U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended December 31, 2004

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

For the transition period from __________ to __________

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)

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

     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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     The number of shares outstanding of each of the issuer’s classes of common stock was:

ALKERMES, INC. AND SUBSIDIARIES

INDEX

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PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited):

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements.

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ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Condensed Consolidated Financial Statements.

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ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Condensed Consolidated Financial Statements.

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ALKERMES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements of Alkermes, Inc. (the “Company”) are unaudited and have been prepared on a basis substantially consistent with the audited financial statements. The condensed consolidated financial statements, in the opinion of management, include all adjustments which are necessary to present fairly the results of operations for the reported periods. The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting.

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto which are contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004, filed with the SEC.

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

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II (“ACT II”), Advanced Inhalation Research, Inc. (“AIR^®”), Alkermes Investments, Inc., Alkermes Europe, Ltd., Alkermes Development Corporation II (“ADCII”) and RC Royalty Sub LLC (“Royalty Sub”), wholly owned subsidiaries of the Company. Intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the following: (1) reported amounts of assets and liabilities; (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for all interim periods beginning after June 15, 2005 and, thus, will be effective for the Company beginning with the second quarter of fiscal 2006 (i.e. the quarter ending September 30, 2005). Early adoption is encouraged and retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. The Company is currently evaluating the impact of SFAS 123R on its results of operations. See Note 4 for information related to the pro forma effects on the reported net loss and net loss per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

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In November 2004, 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 2007 and earlier application is permitted. The Company believes our current accounting policies closely align to the new rules. Accordingly, the Company does not believe this new standard will have a material impact on our financial statements.

2. COMPREHENSIVE LOSS

Comprehensive loss for the three and nine months ended December 31, 2004 and 2003 is as follows:

3. NET LOSS PER COMMON SHARE

Net loss per common share is computed using the weighted-average number of common shares outstanding during the period. For the three and nine months ended December 31, 2004 and 2003, the Company was in a net loss position and, therefore, common equivalent shares are not included in the per share calculation because their effect would be anti-dilutive. As such, diluted net loss per common share is the same amount as basic net loss per common share.

The following table sets forth common stock equivalents which were excluded from the computation of diluted net loss per common share for the three and nine months ended December 31, 2004 and 2003 as they would have had an anti-dilutive effect due to net losses for such periods:

4. STOCK-BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option and award grants to employees using the intrinsic value method. The Company accounts for stock options and awards to non-employees using the fair-value method.

The following table illustrates the effect on net loss and net loss per common share, basic and diluted, as if the fair-value based method had been applied to all outstanding and stock options and awards in each period. Pro forma information for the three and nine months ended December 31, 2004 and 2003 is as follows:

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The fair value of stock options was estimated at the date of grant using the Black-Scholes option-pricing model, assuming no dividends, and with the following weighted average assumptions and the resulting weighted average fair value per share of option granted during the period:

5. RESTRUCTURINGS

In August 2002, the Company announced a restructuring program to reduce the Company’s cost structure as a result of the financial impact of a delay in the U.S. launch of Risperdal Consta by the Company’s collaborative partner, Janssen (the “2002 Restructuring”). The restructuring program reduced our workforce by 122 employees, representing 23% of the Company’s total workforce at that time, and included consolidation and closure of certain leased facilities in Cambridge, Massachusetts, closure of the Company’s medical affairs office in Cambridge, England, write-off of leasehold improvements at leased facilities being vacated and reductions of other expenses. As of December 31, 2004, the Company had paid in cash or written off an aggregate of approximately $1.6 million in employee separation costs and approximately $4.2 million in facility closure costs in connection with the 2002 Restructuring. The amounts remaining in the 2002 Restructuring accrual at December 31, 2004 related to facility lease costs and are expected to be paid through fiscal 2006.

In June 2004, the Company announced a restructuring program in connection with the decision by Alkermes and Genentech to discontinue commercialization of Nutropin Depot (the “2004 Restructuring”). The decision was based on the significant resources required by both companies to continue manufacturing and commercializing the product. In connection with this decision, the Company ceased commercial manufacturing of Nutropin Depot in June 2004, reduced the Company’s workforce by 17 employees, representing approximately 3% of the Company’s total workforce, and recorded restructuring charges in the quarter ended June 30, 2004 of approximately $11.9 million under the caption “Restructuring” in the consolidated statements of operations. The restructuring charges

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consisted of approximately $0.2 million in employee separation costs, including severance and related benefits, and approximately $11.7 million in facility closure costs, including fixed asset write-offs and estimates of future lease costs relating to the Company’s ability to sublease the exited facility through the end of its lease term, August 2008. In addition to the restructuring charges recorded in the quarter ended June 30, 2004, the Company 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 statements of operations.

As of December 31, 2004, the Company had paid in cash or written off an aggregate of approximately $8.6 million in facility closure costs and $0.1 million in employee separation costs in connection with the 2004 Restructuring. The amounts remaining in the 2004 Restructuring accrual at December 31, 2004 are expected to be paid out through fiscal 2009 and relate primarily to estimates of lease costs associated with the exited facility.

The following table displays the restructuring activities and liability balances included in accrued restructuring costs:

6. INVENTORY

Inventory is stated at the lower of cost or market. Cost is determined in a manner that approximates the first-in, first-out method. The components of inventory consist of the following: