UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)

(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

(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 þ          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 þ          No o

      As of September 30, 2004 (the last business day of the second fiscal quarter) the aggregate market value of the 87,835,891 outstanding shares of voting and non-voting common equity held by non-affiliates of the registrant was $1,013,626,182. Such aggregate value was computed by reference to the closing price of the common stock reported on the NASDAQ National Market on September 30, 2004.

      As of May 31, 2005, 90,021,880 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, 2005 for the Registrant’s Annual Shareholders’ Meeting are incorporated by reference into Part III of this Report on Form 10-K.

PART I

      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 being developed as a once-monthly injection for the treatment of alcohol dependence. We have a pipeline of extended-release injectable products and pulmonary drug products based on our proprietary technologies and expertise. Our product development strategy is twofold: we partner our proprietary technology systems and drug delivery expertise with some of the world’s finest pharmaceutical companies and we also develop novel proprietary drug candidates for our own account. Our headquarters is 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, both with partners and on our own, novel drug products that may enhance therapeutic outcomes. The key elements of our strategy are as follows:

      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, to share development risk and, in some cases, to provide access to patented drug candidates.

      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 any partners we are working with 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 drugs in development that could benefit from our delivery systems.

      Establish independent product development capabilities and infrastructure. Based upon our own knowledge 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.

      Expand our pipeline with additional product candidates for our own account. We develop our own proprietary product candidates by applying our drug delivery technologies to certain off-patent pharmaceuticals. For example, we have completed a Phase III clinical trial for Vivitrex for the treatment of alcohol dependence and submitted a New Drug Application (“NDA”) to the FDA for marketing

approval of Vivitrex. 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 own specialized sales and marketing capabilities. We are in the process of establishing an organization for the sales and marketing of Vivitrex. We are also in discussions with potential marketing partners regarding the commercialization of Vivitrex. We may seek to expand our commercial capabilities through the development, or acquisition, of additional products.

Products and Product Candidates in Development

      The following table summarizes the primary indications, 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.

Products and Development Programs

      Risperdal Consta. We have developed a long-acting formulation of Janssen’s antipsychotic drug Risperdal, called Risperdal Consta, using our Medisorb® technology for the treatment of schizophrenia, a brain disorder the symptoms of which include disorganized thinking, delusions and hallucinations. Risperdal Consta is marketed in more than 45 countries around the world including the U.S., U.K., Spain, France and Germany. The product has been approved in more than 75 countries, and 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 $3.1 billion worldwide in 2004 for the relief of symptoms associated with schizophrenia and bipolar disorder. In January 2005, Janssen announced the initiation of a Phase III clinical trial with Risperdal Consta, with the goal of expanding the label to include maintenance therapy for bipolar disorder. Risperdal Consta is administered via injection every two weeks, as opposed to Risperdal tablets, which must be taken daily.

      We are the exclusive manufacturer of Risperdal Consta for Janssen, and 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 2005, our manufacturing revenues were based

on an average of 8.1% of Janssen’s net sales price for Risperdal Consta compared to 9.8% in fiscal 2004 and 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. In January 2005, we announced that we would be expanding the capacity of our plant in Wilmington, Ohio to produce Risperdal Consta, with funding support from Janssen.

      Under our manufacture and supply agreement, 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 the minimum manufacturing revenues is determined by a formula and is currently estimated to aggregate approximately $184.5 million. This amount was increased from $150.0 million in the fourth quarter of fiscal 2005, as a result of additional investment by us in the Risperdal Consta manufacturing infrastructure. As of March 31, 2005, we had recognized approximately $78.5 million of cumulative manufacturing revenues against the estimated $184.5 million minimum. Janssen’s minimum revenue obligation will be satisfied when Alkermes reaches approximately $184.5 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 us 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, 2005, we have recognized the $23.9 million as revenue in our consolidated statement of operations and comprehensive loss.

      Vivitrex. Vivitrex, our most advanced proprietary product candidate, is an injectable, extended-release Medisorb formulation of naltrexone. Naltrexone is an FDA-approved drug indicated for the treatment of alcohol dependence and for the blockade of effects of exogenously administered opioids, and is currently available in daily oral dosage form. It is estimated that in the U.S., 2.3 million individuals seek treatment for alcoholism each year. We believe there is a significant need for a product that will offer a new treatment option and may help improve day-to-day compliance in this patient population. Vivitrex is designed to provide once-monthly dosing and provides the option to alcohol dependent patients of a once-monthly injection rather than the once-daily oral dosing regimen of naltrexone. In March 2005, we submitted an NDA to the FDA for marketing approval of Vivitrex. In May 2005, we were informed by the FDA that the NDA has been filed for review and has been granted a priority review designation. The submission of the NDA does not guarantee approval for marketing.

      In April 2005, the Journal of the American Medical Association (JAMA) published the results of our Phase III study of Vivitrex in alcohol dependent patients. The multi-center, double-blind, placebo-controlled study of 624 patients showed that a once-monthly dose of Vivitrex, in combination with counseling, significantly reduced the rate of heavy drinking in alcohol dependent patients over the six-month treatment period.

      If approved, we will manufacture Vivitrex for commercial sales. We plan to commercialize Vivitrex using a specialty sales force to call on addiction specialists and substance abuse centers, however, we are also in discussions with potential partners regarding the commercialization of Vivitrex in the U.S. and around the world.

      AIR insulin. We are collaborating 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 formulation, which is currently in Phase II clinical development. Lilly is responsible for conducting such clinical trials. We will manufacture AIR insulin for clinical trials. Under our current agreement we and Lilly will manufacture such products for commercial sales, if any.

      In August 2004, Lilly made a positive product decision to proceed with significant investment for the further development of AIR insulin. The decision followed the successful execution of several critical steps: the completion and analysis of data from a Phase II study; the attainment of certain manufacturing capabilities as decided by Lilly; and the development and testing of the commercial AIR insulin inhaler

system. The Phase II trial was a multi-center, cross-over design study with 120 patients with type 1 diabetes receiving an inhaled formulation of insulin using AIR technology for a three-month period.

      In December 2002, we expanded our collaboration with Lilly following the achievement of development milestones relating to clinical progress and manufacturing activities for our AIR insulin dry powder aerosol and inhaler. 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 2004. In addition, under this agreement, the royalty rate payable to us based on revenues of potential AIR 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, under certain conditions at our option, and automatically upon filing of an NDA with the FDA for an AIR insulin product. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million to fund an increase in the scope of our AIR insulin and AIR hGH development programs with them. As of March 31, 2005, this funding has been recorded as revenue in the consolidated statement of operations and comprehensive loss. Ongoing development work is being funded by Lilly.

      Exenatide LAR. We are developing a long-acting release (LAR) Medisorb formulation of Amylin Pharmaceutical, Inc.’s (“Amylin”) exenatide. Exenatide injection (trade name BYETTA^tm) was recently approved by the FDA as adjunctive therapy to improve blood sugar control in patients with type 2 diabetes who have not achieved adequate control on metformin and/or a sulfonylurea, two commonly used oral diabetes medications. BYETTA is a twice daily injection. Amylin has entered into a collaboration agreement with Lilly for the development and commercialization of exenatide, including exenatide LAR.

      In January 2005, Alkermes, Amylin and Lilly initiated a Phase II randomized, placebo-controlled, multi-dose study of exenatide LAR in patients with type 2 diabetes using a once-a-week dosing regimen. The multiple-dose study includes approximately 45 subjects with type 2 diabetes who were failing to achieve adequate glucose control using diet and exercise with or without metformin.

      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 on terms and conditions to be determined. Amylin is responsible for conducting clinical trials, securing regulatory approvals and marketing any products resulting from the collaboration on a worldwide basis.

      AIR hGH. We are collaborating with Lilly to develop an inhaled formulation of human growth hormone (“hGH”) based on our AIR pulmonary drug delivery technology. In January 2002, we announced the decision to proceed with multi-dose Phase I clinical studies for inhaled hGH 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 AIR hGH development program, including certain clinical trials, during calendar year 2003 and into 2004. Lilly is conducting clinical trials for AIR hGH. We will manufacture the AIR hGH formulation for both clinical trials and commercial manufacturing, if any. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million to fund an increase in the scope of our AIR insulin and AIR hGH development programs with them. As of March 31, 2005, this funding has been recorded as revenue in the consolidated statement of operations and comprehensive loss. Ongoing development work is being funded by Lilly.

      AIR 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 our 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. We have completed our third Phase I study of inhaled epinephrine and 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.

Collaborative Arrangements

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

Janssen

      Pursuant to a development agreement, we collaborated with Janssen on the development of Risperdal Consta. 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. Risperdal Consta has been approved in more than 75 countries, including the U.S. Risperdal Consta has been launched in more than 45 countries, including the U.S. and major European markets. We exclusively manufacture Risperdal Consta for commercial sale and receive manufacturing revenues when product is shipped to Janssen and royalty revenues upon the final 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. 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

      We entered into a development and license agreement with Lilly in April 2001 for the development of inhaled formulations of insulin and other compounds potentially useful 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 the development of a device to use in connection with any products developed. Lilly has paid or will pay to us certain initial fees, research funding and milestones payable upon achieving certain development and commercialization goals. Lilly has exclusive worldwide rights to make, use and sell pulmonary formulations of such compounds. Lilly will be responsible for clinical trials, obtaining all regulatory approvals and marketing any AIR insulin products. We will 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.

      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 180 days’ 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 of written notice of material breach or default.

      We entered into an agreement with Lilly in February 2002 that provided for an investment by them in our production facility for inhaled pharmaceutical products based on our AIR pulmonary drug delivery technology. This facility, located in Chelsea, Massachusetts, is designed to accommodate the

manufacturing of multiple products. Lilly’s investment was used to fund a portion of AIR 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 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 for inhaled insulin during calendar year 2003 and used the remaining proceeds in calendar year 2004. In addition, the royalty rate payable to us based on revenues of potential AIR 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, under certain conditions at our option, and automatically upon filing of an NDA with the FDA for an AIR insulin product. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million to fund an increase in the scope of our AIR insulin and AIR hGH development programs with them. As of March 31, 2005, this funding has been recorded as revenue in the consolidated statement of operations and comprehensive loss.

      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 the development of a device to use in connection with any products developed. Lilly has paid or will pay to us certain initial fees, research funding and milestones payable upon achieving certain development and commercialization goals. In connection with the December 2002 preferred stock transaction, we agreed to use a portion of the proceeds to fund the AIR hGH development program during calendar year 2003 and into 2004. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million to fund an increase in the scope of our AIR insulin and AIR hGH development programs with them. As of March 31, 2005, this funding has been recorded as revenue in the consolidated statement of operations and comprehensive loss. 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 180 days’ 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 of written notice of material breach or default.

Amylin

      We entered into a development and license agreement with Amylin in May 2000 for the development of a long-acting Medisorb formulation of exenatide LAR for the treatment of type 2 diabetes.

      Pursuant to the development and license 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 future product sales, if any. 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 on terms and conditions to be determined. 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 upon 90 days’ written notice if such termination occurs before filing an NDA with the FDA or 180 days’ 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

      In October 2004, Alkermes and Serono discontinued the development of a sustained-release version of recombinant human follicle stimulating hormone (“r-hFSH”) for the treatment of infertility.

Genentech

      On June 1, 2004, Alkermes and Genentech, Inc. (“Genentech”) announced the decision to stop commercialization of Nutropin Depot®, an injectable long-acting formulation of Genentech’s recombinant growth hormone for pediatric use based on our ProLease® drug delivery system. 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 ceased commercial manufacturing of Nutropin Depot and recorded net restructuring charges of approximately $11.5 million in our consolidated statement of operations and comprehensive loss in fiscal 2005. The restructuring charges consisted of approximately $0.1 million in employee separation costs, including severance and related benefits, and approximately $11.4 million in facility closure costs, including fixed asset write-offs and estimates of future lease costs relating to our ability to sublease the exited facility through the end of the lease term in August 2008. In addition to the restructuring charges, we also recorded a one-time write-off of Nutropin Depot inventory of approximately $1.3 million in fiscal 2005, which was recorded under the caption “Cost of goods manufactured” in our consolidated statement of operations and comprehensive loss.

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 small molecules, proteins and peptides. We partner our proprietary technology systems and drug delivery expertise with leading pharmaceutical and biotechnology companies and develop novel, proprietary drug candidates for our own account.

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, and also 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 a 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 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.

      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 disaggregate 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 clinical and commercial manufacturing facilities in Massachusetts and Ohio that are responsible for making product from our three product technologies, Medisorb, Prolease and AIR. We either purchase active drug product from third parties or receive it from our third party collaborators to formulate using our product technologies. The manufacture of our product candidates for clinical trials and commercial purposes is subject to current good manufacturing practices (cGMP) and other regulatory agency regulations. We have been producing commercial products since 1999 and have limited experience operating FDA-approved commercial manufacturing sites. Delays in obtaining regulatory agency approvals may result in delays in commercial launch. 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 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.

      We own and occupy approximately 100,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. We manufacture Risperdal Consta for Janssen at this facility. The facility has been inspected by U.S. and European regulatory authorities and they have concluded that the facility meets required cGMP standards for continued commercial manufacturing. In January 2005, we announced that we will expand bulk production capacity for Risperdal Consta. The expansion of this facility is designed to meet anticipated future demand for Risperdal Consta. Our partner, Janssen, will help fund the building of a new bulk manufacturing line.

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 lease a 32,000 square foot commercial scale manufacturing facility in Cambridge, Massachusetts that we are not currently utilizing. We exited this facility in connection with the restructuring of operations in June 2004 and have marketed it for sublet. The lease expires in August 2008.

      We have a cGMP clinical production facility, within our headquarters facility, in Cambridge, Massachusetts. The facility is used to manufacture product candidates using our ProLease extended-release delivery system for use in clinical trials.

AIR

      The AIR manufacturing process uses spray drying technology to produce highly porous particles for drug delivery to the lung. We combine drugs provided by our partners or purchased from generic manufacturers 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 in Cambridge, Massachusetts where powders and final dosage units are prepared under cGMP for use in clinical trials.

      In February 2002, we entered into an agreement with Lilly that provided for an investment by Lilly in our production facility for inhaled pharmaceutical products based on our AIR pulmonary drug delivery technology. This 90,000 square foot facility located in Chelsea, Massachusetts is designed to accommodate

manufacturing of multiple products and contains a 40,000 square foot facility used for clinical production. AIR’s inhalation devices are produced under cGMP at a contract manufacturer in the U.S.

Marketing

      Under our collaboration agreements with Janssen, Lilly and Amylin, these companies have the right and the obligation to market the products developed thereunder if, and when, regulatory approval is obtained. If approved, we plan to commercialize Vivitrex using a specialty sales force to call on addiction specialists and substance abuse centers. We are also in discussions with potential partners to assist us in marketing Vivitrex in the U.S. and around the world. We currently have no internal sales and marketing capabilities, or an infrastructure to support such activities, and have limited experience in the commercialization of pharmaceutical products. Therefore, the successful commercial launch of Vivitrex and our future profitability may depend on our ability to develop a capable specialty sales force and suitable marketing capabilities for Vivitrex and/or entering into a partnering arrangement for Vivitrex.

      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 capability 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 experience 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, product candidates or our technologies obsolete or noncompetitive, or that our collaborators will not choose to use competing drug delivery methods. Presently, 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 more capital resources, manufacturing and marketing experience, research and development resources and production facilities than we do. Many of these competitors also have significantly more 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. For example, a number of products are being developed which may compete with Risperdal Consta, including a number of new oral compounds for the treatment of schizophrenia, and paliperidone palmitate, an injectable, four week long-acting product being developed by Johnson & Johnson. With respect to AIR, we are aware that there are other companies marketing or developing pulmonary delivery systems for pharmaceutical products, including a collaboration between Pfizer Inc. (“Pfizer”) and Nektar Therapeutics for pulmonary insulin. Pfizer and Sanofi-Aventis filed applications for marketing authorization in the U.S. and Europe for pulmonary insulin. 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. Because there is rapid technological change in the industry and because other companies have more resources than we do, other companies may: (i) develop their products more rapidly than we can; (ii) complete any applicable regulatory approval process sooner than we can; or (iii) offer their newly developed products at prices lower than our prices. 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 compositions of matter as well as processes of preparation and methods of use, including applications relating to each of our delivery technologies. We own approximately 112 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, 2005, these fees totaled approximately $0.3 million. 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 may 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 import 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 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 products we or our collaborators develop must undergo an extensive regulatory approval process, which includes preclinical testing and clinical trials of such product candidates to demonstrate safety and efficacy. The manufacture and marketing of pharmaceutical products in the U.S. requires the approval of the FDA under the Federal Food, Drug and Cosmetic Act. The FDA has established mandatory procedures and safety standards which apply to the preclinical testing and clinical trials, manufacture and marketing of pharmaceutical products. Similar standards are established by non-U.S. regulatory bodies for marketing approval of pharmaceutical products and medical devices. Pharmaceutical manufacturing is also regulated by state, local and other authorities. The regulatory approval process in the U.S. is described in brief below.

      As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animal models to assess the drug’s efficacy, identify potential safety problems and evaluate potential for harm to humans. 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 within 30 days of submission and before proposed clinical (human) testing can begin. If the FDA is not convinced of the safety, it has the authority to place the program on hold and request additional animal data or changes to the study design. Studies supporting approval of products in the U.S. are typically accomplished under an IND.

      Typically, clinical testing involves a three-phase process: Phase I trials are conducted with a small number of healthy subjects and are designed to provide information about both product safety and the expected dose of the drug; Phase II trials are conducted on patients and 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 patients. The results of the preclinical testing and clinical trials of a pharmaceutical product, as well as the information on the manufacturing of the product and proposed labeling, are then submitted to the FDA in the form of a New Drug Application or 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. Submission of the NDA does not guarantee approval. At the same time, an FDA request for additional information does not mean the product may not be approved or will significantly delay approval. It is also possible that the labeling may be more limited than what was originally projected. Each NDA application is unique and should be considered as such.

      This regulatory process can span many years and require 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 with cGMP on an ongoing basis. Before approval of an NDA or PLA, the FDA may perform a pre-approval inspection of a facility to determine its compliance with cGMP and other rules and regulations. In complying with cGMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. After a facility is licensed, it is subject to periodic inspections by the FDA. Facilities are also subjected to the requirements of other government bodies, such as the U.S. Occupational Safety & Health Administration and Environmental Protection Agency.

      Similarly, NDA or PLA approval may be delayed or denied due to cGMP non-compliance or other issues at contract sites or suppliers included in the NDA or PLA, and the correction of these shortcomings may be beyond our control.

      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 May 31, 2005, we had approximately 528 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.

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.

      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.

      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 ability to manufacture successfully, our yield and our production schedule. In order to meet our financial plans, we will need to bring additional manufacturing capacity on-line in a timeframe adequate to meet demand and prevent shortfalls in supply. 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.

      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. On March 31, 2005, we submitted an NDA to the FDA for Vivitrex and on May 27, 2005, we announced that the application had been accepted by the FDA. However, there can be no assurance that the FDA will interpret the data contained within the NDA in the same manner as we do or that the NDA will be approved. We are relying in part on the efficacy 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. 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. In addition, we may not be able to manufacture Vivitrex successfully at a commercial scale.

      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 in 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 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 manufacturing lines under development; one for Risperdal Consta and the other for Vivitrex. Construction of these two additional production lines in Ohio is complete and validation is underway. Our plant in Massachusetts includes 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 an ongoing process that must be maintained to allow us to 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 of our 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 higher production volume for Risperdal Consta in the coming year. If we were not able to add such additional capacity or if anything were to interfere with our continuing manufacturing operations in any of our facilities, it could materially adversely affect our business and financial condition.

      If more of our product candidate progress to mid- to late-stage development, we may 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 do not currently have commercial manufacturing capacity for 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 manufacture each of our product candidates at a commercial scale 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 increase our manufacturing scale or 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 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 commercial volumes, or in accordance with cGMP regulations, our development programs and commercialization of any approved products 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.

      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.

      We currently have no sales, marketing or distribution experience and capabilities. Therefore, in order to commercialize our product candidates, we must either develop our own sales, marketing and distribution capabilities or collaborate with a third party to perform these functions. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with our collaborative partners and other third parties. For example, we rely on Janssen to market and distribute Risperdal Consta. In these instances, our future revenues will be materially dependent upon the success of the efforts of these third parties.

      If approved, we plan to commercialize Vivitrex using a specialty sales force to call on addiction specialists and substance abuse centers. We are also in discussions with potential partners to assist us in marketing Vivitrex in the U.S. and around the world. We currently have no internal sales and marketing capabilities, or an infrastructure to support such activities, and have limited experience in the commercialization of pharmaceutical products. Therefore, the successful commercial launch of Vivitrex and our future profitability may depend on our ability to develop a capable specialty sales force and suitable marketing capabilities for Vivitrex and/or entering into a partnering arrangement for Vivitrex. The development of our own sales force and marketing capabilities will result in us incurring significant costs before the time that we may generate significant revenues. We may not be able to attract and retain qualified marketing or sales personnel, or be able to establish an effective specialty sales force for Vivitrex. The cost of establishing and maintaining a sales force may exceed its cost effectiveness.

      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 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:

      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.

      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 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:

      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 have had net operating losses since being founded in 1987. At March 31, 2005, our accumulated deficit was $627.1 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, if we do not enter into a collaborative agreement for the commercialization of Vivitrex or, if approved, Vivitrex sales are not significant, we could have significant losses in the future due to ongoing expenses to launch and commercialize Vivitrex.

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

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

      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 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.

      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 and clinical trials to demonstrate safety and efficacy and a review of the manufacturing process to ensure compliance with cGMP regulations. In March 2005, we submitted an NDA with the FDA for marketing approval of Vivitrex. 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:

      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.

      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.

      The following factors are important to our success:

      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 may 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 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.

      As more products are commercialized using our technologies, or as any product achieves greater commercial success, our patents become more likely to be subject to challenge by potential competitors.

      We may be exposed to liability claims arising from the commercial sale of Risperdal Consta, or the use of our product candidates, such as Vivitrex, in clinical trials or commercially once approved. 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.

      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.

      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:

      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:

      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.

      We derive significant revenues from Risperdal Consta from sales in foreign countries. Such revenues may fluctuate when translated to U.S. dollars as a result of changes in foreign currency exchange rates.

      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:

      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.

      Pursuant to the terms of a purchase and sales agreement between Alkermes and Royalty Sub, we are obligated to repay certain obligations to holders of our Secured 7% Notes. There can be no assurance that we will have sufficient cash to satisfy these obligations.

      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.

      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, 2005, to issue 17,812,268 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, 2,834,735 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 2.5% 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.

      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:

      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.

      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. 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 statement of operations and comprehensive loss. Although Reliant recently announced that it had filed a registration statement on Form S-1 with the Securities and Exchange Commission for an initial public offering, we may not realize any return on our $100.0 million investment.

      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. 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.

      We lease approximately 260,000 square feet of space in Cambridge, Massachusetts under several leases expiring in the calendar years 2005 to 2012. These leases contain provisions permitting us to extend their terms for up to two ten-year periods. Our corporate headquarters, administration and laboratories are located in this space. We also perform clinical manufacturing at this location that uses our ProLease and AIR technologies. Approximately 81,000 square feet of this space is not being utilized by us and the majority of the idle space has been sublet. This space was exited in connection with the relocation of our corporate headquarters and the Company’s restructuring of operations in 2002.

      We lease a 90,000 square foot building in Chelsea, Massachusetts for clinical and commercial manufacturing utilizing our AIR technology. The lease term is for fifteen years, expiring in 2015, with an option to extend the term for up to two five year periods. The building contains a 40,000 square foot facility used for clinical production.

      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 facility designed for commercial manufacturing utilizing our Medisorb technology.

      We also lease a 32,000 square foot commercial manufacturing facility in Cambridge, Massachusetts that we are not currently utilizing. The lease term is for fifteen years, expiring in 2008, with an option to extend the term for one five year period. We exited this facility in connection with the restructuring of operations in June 2004 and have marketed it for sublet.

      We believe that our current and our planned facilities are adequate for our current and near-term preclinical, clinical and commercial manufacturing requirements.

      Beginning in October 2003, the Company and certain of our 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 into a single action captioned: In re Alkermes Securities Litigation, Civil Action No. 03-CV-12091-RCL (D. Mass.). On July 12, 2004, a single consolidated amended complaint was filed on behalf of purchasers of the Company’s common stock during the period April 22, 1999 to July 1, 2002. The consolidated amended complaint generally alleges, among other things, that, during such period, the defendants made misstatements to the investing public relating to the manufacture and FDA approval of our Risperdal Consta product. The consolidated amended complaint seeks unspecified damages. On September 10, 2004, we and the individual defendants filed a motion to dismiss all claims asserted against us and them in the

consolidated amended complaint in their entirety. The Court heard oral argument on the motion on January 12, 2005, and we are awaiting a decision on the motion. Although we believe these allegations are without merit and intend 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.

      No matters were submitted to a vote of our security holders, through the solicitation of proxies or otherwise, during the last quarter of the fiscal year ended March 31, 2005.

PART II

      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 bid prices for our common stock.

      The last reported sale price of our common stock as reported on the NASDAQ National Market on May 31, 2005 was $11.60.

      There were 414 shareholders of record for our common stock and one shareholder of record for our non-voting common stock on May 31, 2005.

      No dividends have been paid on the common stock to or non-voting common stock to date and we do not expect to pay cash dividends thereon in the foreseeable future. We anticipate that we will retain all earnings, if any, to support our operations and our proprietary drug development programs. Any future determination as to the payment of dividends will be at the sole discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant.

      See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

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 Janssen-Cilag, a subsidiary of Johnson & Johnson, together with other affiliates (“Janssen”). Our lead proprietary product candidate, Vivitrex® (naltrexone long-acting injection) is being developed as a once-monthly injection for the treatment of alcohol dependence. We have a pipeline of extended-release injectable products and pulmonary drug products based on our proprietary technology and expertise. 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 is 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, 2005, we had an accumulated deficit of approximately $627.1 million.

      We have funded our operations primarily through public offerings and private placements of debt and equity securities, bank loans, term loans, equipment financing arrangements and payments under research and development agreements with collaborators. We have historically 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, the achievement of certain business and operating goals, manufacturing

revenues, research and development spending, plans for clinical trials and regulatory approvals, financial goals and projections of capital expenditures, recognition of revenues, restructuring charges in connection with the discontinuation of Nutropin Depot® 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 the achievement of certain business and operating milestones and future operating results, the successful registration, launch and commercialization of Vivitrex, continued revenue growth from Risperdal Consta; the continued regulatory approvals and commercial launches of Risperdal Consta; the successful continuation of development activities for our programs, the building of a sales and marketing infrastructure; and, the successful expansion of existing manufacturing capacity are neither promises nor guarantees and our business is subject to significant risk and uncertainties 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) manufacturing and royalty revenues for Risperdal Consta may not continue to grow, particularly because we rely on our partner, Janssen, to forecast and market this product (ii) we not be able to manufacture Risperdal Consta in sufficient quantities to meet Janssen’s requirements and with sufficient yields (iii) additional regulatory approvals may not be received and additional commercial launches of Risperdal Consta in countries where it has been or may be approved may not occur in a timely and successful manner; (iv) the Food and Drug Administration (“FDA”) may not approve the New Drug Application (“NDA”) submission for Vivitrex and we may be unable to successfully register Vivitrex (v) if approved for marketing, we may be unable to develop capable internal sales and marketing capabilities, or an infrastructure to support the commercialization of Vivitrex; (vi) we may be unable to launch Vivitrex successfully, and if launched, may not produce significant revenues; (vii) we may not be able to successfully complete a strategic alliance for the commercialization of Vivitrex; (viii) our proprietary product candidates, if approved for marketing, may not be launched successfully in one or all indications for which marketing is approved, and, if launched, may not produce significant revenues; (ix) we rely on our partners to determine the regulatory and marketing strategies for Risperdal Consta and our other partnered programs; (x) 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; (xi) we may be unable to manufacture Risperdal Consta or manufacture future products (including our proprietary product candidate, Vivitrex) commercially or economically and, in addition, we may be unable to add additional production capacity for Risperdal Consta or unexpected events could interrupt manufacturing operations at our Risperdal Consta facility, which is the sole source of supply for that product; (xii) Risperdal Consta and our product candidates (including our proprietary product candidate, Vivitrex), in commercial use, may have unintended side effects, adverse reactions or incidents of misuse and the FDA or other health authorities could require post approval studies or require removal of our products from the market; (xiii) we may enter into a collaboration with a third party to market or fund a proprietary product candidate (including our proprietary product candidate, Vivitrex) and the terms of such a collaboration may not meet our expectations or the expectations of the financial markets; (xiv) our delivery technologies or product development efforts may not produce safe, efficacious or commercially viable products; (xv) 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; (xvi) clinical trials may take more time or consume more resources than initially envisioned; (xvii) the risk that results of earlier clinical trials are not necessarily predictive of the safety and efficacy results in larger clinical trials; (xviii) 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; (xix) we may not recoup any of our $100 million investment in Reliant Pharmaceuticals, LLC (“Reliant”); (xx) the securities litigation brought against us may result in financial losses or require the dedication of significant management resources; (xxi) 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; (xxii) technological change in the biotechnology or pharmaceutical industries could render our product candidates obsolete or noncompetitive; (xxiii) difficulties or set-backs in obtaining and enforcing our patents and difficulties with the patent rights of others could occur; (xxiv) we may not become profitable and could continue to incur losses for the foreseeable future; and (xxv) 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, 2005, we believe the following accounting policies are 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 Risperdal Consta and Nutropin Depot®. Manufacturing revenues are earned when product is shipped to our collaborative partners. Royalty revenues are earned on product sales made by our collaborative partners and are recorded in the period the product is sold by our collaborative partners. Manufacturing revenues recognized by us are based on information supplied to us by our collaborative partners and may require estimates to be made. In June 2004, we and Genentech, Inc. (“Genentech”) announced the decision to discontinue commercialization of Nutropin Depot. As a result of this decision, we recorded no manufacturing revenue and $0.2 million of royalty revenue in fiscal 2005 related to Nutropin Depot.

      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 March 31, 2005, 2004 and 2003, this charge amounted to approximately $0.0, $0.0 and $94.6 million respectively, and was recorded in our consolidated statement of operations and comprehensive loss under the caption “equity in losses of Reliant Pharmaceuticals, LLC.” Our $100 million investment was reduced to $0.0 during the fiscal year ended March 31, 2003.

      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 is accounted for under the cost method effective April 1, 2004. Consequently, we no longer record any share of Reliant’s net income or losses.

      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.

      On May 20, 2005, Reliant announced that it had filed a registration statement on Form S-1 with the Securities and Exchange Commission for an initial public offering of its common stock (see note 12 to the consolidated financial statements).

      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 and comprehensive loss under the caption “Derivative income (losses) related to convertible subordinated 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 statement of operations and comprehensive loss under the caption “Other income (expense), 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, 2005, the warrants had a fair value of approximately $0.9 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, up until the termination of the manufacturing and supply and license agreements in June 2004, 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.

      Restructuring Charges — We have, at times, announced restructuring programs and, accordingly, recorded certain charges in connection with implementing such programs. These charges generally include employee separation costs, including severance and related benefits, as well as facility consolidation and closure costs, including fixed asset write-offs and significant estimates relating to lease cancellation fees, where applicable, the length of time it will take to sublease certain facilities and the lease rates at which we may negotiate sublease agreements with third parties. Actual costs may differ from those estimates. In the event that we under- or over-estimate the restructuring charges and related accruals, our reported expenses for a reporting period could be overstated or understated and require adjustment in the future.

      Accrued Expenses — As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred on these services as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include contract service fees, such as amounts due to clinical research organizations, professional service fees, such as attorneys and accountants, and investigators in conjunction with clinical trials. Accruals for amounts due to clinical research organizations are among our most significant estimates. In connection with these service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual level of services incurred by the service providers. In the event that we do not identify certain costs that have been incurred or we under- or over-estimate the level of services or the costs of such services, our reported expenses for a reporting period could be overstated or understated. The date on which certain services commence, the level of services performed on or before a given date, and the cost of services is sometimes subject to our judgment.

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, 2005 was $73.9 million or $0.82 per share as compared to a net loss of $102.4 million or $1.25 per share for the fiscal year ended March 31, 2004 and a net loss of $106.9 million or $1.66 per share for the fiscal year ended March 31, 2003. 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 $76.1 million for the fiscal year ended March 31, 2005 compared to $39.1 million and $47.3 million for the fiscal years ended March 31, 2004 and 2003, respectively.

      Total manufacturing and royalty revenues were $50.1 million for the fiscal year ended March 31, 2005 compared to $29.5 million and $15.5 million for the fiscal years ended March 31, 2004 and 2003, respectively.

      Total manufacturing revenues were $40.5 million and $25.7 million for the fiscal years ended March 31, 2005 and 2004, respectively, including $40.5 million and $25.0 million, respectively, of manufacturing revenues for Risperdal Consta. The increase in manufacturing revenues for the year ended March 31, 2005 as compared to the year ended March 31, 2004 was primarily due to increased shipments of Risperdal Consta to Janssen. Risperdal Consta is marketed in more than 45 countries. 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 2005, our manufacturing revenues were based on an average of 8.1% of Janssen’s net sales price for Risperdal Consta compared to 9.8% in fiscal 2004. Following the termination of the License Agreement and the Manufacture and Supply Agreement with Genentech, as announced in June 2004, we did not record any manufacturing revenue from Nutropin Depot in fiscal 2005 as compared to $0.7 million in fiscal 2004. Total manufacturing revenues were $14.3 million for the fiscal year ended March 31, 2003,

including $13.0 million of manufacturing revenues for Risperdal Consta. The increase in manufacturing revenues for the year ended March 31, 2004 as compared to the year ended March 31, 2003 was primarily due to increased shipments of Risperdal Consta to Janssen. In fiscal 2003, our manufacturing revenues were based on an average of 12.3% of Janssen’s net sales price for Risperdal Consta.

      Total royalty revenues were $9.6 million and $3.8 million for the fiscal years ended March 31, 2005 and 2004, respectively, including $9.5 million and $3.1 million, respectively, of royalty revenues for Risperdal Consta. The increase in royalty revenues for fiscal 2005 as compared to fiscal 2004 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. The increase in Risperdal Consta royalty revenues was partially offset by a decrease in Nutropin Depot royalty revenue following the termination of the License Agreement with Genentech in June 2004. Nutropin Depot royalty revenue was $0.1 million in fiscal 2005 as compared to $0.7 million in fiscal 2004. Total royalty revenues were $1.2 million for the fiscal year ended March 31, 2003, including $0.4 million of royalty revenues for Risperdal Consta. The increase in royalty revenues for fiscal 2004 as compared to fiscal 2003 was due to an increase in global sales of Risperdal Consta by Janssen.

      Our research and development revenue under collaborative arrangements was $26.0 million, $9.5 million and $31.8 million for the fiscal years ended in 2005, 2004 and 2003, respectively. The increase in such revenue for fiscal 2005 as compared to fiscal 2004 was primarily the result of an increase in revenues related to our AIR® insulin and AIR hGH programs with Lilly, as well as changes in the stage of several other collaborative programs. Beginning January 1, 2003, we stopped recording research and development revenue for work performed on the Lilly programs and instead used 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 AIR 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 preferred stock is convertible into our common stock at market price, under certain conditions at our option, and automatically upon filing of an NDA with the FDA for an AIR insulin product. 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 AIR insulin and AIR hGH development programs. This funding was recorded as deferred revenue in the consolidated balance sheets. The proceeds from the sale of $30.0 million of our convertible preferred stock was spent in fiscal 2005 and consequently beginning in the quarter ended June 30, 2004 for the AIR hGH program and beginning in the quarter ended September 30, 2004 for the AIR insulin program, we recorded revenue for work performed on these programs. The decrease in research and development revenue under collaborative arrangements for fiscal 2004 as compared to fiscal 2003 was primarily the result of changes in the structure of our AIR insulin and AIR hGH programs with Lilly, as described above, changes in our partners and changes in the stage of several other collaborative programs.

      Cost of goods manufactured was $16.8 million in fiscal 2005, consisting of approximately $14.5 million for Risperdal Consta and $2.3 million for Nutropin Depot. 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. The decrease in cost of goods manufactured in fiscal 2005 as compared to fiscal 2004 was primarily the result of the termination of the License Agreement and Manufacturing and Supply Agreement with Genentech. Cost of goods manufactured in fiscal 2005 included a one-time write-off of Nutropin Depot inventory of $1.3 million following the decision to discontinue manufacture of that product. The decrease in cost of goods manufactured related to Nutropin Depot, was partially offset by an increase in production of Risperdal Consta for shipment to our partner, Janssen. 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.

      Research and development expenses were $91.1 million for the fiscal year ended in 2005 compared to $91.1 million and $85.4 million for the fiscal years ended in 2004 and 2003, respectively. Research and

development expenses in the year ended March 31, 2005 were consistent with those in the year ended March 31, 2004. This reflects a decrease in external research expenses due to the completion of certain clinical trials related to our proprietary product candidate, Vivitrex, in addition to the termination of our development agreement with Serono, in October 2004, offset by an increase in personnel costs, an increase in occupancy costs related to the expansion of our facilities in both Massachusetts and Ohio, and costs incurred in the completion and filing of the Vivitrex NDA. In addition, we conformed our accounting for lease expenses to the recently reaffirmed views of the Securities and Exchange Commission whereby lease expenses must be recognized on the straight-line basis, rather than as incurred. This resulted in a cumulative one-time, non-cash charge of $2.5 million, related to the past five years since lease inception. Of this amount, $2.3 million was reported within research and development expense. The amount was not material to our reported results in any one quarter or any one year. The remaining $0.2 million of this amount was reported in sales, general and administrative expense. The increase in research and development expenses for fiscal 2004 as compared to fiscal 2003 was primarily because of 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 based on our annual budget of salaries, employee benefits and the billable non-project-specific costs mentioned above and is generally increased annually 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.

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

      Sales, general and administrative expenses were $28.8 million, $26.0 million and $26.7 million for the fiscal years ended in 2005, 2004 and 2003, respectively. The increase in sales, general and administrative

expenses for fiscal 2005 as compared to fiscal 2004 was due to an increase in sales and marketing costs as we prepare for the potential future commercialization of Vivitrex, higher personnel costs and an increase in legal fees, related to the securities litigation, and accountant fees, related to Sarbanes Oxley compliance. Excluding the write-off of $2.6 million in deferred merger costs in connection with the termination of our proposed merger with Reliant in the year ended March 31, 2003, sales, 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.

      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 ceased commercial manufacturing of Nutropin Depot and recorded restructuring charges in the quarter ended June 30, 2004 of $11.9 million. These restructuring charges included the write-off of equipment and leasehold improvements related to the manufacture of Nutropin Depot as well as employee separation costs, including severance and related benefits. The restructuring charges also included 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. In addition to the restructuring changes, we also recorded a one-time write-off of Nutropin Depot inventory of approximately $1.3 million which was recorded under the caption “Cost of goods manufactured” in the consolidated statement of operations and comprehensive loss. In the quarter ended March 31, 2005, we reversed a reserve, through restructuring, that we had been carrying related to a yield loss penalty originally due under the Manufacturing and Supply Agreement for Nutropin Depot. This penalty was forgiven and the reserve was reversed. The final net restructuring charge for the fiscal year was $11.5 million. The amounts in the accrual at March 31, 2005 are expected to be paid through August 2008.

      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 2002 restructuring program, we recorded charges of approximately $6.5 million in the consolidated statement of operations and comprehensive loss for the year ended March 31, 2003. There were no additional charges or recoveries recorded in fiscal 2005 related to this restructuring. 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, 2005, we had paid an aggregate of approximately $1.5 million in employee separation costs and approximately $4.4 million in facility closure costs. The amounts in the accrual at March 31, 2005 are expected to be paid through fiscal 2006.

      Pursuant to the restructuring plans, the following charges and payments have been recorded during the year ended March 31, 2005, 2004 and 2003:

      We have substantially completed our restructuring programs. 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 $3.0 million, $3.4 million and $3.8 million for the fiscal years ended in 2005, 2004 and 2003, respectively. The decrease for fiscal 2005 as compared to fiscal 2004 was primarily due to lower average cash and investments balances held during the year ended March 31, 2005 as compared to the year ended March 31, 2004. 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 as compared to the year ended March 31, 2003.

      Derivative income (losses) related to convertible subordinated notes was an income of $4.4 million in fiscal 2005, as compared to a loss of $4.5 million and $4.3 million for the fiscal years ended in 2004 and 2003, respectively.

      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 8 to our consolidated financial statements included in this annual report on 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 income (losses) related to convertible subordinated notes” in the consolidated statement of operations and comprehensive losses for changes in the estimated market value of the feature. During the fiscal years ended March 31, 2005, 2004 and 2003, we recorded charges of $0.0 million, $3.8 million and $4.3 million, respectively, in the consolidated statement 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 2.5% Convertible Subordinated Notes due 2023 (the “2.5% Subordinated Notes”). The Three-Year Interest Make-Whole represented an embedded derivative which was required to be accounted for apart from the underlying 2.5% Subordinated Notes. At issuance of the 2.5% Subordinated Notes, the Three-Year Interest Make-Whole feature 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 2.5% Subordinated Notes and is being accreted to interest expense over five years through September 1, 2008, the first date on which holders of the 2.5% Subordinated Notes have the right to require us to repurchase the 2.5% 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 income (losses) related to convertible subordinated notes” in the consolidated statement of operations and comprehensive loss until it is paid out or expires. During the fiscal years ended March 31, 2005 and 2004, we recorded net income of $4.4 million and net losses of $0.8 million, respectively, in the consolidated statement 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 2.5% Subordinated Notes, approximately $0.3 million and $4.7 million at March 31, 2005 and 2004, respectively, can fluctuate significantly based on fluctuations in the market value of our common stock.

      Gain on exchange of notes was $80.8 million for the fiscal year ended in 2003, as compared to $0.0 in both fiscal 2005 and 2004 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.

      Interest expense was $7.4 million for the fiscal year ended in 2005 as compared to $6.5 million and $10.4 million for the fiscal years ended in 2004 and 2003, respectively. The increase for fiscal 2005 as compared to fiscal 2004 was primarily due to interest on the Secured 7% Notes due 2018 with a face amount of $170 million. 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.

      Other income (expense), net was an expense of $1.8 million in fiscal 2005 as compared to an income of $2.1 million and $0.0 in fiscal 2004 and 2003, respectively. Other income (expense), net represents net expense or 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.

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

      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 March 31, 2004 and 2003, this charge amounted to approximately $0.0 and $94.6 million respectively, and was recorded in our consolidated statement 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 $0.0 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 statement of operations and comprehensive loss under the caption “Equity in losses of Reliant Pharmaceuticals, LLC.”

      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 was accounted for under the cost method effective April 1, 2004. We therefore did not record any share of Reliant’s net income or losses in fiscal 2005 and we will not record any share of Reliant’s future net income or losses.

      On May 20, 2005, Reliant announced that it had filed a registration statement on Form S-1 with the Securities and Exchange Commission for an initial public offering of its common stock. See note 12 to the consolidated financial statements.

Liquidity and Capital Resources

      Cash and cash equivalents and short-term investments were approximately $202.6 million at March 31, 2005 as compared to $143.9 million at March 31, 2004. In addition, we held approximately $4.9 million of U.S. government obligations classified as long-term investments at March 31, 2005 ($5.0 million at March 31, 2004) which are pledged as collateral under certain letters of credit and lease agreements.

      Our investment objectives, other than our investment in Reliant and warrants we receive in connection with our collaborations and licensing activities, are, first, to assure liquidity and conservation of capital and, second, to obtain investment income. 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 and warrants we receive in connection with our collaborations and licensing activities. All of our investments in debt securities are classified as available-for-sale and are recorded at fair value.

      Our cash and cash equivalents and short-term investments increased by approximately $58.7 million during fiscal 2005 primarily due to (i) the issuance by our wholly owned subsidiary, RC Royalty Sub LLC (“Royalty Sub”), of an aggregate principal amount of $170.0 million of its Secured 7% Notes (the “7% Notes”) for net proceeds of approximately $145.0 million (ii) borrowings of $3.7 million under a new term loan with General Electric Capital Corporation (“GE”) and (iii) proceeds of $3.0 million from the exercise of stock options, offset by approximately $93.0 million of cash used to fund our operations, acquire fixed assets and to make interest and principal repayments on our indebtedness.

      On February 1, 2005, our wholly owned subsidiary Alkermes Controlled Therapeutics Inc. II (“ACT II”), pursuant to the terms of a purchase and sale agreement, sold, assigned and contributed to Royalty Sub the rights of ACT II to collect certain royalty payments and manufacturing fees (the “Royalty Payments”) payable to ACT II under the Janssen Agreements (defined below) and certain agreements that may arise in the future, in exchange for approximately $144 million in cash. The Royalty Payments arise under (i) the license agreements dated February 13, 1996 for the United States and its territories and February 21, 1996 for all countries other than the United States and its territories, by and between ACT II and Janssen Pharmaceutica Inc. and certain of its affiliated entities (“JP”) and (ii) the Manufacturing and Supply Agreement dated August 6, 1997 by and between JPI Pharmaceutica

International (“JPI” and together with JP, “Janssen”), JP and ACT II (collectively, the “Janssen Agreements”).

      In connection with the purchase and sale agreement, on February 1, 2005, Royalty Sub issued an aggregate principal amount of $170 million of its 7% Notes to certain institutional investors in a private placement for net proceeds of approximately $145 million, after original issue discount and offering costs of approximately $19.7 million and $5.8 million, respectively. The annual cash coupon rate is 7% and is payable quarterly, beginning on April 1, 2005, however, portions of the principal amount that are not paid off in accordance with the expected principal repayment profile will accrue interest at 9.75%. The yield to maturity on the 7% Notes is 9.75%. Through January 1, 2009, the holders will receive only the quarterly cash interest payments. In addition, beginning on April 1, 2009, principal payments will be made to the holders, subject to certain conditions. Timing of the principal repayment will be based on the revenues received by Royalty Sub but will occur no earlier than equally over the twelve quarters between April 1, 2009 and January 1, 2012, subject to certain conditions. Principal on the 7% Notes must be paid in full by the final legal maturity date of January 1, 2018, unless redeemed earlier. Non-payment of principal will not be an event of default prior to January 1, 2018. The 7% Notes, however, may be redeemed at Royalty Sub’s option, subject, in certain circumstances, to the payment of a redemption premium. The 7% Notes are secured by (i) all of Royalty Sub’s property and rights, including the Royalty Rights and (ii) ACT II’s ownership interests in Royalty Sub. Accordingly, the assets of Royalty Sub will not be available to satisfy obligations of Alkermes or its subsidiaries.

      The Royalty Payments received by Royalty Sub under the Janssen Agreements are the sole source of payment of operating costs, the interest, principal and redemption premium, if any, for the 7% Notes. We will receive all of the Risperdal Consta revenues in excess of interest, principal and redemption premium, if any. Our rights to receive such excess revenues will be subject to certain restrictions so long as the 7% Notes remain outstanding.

      On December 22, 2004, we entered into a term loan in the principal amount of $3.7 million with General Electric Capital Corporation (“GE”). The term loan is secured by certain of our equipment pursuant to a security agreement and is subject to an ongoing financial covenant related to our available cash position. The loan is payable in 36 monthly installments with the final installment due on December 27, 2007 and bears a floating interest rate equal to the one-month London Interbank Offered Rate (“LIBOR”), which is determined monthly, plus a certain fixed interest rate. We may prepay the term loan without any penalty, contingent on GE’s approval, and further use the $3.7 million of available credit to finance new equipment purchases with the same terms and conditions as the equipment financing arrangement discussed below. If we fail to pay any amounts when due, or are in default under or fail to perform any term or condition of the security agreement, then GE may elect to accelerate the entire outstanding principal amount of the loan with accrued interest such that the amounts are immediately due and payable from us to GE. In addition, all amounts accelerated shall bear interest at 18% until such amounts are paid in full. As of March 31, 2005, $3.5 million was outstanding under the term loan.

      In addition, on December 22, 2004, we entered into a commitment for equipment financing with GE. The equipment financing, in the form of an equipment lease line, provides us the ability to finance up to $18.3 million in new equipment purchases through December 31, 2005. The equipment financing would be secured by the purchased equipment and will be subject to a financial covenant. The lease terms provide us with the option at the end of the lease to (a) purchase the equipment from GE at the then prevailing market value, (b) renew the lease at a fair market rental value, subject to remaining economic useful life requirements, or (c) return the equipment to GE, subject to certain conditions. As of March 31, 2005, there were no amounts outstanding under this commitment.

      At March 31, 2005, we had approximately $575.1 million of net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes available to offset future taxable income and approximately $27.3 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 2006 through 2025. 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, 2005 and, therefore, no benefit has been recognized in the financial statements.

      We have funded our operations primarily through public offerings and private placements of debt and equity securities, bank loans, term loans, equipment financing arrangements and payments received 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 $17.8 million for the year ended March 31, 2005, principally reflecting equipment purchases and building expansion and improvements. We expect our capital expenditures to total approximately $30.0 million during fiscal year 2006, primarily to expand our manufacturing infrastructure for Risperdal Consta, Vivitrex and exenatide LAR 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, GE 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, 2005:

      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 our unused equipment lease line, anticipated interest income, manufacturing and royalty revenues and research and development revenues under collaborative arrangements, will be sufficient to meet our anticipated capital requirements through at least March 31, 2007.

      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 December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123R, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation”, or SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123R is effective for us beginning with the first quarter of fiscal 2007 (i.e. the quarter ending June 30, 2006). SFAS 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS 123 or only to interim periods in the year of adoption. We are currently evaluating these transition methods.

      We expect that the adoption of SFAS 123R will have a significant impact on our reported results of operations. The impact of adoption of SFAS 123R will depend on estimates of stock price volatility, option terms, interest rates and other factors.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, which amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for idle facility expense, freight, handling costs and waste (spoilage). This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, and, thus, will be effective for us beginning with the first quarter of fiscal 2007 (i.e. the quarter ending June 30, 2006). Earlier application is

permitted. We believe our current accounting policies closely align to the new rules. Accordingly, we do not believe this new standard will have a material impact on our financial statements.

      As part of our investment portfolio we own financial instruments that are sensitive to market risks. The investment portfolio, excluding our investment in Reliant, is used to preserve our capital until it is required to fund operations, including our research and development activities. Our short-term and long-term investments consist of U.S. government obligations, high-grade corporate notes and commercial paper. These debt securities (i) are classified as available-for-sale; (ii) are recorded at fair value; and (iii) are subject to interest rate risk, and could decline in value if interest rates increase. Due to the conservative nature of our short-term and long-term investments and our investment 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.

      We also hold certain marketable equity securities, including warrants to purchase the securities of publicly traded companies we collaborate with, that are classified as available-for-sale and recorded at fair value under the caption “Other assets” in the consolidated balance sheets. These marketable equity securities are also 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% increase or decrease in market interest rates would result in no material impact on the net fair value of such interest-sensitive financial instruments.

      As of March 31, 2005, the fair value of our Secured 7% Notes, our 2.5% Subordinated Notes, and our 3.75% Subordinated Notes approximate the carrying values. The interest rates on these notes, and our capital lease obligations, are fixed and therefore not subject to interest rate risk. A 10% increase or decrease in market interest rates would have no material impact on the fair value of these notes.

      As of March 31, 2005, we have a term loan that bears a floating interest rate equal to the one-month London Interbank Offered Rate (“LIBOR”) plus 5.45%. A 10% increase or decrease in market interest rates would have no material impact on the fair value of this loan.

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.

      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.

      There have been no changes in and no disagreements with our independent registered public accounting firm on accounting and financial disclosure matters.

      (a) Evaluation of disclosure controls and procedures

      Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2005. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to our company, including our consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

      (b) Evaluation of internal control over financial reporting

      Management’s Report on Internal Control over Financial Reporting

      The management of Alkermes, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of March 31, 2005. Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company’s internal control over financial reporting was effective as of March 31, 2005.

      The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2005 has been attested to by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their report which is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Alkermes, Inc.
Cambridge, Massachusetts

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Alkermes, Inc. (the “Company”) maintained effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of March 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of March 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2005, and our report dated June 14, 2005 expressed an unqualified opinion on those financial statements.

Boston, Massachusetts

June 14, 2005

      (c) Changes in internal controls

      No significant change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      Not Applicable

PART III

      The information required by this item is incorporated herein by reference to our Proxy Statement for our annual shareholders’ meeting (the “2005 Proxy Statement”).

      The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

      The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

      The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

      The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

PART IV

      (a) (1) Financial Statements — 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.

      (3) Exhibits

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.

June 14, 2005

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.

Report of Independent Registered Public Accounting Firm

To 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, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2005. 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 Alkermes, Inc. as of March 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Boston, Massachusetts
June 14, 2005

ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2005 And 2004

See notes to consolidated financial statements.

ALKERMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Years Ended March 31, 2005, 2004 And 2003