable preferred units of Reliant Pharmaceuticals, LLC (“Reliant”) and we currently own approximately 12% of Reliant’s equity. In March 2004, Reliant converted from a limited liability company to a corporation. Reliant is a privately held pharmaceutical company marketing branded, prescription pharmaceutical products to primary care physicians in the U.S. Our investment in Reliant is illiquid and required us to take noncash charges based on Reliant’s net losses from its operations. We recorded equity losses of $100.0 million related to our Reliant investment from the date of our investment through March 31, 2003 and, as required under the equity method of accounting, our $100.0 million dollar investment was reduced to zero in the same time period. Since we have no further funding commitments to Reliant, we will not record any further share of Reliant’s losses in our consolidated statements of operations and comprehensive loss. We may not see any return on our $100.0 million investment.

Litigation may result in financial losses or harm our reputation and may divert management resources.

     In October and early November 2003, Alkermes and certain of our current and former officers and directors were named as defendants in six purported securities class action lawsuits filed in the U.S.

29

District Court for the District of Massachusetts. On May 14, 2004, the six actions were consolidated into a single action captioned: In re Alkermes Securities Litigation, Civil Action No. 03-CV-12091-RCL (D. Mass.). The complaints allegedly were filed on behalf of purchasers of our common stock during the period April 22, 1999 to July 1, 2002, and generally allege, among other things, that, during such period, the defendants made misstatements to the investing public relating to FDA approval of Risperdal Consta. The complaints seek unspecified damages. This and any other litigation that may be brought against us may result in financial losses, harm our reputation and require the dedication of significant management resources.

Item 2. Properties

     We lease approximately 292,000 square feet of laboratory, manufacturing and office space in Cambridge, Massachusetts under several leases expiring in the years 2004 to 2012. Approximately 81,000 square feet of laboratory and office space in Cambridge, Massachusetts is not utilized by us, however the vast majority is being sublet. A portion of the space was exited in connection with the move into our new corporate headquarters and the balance was exited as a part of the Company’s restructuring of operations undertaken in August 2002. We have completed the move of our cGMP clinical manufacturing suites for the manufacture of product candidates incorporating the ProLease delivery system and the AIR technology in the Company’s headquarters and validation is underway. The leases for the Company’s headquarters and principle location for clinical manufacturing and laboratory space commenced in June 2002 and will terminate in 2012. Such leases contain provisions permitting us to extend the term of such leases for up to two ten-year periods. We also have a 32,000 square foot commercial scale ProLease manufacturing facility in Cambridge, Massachusetts, where we have manufactured Nutropin Depot. On June 1, 2004, Alkermes and Genentech announced the decision to stop commercialization of Nutropin Depot. In connection with this decision, the Company plans to exit this facility in fiscal 2005.

     During fiscal 2001, we entered into a new lease for a 90,000 square foot building which we are developing as a commercial scale AIR manufacturing facility in Chelsea, Massachusetts. The lease term is for fifteen years with an option to extend the term of such lease for up to two five-year periods. Construction of 40,000 square feet of this facility is complete and validation is underway.

     We own and occupy approximately 100,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. The facility contains a 50,000 square foot cGMP production facility designed for the production of Medisorb microspheres on a commercial scale. We have completed construction of the remaining 50,000 square feet of this manufacturing facility and validation is currently underway. We also lease and occupy approximately 30,000 square feet of laboratory and office space in Blue Ash, Ohio under a lease expiring in 2005, which we do not plan to extend.

     We believe that our current and planned facilities in Massachusetts and Ohio are adequate for our current and near-term preclinical, clinical and commercial operations.

Item 3. Legal Proceedings

     Beginning in October 2003, the Company and certain of its current and former officers and directors were named as defendants in six purported securities class action lawsuits filed in the United States District Court for the District of Massachusetts. The cases were captioned: Bennett v. Alkermes, Inc., et. al., 1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc., et. al., 1:03-CV-12184 (D. Mass.); Barry Family LP v. Alkermes, Inc., et. al., 1:03-CV-12243 (D. Mass.); Waltzer v. Alkermes, Inc., et. al., 1:03-CV-12277 (D. Mass.); Folkerts v. Alkermes, Inc., et. al., 1:03-CV-12386 (D. Mass.); and Slavas v. Alkermes, Inc., et. al., 1:03-CV-12471 (D. Mass.). On May 14, 2004, the six actions were consolidated

30

into a single action captioned: In re Alkermes Securities Litigation, Civil Action No. 03-CV-12091-RCL (D. Mass.). The complaints allegedly were filed on behalf of purchasers of the Company’s common stock during the period April 22, 1999 to July 1, 2002, and generally allege, among other things, that, during such period, the defendants made misstatements to the investing public relating to FDA approval of the Company’s Risperdal Consta product. The complaints seek unspecified damages. Although the Company believes these allegations are without merit and intends to vigorously defend against them, the litigation process is inherently uncertain and there can be no guarantee as to the ultimate outcome of these matters.

     From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders of the Company, through the solicitation of proxies or otherwise, during the last quarter of the fiscal year ended March 31, 2004.

31

PART II

Item 5. Market for Our Common Stock and Related Stockholder Matters

Market Information

     Our common stock is traded on the Nasdaq National Market under the symbol ALKS. We have 382,632 shares of our non-voting common stock issued and outstanding. There is no established public trading market for our non-voting common stock. Set forth below for the indicated periods are the high and low sale prices for our common stock.

Stockholders and Dividends

     There were 452 shareholders of record for our common stock and one shareholder of record for our non-voting common stock on June 3, 2004. No dividends have been paid on the common stock or non-voting common stock to date and we do not expect to pay cash dividends thereon in the foreseeable future. The closing share price of our common stock on June 3, 2004 was $13.85.

32

Item 6. Selected Financial Data

Alkermes, Inc. and Subsidiaries
(In thousands, except share and per share data)

33

Consolidated Balance Sheets:

(1) Represents charges (recoveries) in connection with our August 2002 restructuring of operations. We substantially completed our restructuring program during fiscal 2003.

(2) Represents income recognized on the changes in the fair value of warrants of public companies held by us in connection with collaboration and licensing arrangements, which are recorded as derivatives under the caption “Other assets” in the consolidated balance sheets. The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants.

(3) Represents an $80,849 nonrecurring gain related to the exchange of our 3.75% Subordinated Notes for our 6.52% Senior Notes.

(4) Represents noncash charges in connection with derivative liabilities associated with the “Two-Year Interest Make-Whole” payment provision of our 6.52% Senior Notes and the “Three-Year Interest Make-Whole” payment provision of our 2½% Subordinated Notes. The derivative liability is recorded at fair value in the consolidated balance sheets.

(5) Represents our share of Reliant’s losses recorded under the equity method of accounting. Since we have no further funding commitments to Reliant, we will not record any further share of the losses of Reliant in our consolidated statements of operations and comprehensive loss.

34

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Alkermes, Inc. and Subsidiaries

Introduction

     Alkermes, Inc. (as used in this section, together with our subsidiaries, “us”, “we” or “our”), a Pennsylvania corporation organized in 1987, is a pharmaceutical company that develops products based on sophisticated drug delivery technologies to enhance therapeutic outcomes in major diseases. Our lead commercial product, Risperdal^® Consta™ [(risperidone) long-acting injection], is the first and only long-acting atypical antipsychotic medication approved for use in schizophrenia, and is marketed worldwide by Jannsen-Cilag (“Janssen”), a division of Johnson & Johnson. Our lead proprietary product candidate, Vivitrex^® [(naltrexone) long-acting injection], is a once-a-month injection for the treatment of alcohol dependence. We have a pipeline of extended-release injectable and pulmonary drug products based on our proprietary technology and expertise, ProLease and Medisorb for extended-release of injectable drug products, and AIR for inhaled drug products. Our product development strategy is twofold: we partner our proprietary technology systems and drug delivery expertise with several of the world’s finest pharmaceutical companies and we also develop novel, proprietary drug candidates for our own account. Our headquarters are in Cambridge, Massachusetts, and we operate research and manufacturing facilities in Massachusetts and Ohio. Since our inception in 1987, we have devoted a significant portion of our resources to research and development programs and the purchase of property, plant and equipment. At March 31, 2004, we had an accumulated deficit of $553.1 million. We expect to incur substantial additional operating losses over the next few years.

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

Forward-Looking Statements

     Any statements herein or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning future operating results, manufacturing revenues, research and development spending, capital expenditures and future financings. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like “believe,” “expect,” “may,” “will,” “should,” “seek,” or “anticipate,” and similar expressions.

     Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, the forward-looking statements contained in this document, including but not limited to, statements concerning achievement of certain business and operating goals, plans for clinical trials and regulatory approvals, financial goals and projections of capital expenditures, recognition of revenues and the anticipated restructuring charges in connection with the discontinuation of Nutropin Depot are neither promises or guarantees and our business is subject to significant risks and there can be no assurance that our actual results will not differ materially from our expectations. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements include, among others: (i) Risperdal Consta and our product candidates (including our proprietary product candidate, Vivitrex), if approved for marketing, may not be launched

35

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

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

Critical Accounting Policies

     While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Form 10-K for the year ended March 31, 2004, we believe the following accounting policies to be important to the portrayal of our financial condition and results of operations and can require estimates from time to time.

     Revenue Recognition – Manufacturing and royalty revenues consist of revenue earned under certain manufacturing and supply and license agreements for our two commercial products, Risperdal

36

Consta and Nutropin Depot. Manufacturing revenues are earned when product is shipped to our collaborative partners. Royalty revenues are earned on product sales made by our collaborative partners and are recorded in the period the product is sold by our collaborative partners. Manufacturing revenues recognized by us are based on information supplied to us by our collaborative partners and may require estimates to be made.

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

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

     Equity Method Investment in Reliant – In December 2001, we purchased approximately 63% of an offering by Reliant of its Series C convertible, redeemable preferred units, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100.0 million. Through March 31, 2004, the investment had been accounted for under the equity method of accounting because Reliant was organized as a limited liability company, which is treated in a manner similar to a partnership. Because, at the time of our investment, Reliant had an accumulated deficit from operations and a deficit in members’ capital, under applicable accounting rules, our share of Reliant’s losses from the date of our investment was being recognized in proportion to our percentage participation in the Series C financing, and not in proportion to our percentage ownership interest in Reliant. We recorded our equity in the income or losses of Reliant three months in arrears. For the fiscal years ended in 2004, 2003 and 2002, this charge amounted to approximately $0, $94.6 million and $5.4 million respectively, and was recorded in our consolidated statements of operations and comprehensive loss under the caption “equity in losses of Reliant Pharmaceuticals, LLC.” Our $100 million investment was reduced to $0 during the fiscal year ended March 31, 2003.

     During the period from September 2003 through December 2003, Reliant closed on offerings of its Series D convertible, redeemable preferred units at a price of $20 per unit totaling approximately $271.4 million, including the exchange of approximately $65.9 million of existing debt. The Series D convertible, redeemable preferred units rank senior to the Series A, B and C convertible, redeemable preferred units and the common units. The Series D convertible, redeemable preferred units holders are entitled to receive a preferred return at an annual rate of 8.5%, compounded quarterly, of the contributed capital to acquire each unit, when and if declared by the Board of Managers. As a result of the Series D offering by Reliant, Alkermes’ ownership percentage in Reliant has been reduced from approximately 19% to approximately 12%.

     Effective April 1, 2004, Reliant converted from a limited liability company to a corporation under Delaware state law. Because of this change from a limited liability company to a corporation, our investment in Reliant will henceforth be accounted for under the cost method effective April 1, 2004. Alkermes therefore will not record any share of Reliant’s future net income or losses.

37

     Reliant is a privately held company over which we do not exercise control and we have relied on the unaudited and audited financial statements prepared by Reliant’s management and provided to us to calculate our share of Reliant’s losses.

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

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

     Warrant Valuation – We hold warrants to acquire shares of certain publicly held companies, received in connection with our collaboration and licensing activities. The warrants are valued using an established option pricing model and changes in value are recorded in the consolidated statements of operations and comprehensive loss under the caption “Other income, net.” The recorded value of these warrants can fluctuate significantly based on changes in the value of the underlying common stock of the issuer. At March 31, 2004, the warrants had a fair value of approximately $2.9 million and were recorded under the caption “Other assets” in our consolidated balance sheets.

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

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

38

Results of Operations

     The net loss in accordance with accounting principles generally accepted in the U.S. (known as “GAAP”) for the fiscal year ended March 31, 2004 was $102.4 million or $1.25 per share as compared to a net loss of $106.9 million or $1.66 per share for the fiscal year ended March 31, 2003 and a net loss of $61.4 million or $0.96 per share for the fiscal year ended March 31, 2002. Included in the net loss for fiscal 2003 was a $94.6 million noncash charge related to the equity investment we made in Reliant in December 2001, as well as an $80.8 million noncash gain on the exchange of our convertible notes in December 2002.

     Total revenues were $39.1 million for the year ended March 31, 2004 compared to $47.3 million and $54.1 million for the years ended March 31, 2003 and 2002, respectively.

     Total manufacturing and royalty revenues were $29.5 million and $15.5 million for the fiscal years ended March 31, 2004 and 2003, respectively. We began reporting manufacturing and royalty revenues separately from research and development revenues for the first time in fiscal 2003 as revenues earned as a result of the commercial launch of Risperdal Consta in certain countries outside the U.S became material to operating results.

     Total manufacturing revenues were $25.7 million and $14.3 million for the fiscal years ended March 31, 2004 and 2003, respectively, including $25.0 million and $13.0 million, respectively, of manufacturing revenues for Risperdal Consta. The increase in manufacturing revenues for the year ended March 31, 2004 compared to the year ended March 31, 2003 was primarily due to increased shipments of Risperdal Consta to Janssen for the U.S. launch of the product which occurred in December 2003 and to supply product for additional countries around the world. Risperdal Consta is marketed in more than 30 countries. Under our manufacturing and supply agreement with Janssen, we record manufacturing revenues upon shipment of product by Alkermes to Janssen based on a percentage of Janssen’s net selling price. These percentages are based on the volume of units shipped to Janssen in any given calendar year, with a minimum manufacturing fee of 7.5%. In fiscal 2004, our manufacturing revenues were based on an average of 9.8% of Janssen’s net sales price for Risperdal Consta compared to 12.3% in fiscal 2003.

     Total royalty revenues were $3.8 million and $1.2 million for the fiscal years ended March 31, 2004 and 2003, respectively, including $3.1 million and $0.4 million, respectively, of royalty revenues for Risperdal Consta. The increase in royalty revenues for fiscal 2004 compared to fiscal 2003 was due to an increase in global sales of Risperdal Consta by Janssen. Under our license agreements with Janssen, we record royalty revenues equal to 2.5% of Janssen’s net sales of Risperdal Consta in the quarter when the product is sold by Janssen.

     Our research and development revenue under collaborative arrangements was $9.5 million, $31.8 million and $54.1 million for the fiscal years ended in 2004, 2003 and 2002, respectively. The decrease in such revenue for fiscal 2004 as compared to fiscal 2003 was primarily the result of the restructuring of our AIR^® insulin and AIR human growth hormone (“hGH”) programs with Lilly, changes in our partners, as well as changes in the stage of several other collaborative programs. Beginning January 1, 2003, we no longer record research and development revenue for work performed on the Lilly programs but instead use the proceeds from Lilly’s purchase of $30.0 million of our convertible preferred stock in December 2002 to pay for development costs into calendar year 2004. Also, in December 2002, the royalty payable by Lilly to us based on revenues of potential inhaled insulin products was increased. Lilly has the right to return the convertible preferred stock to us in exchange for a reduction in this royalty rate. The Convertible Preferred Stock is convertible into our common stock at the market price at the time of conversion at our option or automatically upon the filing of a new drug application with the FDA for a pulmonary insulin product. At March 31, 2004, approximately $24.6 million of the proceeds from the sale of $30.0 million of our convertible preferred stock had been spent. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our development programs with Lilly. This funding has been recorded as deferred revenue in the consolidated balance sheets and we

39

expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent. The decrease in research and development revenue under collaborative arrangements for fiscal 2003 as compared to fiscal 2002 was primarily the result of the change in the Risperdal Consta program from a development stage program to a commercial product, the restructuring of our AIR insulin and AIR hGH programs with Lilly, changes in our partners and changes in the stage of several other collaborative programs.

     Cost of goods manufactured was $19.0 million in fiscal 2004, consisting of approximately $13.0 million for Risperdal Consta and $6.0 million for Nutropin Depot. Cost of goods manufactured was $10.9 million in fiscal 2003, consisting of approximately $5.5 million for Risperdal Consta and $5.4 million for Nutropin Depot. The increase in cost of goods manufactured in fiscal 2004 as compared to fiscal 2003 was primarily the result of an increase in production of Risperdal Consta for shipment to our partner, Janssen. We began reporting cost of goods manufactured separately from research and development expenses for the first time in fiscal 2003 as revenues earned as a result of the commercial launch of Risperdal Consta became material to operating results.

     Research and development expenses were $91.1 million for the fiscal year ended in 2004 compared to $85.4 million and $92.1 million for the fiscal years ended in 2003 and 2002, respectively. Research and development expenses were higher in the year ended March 31, 2004 as compared to the year ended March 31, 2003 primarily because of an increase in external research expenses related to both the continuing development of the our proprietary product candidates, primarily Vivitrex, and also our collaborator product candidates, as well as an increase in occupancy costs and depreciation expense related to the expansion of our facilities in both Massachusetts and Ohio. The decrease in research and development expenses for fiscal 2003 as compared to fiscal 2002 was primarily because we began separately reporting the cost of goods manufactured for our commercial products in fiscal 2003 as Risperdal Consta moved from a development stage program to a commercial product. This decrease was partially offset by an increase in external research expenses as we advanced our proprietary product candidates and our collaborators’ product candidates through development and clinical trials as well as an increase in occupancy costs and depreciation expense related to the expansion of our facilities in both Massachusetts and Ohio.

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

40

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

______________

     General and administrative expenses were $26.0 million, $26.7 million and $24.4 million for the fiscal years ended in 2004, 2003 and 2002, respectively. Excluding the write off of $2.7 million in deferred merger costs in connection with the termination of our proposed merger with Reliant in the year ended March 31, 2003, general and administrative expenses for fiscal 2004 were higher than in fiscal 2003 primarily as a result of an increase in personnel, consulting and insurance costs. The increase for fiscal 2003 as compared to fiscal 2002 was primarily the result of the write off of the $2.7 million of merger costs described above as a result of the mutual termination of the merger agreement with Reliant in fiscal 2003, partially offset by a decrease in personnel and related costs as a result of our restructuring in August 2002.

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

     In connection with the restructuring program, we recorded charges of approximately $6.5 million in the consolidated statements of operations and comprehensive loss for the year ended March 31, 2003. We recorded recoveries of $0.2 million in fiscal 2004 related to subleases negotiated on more favorable terms than initially estimated. The charges incurred in fiscal 2003 consisted of approximately $1.5 million in employee separation costs, including severance and related benefits, and approximately $5.0 million in facility consolidation and closure costs, including significant estimates relating to a lease cancellation fee, the length of time it will take to sublease certain of our facilities and the lease rates at which the we may negotiate sublease agreements with third parties. As of March 31, 2004, we had paid

41

an aggregate of approximately $1.5 million in employee separation costs and approximately $3.7 million in facility closure costs.

     The amounts in the accrual at March 31, 2004 are expected to be paid through fiscal 2006. Pursuant to the restructuring plan, the following charges and payments have been recorded during the year ended March 31, 2004 and 2003:

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

     Interest income was $3.4 million, $3.8 million and $15.3 million for the fiscal years ended in 2004, 2003 and 2002, respectively. The decrease for fiscal 2004 as compared to fiscal 2003 was primarily the result of a decline in interest rates on investments held during the year, partially offset by higher average cash and investment balances held during the year ended March 31, 2004 compared to the year ended March 31, 2003. The decrease for fiscal 2003 as compared to 2002 was primarily the result of lower average cash and investment balances as compared to the prior year as well as a decline in market interest rates.

     Other income, net was $2.1 million in fiscal 2004 as compared to $0 in fiscal 2003 and 2002. Other income, net represents income recognized on the changes in the fair value of warrants of public companies held by us in connection with collaboration and licensing arrangements, which are recorded as derivatives under the caption “Other assets” in the consolidated balance sheets. The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants.

     Interest expense was $6.5 million for the fiscal year ended in 2004 as compared to $10.4 million and $8.9 million for the fiscal years ended in 2003 and 2002, respectively. The decrease for fiscal 2004 as compared to fiscal 2003 was primarily the result of a decrease in the outstanding average debt balance as well as a lower interest rate payable on the convertible debt outstanding during the respective periods. The increase for fiscal 2003 as compared to fiscal 2002 was primarily the result of interest charges related to the 6.52% Convertible Senior Subordinated Notes (the “6.52% Senior Notes”) issued in December 2002.

     Gain on exchange of notes was $80.8 million for the fiscal year ended in 2003 and was a result of the gain on the exchange of $199.3 million principal of the 3.75% Convertible Subordinated Notes due 2007 (the “3.75% Subordinated Notes”) for $114.6 million principal of the 6.52% Senior Notes in December 2002.

     Derivative loss related to convertible subordinated notes was $4.5 million, $4.3 million and $0 for the fiscal years ended in 2004, 2003 and 2002, respectively.

42

     We recorded a derivative liability related to the 6.52% Senior Notes. The Two-Year Interest Make-Whole provision, included in the note indenture and described in Note 6 to our consolidated financials statements included in this Form 10-K, represented an embedded derivative which was required to be accounted for apart from the underlying 6.52% Senior Notes. At issuance of the 6.52% Senior Notes, the Two-Year Interest Make-Whole feature was estimated to have a fair value of $9.0 million and the initial recorded value of the 6.52% Senior Notes was reduced by this allocation. The estimated value of the Two-Year Interest Make-Whole feature was carried in the consolidated balance sheets under the caption “derivative liability related to convertible subordinated notes” and was adjusted quarterly through “derivative loss related to convertible notes” in the consolidated statements of operations and comprehensive losses for changes in the estimated market value of the feature. During the fiscal years ended March 31, 2004, 2003 and 2002, we recorded charges of $3.8 million, $4.3 million and $0, respectively, in the consolidated statements of operations and comprehensive loss for changes in the estimated value of the feature after issuance. In June 2003, we announced that we had exercised our automatic conversion right for the 6.52% Senior Notes. The embedded derivative was adjusted to the value of the remaining balance of the Two-Year Interest Make-Whole payment, or approximately $17.1 million, at June 30, 2003 and was accounted for as a liability on the consolidated balance sheets. In July 2003, upon conversion of the then outstanding 6.52% Senior Notes and payment of the Two-Year Interest Make-Whole, the embedded derivative was settled in full and the balance was reduced to zero.

     We also recorded a derivative liability related to the 2½% Convertible Subordinated Notes due 2023 (the “2½% Subordinated Notes”). The Three-Year Interest Make-Whole, included in the note indenture and described in Note 6 to our consolidated financial statements in this Form 10-K, represented an embedded derivative which was required to be accounted for apart from the underlying 2½% Subordinated Notes. At issuance of the 2½% Subordinated Notes, the Three-Year Interest Make-Whole had an estimated initial aggregate fair value of $3.9 million, which reduced the amount of the outstanding debt and has been recorded as a derivative liability in the consolidated balance sheets. The $3.9 million initially allocated to the Three-Year Interest Make-Whole feature has been treated as a discount on the 2½% Subordinated Notes and is being accreted to interest expense over five years through September 1, 2008, the first date on which holders of the 2½% Subordinated Notes have the right to require us to repurchase the 2½% Subordinated Notes. The estimated value of the Three-Year Interest Make-Whole feature is carried in the consolidated balance sheets under the caption “derivative liability related to convertible notes” and will be adjusted to its fair value on a quarterly basis until it expires or is paid. Quarterly adjustments to the fair value of the Three-Year Interest Make-Whole will be charged to “derivative losses related to convertible notes” in the consolidated statements of operations and comprehensive loss until it is paid out or expires. During the fiscal years ended March 31, 2004, 2003 and 2002, we recorded net charges of $0.8 million, $0 and $0, respectively, in the consolidated statements of operations and comprehensive loss for changes in the estimated value of the feature after issuance. The recorded value of the derivative liability related to the 2½% Subordinated Notes, approximately $4.7 million and $0 at March 31, 2004 and 2003, respectively, can fluctuate significantly based on fluctuations in the market value of the our common stock.

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

43

Discontinuation of Nutropin Depot

     On June 1, 2004, Alkermes and Genentech announced the decision to discontinue commercialization of Nutropin Depot. The decision was based on the significant resources required by both companies to continue manufacturing and commercializing the product. In connection with this decision, we will cease commercial manufacturing of Nutropin Depot and record restructuring charges in the quarter ended June 30, 2004 currently estimated to aggregate between $15.0 and $20.0 million. These restructuring charges will include the write-off of equipment, inventory and leasehold improvements related to the manufacture of Nutropin Depot as well as employee separation costs, including severance and related benefits. The restructuring charges will also include lease costs and significant estimates related to the costs to maintain the facility in which Nutropin Depot was produced through the end of its lease term, August 2008. A portion of the restructuring charges will be recorded under the caption cost of goods manufactured in the consolidated statements of operations and comprehensive loss and relate to a one time write-off of Nutropin Depot inventory.

Reliant

     In December 2001, we purchased approximately 63% of an offering by Reliant of its Series C convertible, redeemable preferred units, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100.0 million. Through March 31, 2004, the investment had been accounted for under the equity method of accounting because Reliant was organized as a limited liability company, which is treated in a manner similar to a partnership. At the time of our investment, Reliant had an accumulated deficit from operations and a deficit in members’ capital; as a result under applicable accounting rules, our share of Reliant’s losses from the date of the our investment was being recognized in proportion to our percentage participation in the Series C financing, and not in proportion to our percentage ownership interest in Reliant. We recorded our equity in the income or losses of Reliant three months in arrears. For the fiscal years ended in 2004, 2003 and 2002, this charge amounted to approximately $0, $94.6 million and $5.4 million respectively, and was recorded in our consolidated statements of operations and comprehensive loss under the caption “equity in losses of Reliant Pharmaceuticals, LLC.”

     Reliant is a privately held company over which we do not exercise control and we have relied on the unaudited and audited financial statements prepared by Reliant’s management and provided to us to calculate our share of Reliant’s losses. Our $100.0 million investment was reduced to $0 during the fiscal year ended March 31, 2003.

     In connection with our $100.0 million equity investment in Reliant, we allocated our proportionate share of the assets acquired and liabilities assumed in accordance with the guidance set forth in SFAS No. 141, “Business Combinations.” In the quarter ended December 31, 2001, we recorded a $2.7 million noncash charge for in-process research and development through the consolidated statements of operations and comprehensive loss under the caption “equity in losses of Reliant Pharmaceuticals, LLC.”

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

44

each unit when and if declared by the Board of Managers. As a result of the Series D offering by Reliant, Alkermes’ ownership percentage in Reliant was reduced from approximately 19% to approximately 12%.

     Effective April 1, 2004, Reliant converted from a limited liability company to a corporation under Delaware state law. Because of this change from a limited liability company to a corporation, our investment in Reliant will henceforth be accounted for under the cost method effective April 1, 2004. We therefore will not record any share of Reliant’s future net income or losses.

     In March 2002, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reliant. In August 2002, we and Reliant announced the mutual termination of the Merger Agreement. The companies agreed to terminate due to general market conditions. There were no payments triggered by the mutual termination and each company was responsible for its own legal and transaction fees. As a result of the termination of the Merger Agreement, we expensed approximately $2.7 million in fiscal 2003 of deferred merger costs that are included in general and administrative expenses.

45

46

Liquidity and Capital Resources

     Cash and cash equivalents and short-term investments were approximately $143.9 million at March 31, 2004 as compared to $136.1 million at March 31, 2003. During the fiscal year ended in 2004 we received approximately $121.0 million in net proceeds from the sale of our 2½% Subordinated Notes, approximately $7.0 million from Lilly in order to fund an increase in the scope of our development programs with Lilly and approximately $3.4 million in proceeds from stock option exercises. This increase in cash was offset by cash used to fund our operations, to acquire fixed assets and to make interest and principal payments on our indebtedness.

     We invest in cash equivalents, U.S. Government obligations, high-grade corporate notes and commercial paper, with the exception of our $100 million investment in Reliant. Our investment objectives for our investments, other than our investment in Reliant, are, first, to assure liquidity and conservation of capital and, second, to obtain investment income. Investments classified as long-term at March 31, 2004 consist of U.S. Government obligations held as collateral under certain letters of credit and lease agreements.

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

     In June 2003, we announced that we had exercised our right to automatically convert all of our outstanding 6.52% Senior Notes into shares of our common stock in July 2003. During June and July 2003, approximately $150.7 million principal amount of 6.52% Senior Notes were exchanged for, and approximately $23.9 million principal amount of 6.52% Senior Notes were converted into, our common stock. In aggregate, we issued 24.0 million shares of common stock in connection with the exchanges and conversion and paid approximately $2.3 million in cash to satisfy the Two-Year Interest Make-Whole payment. None of the 6.52% Notes are currently outstanding and no gain or loss was recorded on the conversion of the 6.52% Senior Notes, which was done in accordance with the underlying indenture.

     In August and September 2003, we issued an aggregate of $100.0 million and $25.0 million, respectively, principal amount of 2½% Subordinated Notes. The 2½% Subordinated Notes are convertible into shares of our common stock at a conversion price of $13.85 per share, subject to adjustment in certain events. The 2½% Subordinated Notes bear interest at 2½% per year, payable semiannually on March 1 and September 1, commencing on March 1, 2004 and are subordinated to existing and future senior indebtedness of Alkermes.

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

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

     As a part of the sale of the 2½% Subordinated Notes, we incurred approximately $4.0 million of offering costs, which were recorded as “Other assets” in the consolidated balance sheets and are being

47

amortized to interest expense over five years through September 1, 2008, the first date on which holders of the 2½% Subordinated Notes have the right to require us to repurchase the 2½% Subordinated Notes.

     In December 2002, we and Lilly expanded the collaboration for the development of inhaled formulations of insulin and hGH based on our AIR pulmonary drug delivery technology and Lilly purchased $30.0 million of our Convertible Preferred Stock pursuant to a stock purchase agreement. We agreed to use the proceeds from the Convertible Preferred Stock to fund the development of inhaled insulin and hGH during calendar year 2003 and into calendar year 2004. We will not record any research and development revenue for these programs related to the $30.0 million in proceeds from the Convertible Preferred Stock. To the extent that the $30.0 million is not used for purposes specified in the agreement, Lilly will be entitled to credits for additional research services in the future. In addition, the royalty rate payable to us based on revenues of potential inhaled insulin products has been increased. Lilly has the right to return the Convertible Preferred Stock to us in exchange for a reduction in this royalty rate. The Convertible Preferred Stock is convertible into our common stock at the market price at the time of conversion at our option or automatically upon the filing of a new drug application with the FDA for a pulmonary insulin product. The collaboration cannot terminate without cause until January 2005. We will register for resale all of our shares of common stock issued upon conversion of the Convertible Preferred Stock. At March 31, 2004, approximately $24.6 million of the proceeds from the sale of $30.0 million of our convertible preferred stock had been spent. In December 2003, Lilly made payments to us totaling approximately $7.0 million in order to fund an increase in the scope of our Lilly development programs. This funding has been recorded as deferred revenue in the consolidated balance sheets and we expect to recognize the $7.0 million as revenue after the proceeds from the sale of $30.0 million of our convertible preferred stock have been spent.

     In August 2002, we announced the regulatory approval and expected commercial launch of Risperdal Consta in Germany and the United Kingdom. Under a manufacture and supply agreement with Janssen and based on the foregoing, Janssen is required to pay us certain minimum amounts of manufacturing revenues relating to our sales of Risperdal Consta to Janssen. The actual amount of such minimum manufacturing revenues will be determined by a formula and is currently estimated to aggregate approximately $150.0 million. As of March 31, 2004, we had recognized approximately $38.0 million of cumulative manufacturing revenues against the estimated $150.0 million minimum. Janssen’s minimum revenue obligation will be satisfied when Alkermes reaches approximately $150.0 million in cumulative manufacturing revenues earned from sales of Risperdal Consta to Janssen. While the manufacture and supply agreement with Janssen specifies annual minimum revenues expected to be paid to Alkermes over a ten year period beginning in calendar 2003, we expect our annual manufacturing revenues to exceed those annual minimums. In December 2002, Janssen prepaid the first two years of minimum manufacturing revenues to us, totaling $23.9 million and these amounts were recorded as deferred revenue in our consolidated balance sheets. As of March 31, 2004, approximately $10.1 million of this prepayment was unearned and was recorded as a current liability under the caption deferred revenue in the consolidated balance sheets.

     At March 31, 2004, we have approximately $502.8 million of net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes available to offset future taxable income and approximately $24.2 million of research and development tax credits available to offset future federal income tax, subject to limitations for alternative minimum tax. The NOL and research and development credit carryforwards are subject to examination by the tax authorities and expire in various years from fiscal 2005 through 2024. Due to the uncertainty of realizing the future benefits of the net deferred income tax assets, a full valuation allowance has been established at March 31, 2004 and, therefore, no benefit has been recognized in the financial statements.

48

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

     Capital expenditures were approximately $15.1 million for the year ended March 31, 2004, principally reflecting equipment purchases and building expansion and improvements. We expect our capital expenditures to total approximately $25.0 million during fiscal year 2005, primarily to expand our manufacturing infrastructure for Risperdal Consta, Exenatide LAR and Vivitrex in addition to continued improvements to our manufacturing and development facilities in Massachusetts and Ohio. Our capital expenditures for equipment, facilities and building improvements have been financed to date primarily with proceeds from bank loans and the sales of debt and equity securities. Under the provisions of the existing loans, General Electric Capital Corporation (“GECC”) and Johnson & Johnson Finance Corporation have security interests in certain of our assets.

     We have summarized below our material contractual cash obligations as of March 31, 2004:

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

     We believe that our current cash and cash equivalents and short-term investments, combined with anticipated interest income, manufacturing and royalty revenues and research and development revenues

49

under collaborative arrangements, will be sufficient to meet our anticipated capital requirements through at least March 31, 2006.

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

Recent Accounting Pronouncements

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

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

     In January 2003 and December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), and its revision, FIN 46-R, respectively. FIN 46 and FIN 46-R addresses the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (VIEs), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 and FIN 46-R are applicable for financial statements of public entities that have interests in VIEs or potential VIEs referred to as special purpose entities for periods ending after December 15, 2003, of which we had none. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. We have applied the provisions of FIN 46 and FIN 46-R and the adoption of these statements was not material to our consolidated financial position and results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     As part of our investment portfolio we own financial instruments that are sensitive to market risks. The investment portfolio, excluding our December 2001 $100 million investment in Reliant, is

50

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

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

     A 10% increase or decrease in market interest rates on our 2½% Subordinated Notes and our 3.75% Subordinated Notes would result in no material impact on our notes.

Foreign Currency Exchange Rate Risk

     The royalty revenues we receive on Risperdal Consta are a percentage of the net sales made by our collaborative partner. Some of these sales are made in foreign countries and are denominated in foreign currencies. The royalty payment on these foreign sales is calculated initially in the foreign currency in which the sale is made and is then converted into U.S. dollars to determine the amount that our collaborative partner pays us for royalty revenues. Fluctuations in the exchange ratio of the U.S. dollar and these foreign currencies will have the effect of increasing or decreasing our royalty revenues even if there is a constant amount of sales in foreign currencies. For example, if the U.S. dollar strengthens against a foreign currency, then our royalty revenues will decrease given a constant amount of sales in such foreign currency.

     The impact on our royalty revenues from foreign currency exchange rate risk is based on a number of factors, including the amount of sales in any foreign currency, the exchange ratio (and the change in the exchange ratio from the prior period) between a foreign currency and the U.S. dollar, and the amount of sales by our collaborative partner that are denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk.

Item 8. Financial Statements and Supplementary Data

     All financial statements required to be filed hereunder are filed as an exhibit hereto, are listed under Item 15 (a)(1) and (2) and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     Not applicable.

Item 9A. Controls and Procedures

     As of March 31, 2004, Alkermes’ management, with the participation of Alkermes’ Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Alkermes’ disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of

51

1934, as amended (the “Exchange Act”). Based upon that evaluation, Alkermes’ Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2004, Alkermes’ disclosure controls and procedures were effective in ensuring that material information required to be disclosed by Alkermes in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to Alkermes’ management, including Alkermes’ Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in Alkermes’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Alkermes’ internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

     The information required by this item is incorporated herein by reference to our Proxy Statement for our annual shareholders’ meeting (the “2004 Proxy Statement”).

Item 11. Executive Compensation

     The information required by this item is incorporated herein by reference to the 2004 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information required by this item is incorporated herein by reference to the 2004 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

     The information required by this item is incorporated herein by reference to the 2004 Proxy Statement.

Item 14. Principal Accountant Fees and Services

     The information required by this item is incorporated herein by reference to the 2004 Proxy Statement.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)

Documents filed as part of the Report:

(1)		The consolidated financial statements of Alkermes, Inc. required by this item are submitted in a separate section beginning on page F-1 of this Report.
(2)		Financial Statement Schedule:

I

Financial Statements of Reliant Pharmaceuticals, LLC (financial statements required by Regulation S-X) are submitted in a separate section beginning on page I-1 of this Report.

52

		Schedules other than that listed above have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
(3)		Exhibits

53

54

55

56

*

Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted August 19, 1999. Such provisions have been filed separately with the Commission.

**

Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 27, 2001. Such provisions have been filed separately with the Commission.

57

***		Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 3, 1996. Such provisions have been filed separately with the Commission.
§		Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 16, 2002. Such provisions have been separately filed with the Commission.
+		Constitutes a management contract or compensatory plan required to be filed as an Exhibit to this Report pursuant to Item 15(c) of Form 10-K.

(b)

During the quarter ended March 31, 2004, the Registrant filed or furnished Current Reports on Form 8-K as follows:

58

UNDERTAKING

     For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant’s Registration Statements on Form S-8, Nos. 333-72988, 333-89573, 333-89575, 333-48768, 333-48772, 333-71011, 333-50357, 333-13283, 33-97468, 33-58330, 333-107206, 333-109376, 333-107208 and 33-44752 and on Form S-3, Nos. 333-75649 and 333-108483.

     Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

59

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALKERMES, INC.
June 10, 2004	By:	/s/ Richard F. Pops
		Richard F. Pops
		Chief Executive Officer

POWER OF ATTORNEY

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

     Each person whose signature appears below in so signing also makes, constitutes and appoints Richard F. Pops and James M. Frates, and each of them, his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to this Form 10-K, with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.

60

61

Alkermes, Inc. and Subsidiaries

Consolidated Financial Statements as of March 31, 2004 and 2003 and for the Three Years in the Period Ended March 31, 2004 and Report of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Alkermes, Inc.
Cambridge, Massachusetts

We have audited the accompanying consolidated balance sheets of Alkermes, Inc. and subsidiaries (the “Company”) as of March 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended March 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
June 10, 2004

F-1

ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003

See notes to consolidated financial statements.

F-2

ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002