##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
   (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    December 31, 2006o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number 1-14131
  ALKERMES, INC.
 (Exact name of registrant as
    specified in its charter)
   PENNSYLVANIA(State or other
    jurisdiction of
    incorporation or organization)

23-2472830(I.R.S. Employer
    Identification No.)88 Sidney Street, Cambridge,
    MA(Address of principal
    executive offices)

02139-4234(Zip
    Code)   Registrants telephone number including area code:(617) 494-0171
  (Former name, former address,
    and former fiscal year, if changed since last report)
   þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ
    As of February 1,Class

2007Common Stock, $.01 par value


100,578,967Non-Voting Common Stock,
    $.01 par value


382,632




---



##### 



ALKERMES,
    INC. AND SUBSIDIARIES
  INDEX
  
  Page No.PART I 
    FINANCIAL INFORMATIONItem 1.


Condensed
    Consolidated Financial Statements:Condensed
    Consolidated Balance Sheets  December 31, 2006
    and March 31, 2006


3Condensed
    Consolidated Statements of Operations  For the Three
    and Nine Months Ended December 31, 2006 and 2005


4Condensed
    Consolidated Statements of Cash Flows  For the Nine
    Months Ended December 31, 2006 and 2005


5Notes to Condensed
    Consolidated Financial Statements


6Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


20Item 3.


Quantitative and
    Qualitative Disclosures about Market Risk


34Item 4.


Controls and
    Procedures


35PART II 
    OTHER INFORMATIONItem 1.


Legal
    Proceedings


37Item 1A.


Risk
    Factors


37Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


39Item 6.


Exhibits


39Signatures


40Exhibit Index


41EX-10.1 1998 Equity Incentive PlanEX-10.2 1999 Stock Option PlanEX-10.3 2002 Restricted Stock Award PlanEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO & CFO Certification   2




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##### Table of Contents



PART 1.
    FINANCIAL INFORMATION  Item 1.
    Condensed
    Consolidated Financial Statements:  ALKERMES,
    INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (unaudited)
  December 31,


March 31,2006


2006(In thousands, exceptshare and per shareamounts)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
83,224


$
33,578Investments  short-term


267,875



264,389Receivables


62,381



39,802Inventory, net


13,933



7,341Prepaid expenses and other current
    assets


6,673



2,782Total current assets


434,086



347,892PROPERTY, PLANT AND EQUIPMENT:Land


301



301Building and improvements


25,138



20,966Furniture, fixtures and equipment


69,907



61,086Equipment under capital lease


464



464Leasehold improvements


34,664



45,842Construction in progress


35,016



23,555165,490



152,214Less: accumulated depreciation and
    amortization


(48,523
)


(39,297
)Property, plant and
    equipment  net


116,967



112,917RESTRICTED INVESTMENTS 
    long-term


5,144



5,145OTHER ASSETS


7,179



11,209TOTAL ASSETS

$
563,376


$
477,163LIABILITIES, REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
    EQUITYCURRENT LIABILITIES:Accounts payable and accrued
    expenses

$
25,085


$
36,141Accrued interest


2,985



3,239Accrued restructuring costs


311



852Unearned milestone
    revenue  current portion


39,037



83,338Deferred revenue 
    current portion


200



200Convertible subordinated
    notes  current portion


676



676Long-term debt  current
    portion


1,287



1,214Total current liabilities


69,581



125,660NON-RECOURSE RISPERDAL CONSTA
    SECURED 7% NOTES


156,026



153,653CONVERTIBLE SUBORDINATED
    NOTES  LONG-TERM PORTION






124,346LONG-TERM DEBT


629



1,519UNEARNED MILESTONE
    REVENUE  LONG-TERM PORTION


119,259



16,198DEFERRED REVENUE 
    LONG-TERM PORTION


19,266



750OTHER LONG-TERM LIABILITIES


6,378



6,821TOTAL LIABILITIES


371,139



428,947REDEEMABLE CONVERTIBLE PREFERRED
    STOCK, par value, $0.01 per share; authorized and issued,
    none and 1,500 shares at December 31, 2006 and
    March 31, 2006, respectively (at liquidation preference),






15,000COMMITMENTS AND CONTINGENCIES:SHAREHOLDERS EQUITY:Capital stock, par value,
    $0.01 per share; authorized, 4,550,000 shares
    (includes 2,997,000 shares of preferred stock); issued, none






Common stock, par value,
    $0.01 per share; authorized, 160,000,000 shares;
    101,386,949 and 91,744,680 shares issued, 100,560,298 and
    91,744,680 shares outstanding at December 31, 2006 and
    March 31, 2006, respectively


1,014



917Nonvoting common stock, par value,
    $0.01 per share; authorized 450,000 shares; issued and
    outstanding, 382,632 shares at December 31, 2006 and
    March 31, 2006


4



4Treasury stock, at cost
    (823,677 shares and none at December 31, 2006 and
    March 31, 2006, respectively)


(12,492
)


Additional paid-in capital


830,392



664,596Deferred compensation






(374
)Accumulated other comprehensive
    income


365



1,064Accumulated deficit


(627,046
)


(632,991
)TOTAL SHAREHOLDERS EQUITY


192,237



33,216TOTAL LIABILITIES, REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY

$
563,376


$
477,163    3




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
  Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands, except per share amounts)REVENUES:Manufacturing revenues

$
28,763


$
14,715


$
77,078


$
42,224Royalty revenues


5,673



4,228



16,625



11,867Research and development revenue
    under collaborative arrangements


19,532



9,951



51,620



33,935Net collaborative profit


8,445



12,524



29,798



24,918Total revenues


62,413



41,418



175,121



112,944EXPENSES:Cost of goods manufactured


12,989



6,077



34,149



14,954Research and development


29,908



22,501



85,588



63,493Selling, general and administrative


16,365



9,332



48,572



27,393Total expenses


59,262



37,910



168,309



105,840OPERATING INCOME


3,151



3,508



6,812



7,104OTHER INCOME (EXPENSE):Interest income


4,260



3,278



13,329



7,928Interest expense


(4,141
)


(5,177
)


(13,648
)


(15,497
)Derivative loss related to
    convertible subordinated notes






(315
)






(1,084
)Other income (expense), net


89



113



212



971Total other income (expense)


208



(2,101
)


(107
)


(7,682
)INCOME (LOSS) BEFORE INCOME TAXES


3,359



1,407



6,705



(578
)INCOME TAXES


426







761



NET INCOME (LOSS)

$
2,933


$
1,407


$
5,944


$
(578
)EARNINGS (LOSS) PER COMMON SHARE:BASIC

$
0.03


$
0.02


$
0.06


$
(0.01
)DILUTED

$
0.03


$
0.01


$
0.06


$
(0.01
)WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING:BASIC


100,896



91,505



98,690



90,826DILUTED


104,746



96,720



103,156



90,826    4




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
  Nine Months EndedDecember 31,2006


2005(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income (loss)

$
5,944


$
(578
)Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Share-based compensation


22,218



Depreciation and amortization


8,838



7,856Other non-cash charges


2,738



4,410Derivative loss related to
    convertible subordinated notes






1,084Loss (gain) on sale of investments


510



(1,000
)Gain on sale of equipment


(93
)


(54
)Changes in assets and liabilities:Receivables


(11,079
)


(14,599
)Inventory, prepaid expenses and
    other current assets


(10,058
)


(5,096
)Accounts payable, accrued expenses
    and accrued interest


(11,205
)


9,444Accrued restructuring costs


(393
)


(780
)Unearned milestone revenue


58,760



128,526Deferred revenue


18,516



Other long-term liabilities


202



506Net cash provided by operating
    activities


84,898



129,719CASH FLOWS FROM INVESTING
    ACTIVITIES:Additions to property, plant and
    equipment


(24,728
)


(20,809
)Proceeds from the sale of equipment


159



105Purchases of short and long-term
    investments


(217,453
)


(613,813
)Sales and maturities of short and
    long-term investments


214,193



478,933Decrease in other assets


18



95Net cash used in investing
    activities


(27,811
)


(155,489
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from issuance of common
    stock


5,868



3,077Payment of debt


(817
)


(835
)Purchase of treasury stock


(12,492
)


Net cash (used in) provided by
    financing activities


(7,441
)


2,242NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


49,646



(23,528
)CASH AND CASH
    EQUIVALENTS  Beginning of period


33,578



47,485CASH AND CASH
    EQUIVALENTS  End of period

$
83,224


$
23,957SUPPLEMENTARY INFORMATION:Cash paid for interest

$
10,647


$
10,371Cash paid for taxes


896



Noncash activities:Conversion of
    2.5% convertible subordinated notes into common stock


125,000



Conversion of redeemable
    convertible preferred stock into common stock






15,000Redemption of redeemable
    convertible preferred stock


15,000



    5




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS
  1.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Basis
    of Presentation
    Form 10-K/A
    Principles of Consolidation ® ®
  Use of Estimates
  New
    Accounting Pronouncements
  Fair Value
    Measurements
  Accounting for
    Uncertainty in Income Taxes Accounting for Income
    Taxes
 6




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.
    COLLABORATIVE
    ARRANGEMENTS  Lilly
  ® scale-up scale-up
          Cephalon
  ®
 7




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Indevus
    ®
   8




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Rensselaer
    Polytechnic Institute
      3.
    COMPREHENSIVE
    INCOME (LOSS)    Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands)Net income (loss)

$
2,933


$
1,407


$
5,944


$
(578
)Unrealized (loss) gain on
    available-for-sale
    investments


(1,152
)


(52
)


(699
)


82Comprehensive income (loss)

$
1,781


$
1,355


$
5,245


$
(496
)   4.
    EARNINGS
    (LOSS) PER COMMON SHARE   9




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands)Numerator:Net income (loss)

$
2,933


$
1,407


$
5,944


$
(578
)Denominator:Weighted average number of common
    shares outstanding


100,896



91,505



98,690



90,826Effect of dilutive securities:Stock options


2,723



4,180



3,633



Restricted stock awards


291



86



244



Redeemable convertible preferred
    stock


836



949



589



Dilutive common share equivalents


3,850



5,215



4,466



Shares used in calculating diluted
    earnings (loss) per common share


104,746



96,720



103,156



90,826     Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands)Numerator:Adjustment for interest

$
8


$
787


$
1,243


$
2,361Adjustment for derivative loss






315







1,084Total

$
8


$
1,102


$
1,243


$
3,445Denominator:Stock options














19,196Restricted stock awards














83Redeemable convertible preferred
    stock














2,8352.5% convertible subordinated
    notes






9,025



2,461



9,0253.75% convertible
    subordinated notes


10



10



10



10Total


10



9,035



2,471



31,149  10




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    INVENTORY,
    NET  first-in,
  December 31,


March 31,2006


2006(In thousands)Raw materials

$
5,741


$
4,211Work in process


4,500



2,345Finished goods


4,669



1,629Inventory, gross


14,910



8,185Allowances


(977
)


(844
)Inventory, net

$
13,933


$
7,341   6.
    CONVERTIBLE
    SUBORDINATED NOTES  2.5% Convertible Subordinated Notes 
  7.
    RESTRUCTURING  ®
    Balance








BalanceMarch 31,


Write-Downs and





December 31,2006


Adjustments(1)


Payments


2006(In thousands)Facility closure and employee
    separation

$
2,368


$
(792
)

$
(394
)

$
1,182Total

$
2,368


$
(792
)

$
(394
)

$
1,182     (1)
    
    Consists of $0.3 million of non-cash write-downs and
    $0.5 million of adjustments for sublease income due to the
    Company under a facility sublease agreement related to facility
    that the Company had closed in connection with the 2004
    Restructuring. These adjustments are included in selling,
    general and administrative expense. 11




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    REDEEMABLE
    CONVERTIBLE PREFERRED STOCK          Research and Development Arrangements.
 12




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   9.
    SHAREHOLDERS
    EQUITY        10.
    SHARE-BASED
    COMPENSATION  Share-Based
    Payment Accounting for
    Stock-Based Compensation Accounting for Stock Issued to Employees
        Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2006


2006(In thousands)Cost of goods manufactured

$
931


$
2,094Research and development


1,897



6,965Selling, general and administrative


4,672



13,159Total share-based compensation
    expense

$
7,500


$
22,218    13




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2006


2006Expected option term


4 -5 years



4 - 5 yearsExpected stock volatility


50
%


50
%Risk-free interest rate


4.45% - 4.61
%


4.45% - 5.07
%Expected annual dividend yield






    14




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Accounting for Stock-Based Compensation 
    Transition and Disclosure
  Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2005


2005(In thousands, except per share amounts)Net income
    (loss)  as reported

$
1,407


$
(578
)Add: employee share-based
    compensation expense as reported in the unaudited condensed
    consolidated statement of operations


47



162Deduct: employee share-based
    compensation expense determined under the fair-value method for
    all options and awards


(5,540
)


(16,651
)Net loss  pro-forma

$
(4,086
)

$
(17,067
)Reported earnings (loss) per
    common share:Basic

$
0.02


$
(0.01
)Diluted

$
0.01


$
(0.01
)Pro-forma loss per common share:Basic

$
(0.04
)

$
(0.19
)Diluted

$
(0.04
)

$
(0.19
)     Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,2005


2005Expected option term


5 years



5 yearsExpected stock volatility


49
%


50
%Risk-free interest rate


4.35
%


4.08
%Expected annual dividend yield






   Stock
    Options and Award Plans
    Sub-Committee
 15




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Sub-Committee
  Sub-Committee Sub-Committee
           16




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Options Outstanding


Restricted StockAwards OutstandingWeightedWeighted


Average





WeightedAverage


Remaining





AverageNumber of


Exercise


Contractual


Number of


Grant DateShares


Price


Term


Shares


Fair Value(In years)Outstanding at March 31, 2006


18,733,823


$
16.09



6.71



91,000


$
8.15Granted


2,427,930



16.97







297,500



18.99Exercised


(547,830
)


10.71











Vesting of restricted stock














(99,425
)


17.39Cancelled


(547,615
)


16.16







(2,000
)


11.45Outstanding at December 31,
    2006


20,066,308


$
16.35



6.37



287,075


$
16.16Exercisable at December 31,
    2006


13,427,747


$
16.52



5.25     Options Outstanding


Options ExercisableWeighted


Weighted





WeightedAverage


Average





AverageNumber


Remaining


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Contractual Life


Price


Exercisable


Price(In years)$ 0.30 - $  7.69


2,540,554



5.17


$
6.57



2,483,505


$
6.547.72 -   12.16


2,723,869



5.80



10.71



2,126,926



10.5812.19 -   14.57


3,250,774



8.21



13.75



1,261,950



13.5814.76 -   16.24


2,746,812



7.85



15.03



1,322,388



14.9916.28 -   18.60


3,672,372



6.39



17.61



2,167,102



17.1218.61 -   28.30


2,886,077



6.39



21.28



1,820,026



21.3128.40 -   96.88


2,245,850



3.88



31.24



2,245,850



31.24$ 0.30 - $ 96.88


20,066,308



6.37


$
16.35



13,427,747


$
16.51    17




---



##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Unvested RestrictedUnvested Stock Options


Stock AwardsWeighted





WeightedAverage





AverageNumber of


Exercise


Number of


Grant DateShares


Price


Shares


Fair ValueUnvested at March 31, 2006


7,373,398


$
16.97



91,000


$
8.15Granted


2,427,930



16.97



297,500



18.99Vested


(2,721,046
)


19.60



(99,425
)


17.39Cancelled


(441,721
)


15.05



(2,000
)


11.45Unvested at December 31, 2006


6,638,561


$
16.02



287,075


$
16.16           11.
    INCOME
    TAXES      12.
    LEGAL
    MATTERS   18




---



##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       19




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  ® ® ®
    Forward-Looking
    Statements
    ® scale-up,
 20




---



##### Table of Contents



and/or scale-up and/or Share-Based Payment
   21




---



##### Table of Contents



Collaborative
    Arrangements
  Lilly
  scale-up scale-up
          Cephalon
     22




---



##### Table of Contents



Indevus
    ®
      Rensselaer
    Polytechnic Institute
     23




---



##### Table of Contents



Product
    Developments
  RISPERDAL
    CONSTA
      30-85 years
  VIVITROL
    AIR
    Insulin
  scale-up scale-up
     24




---



##### Table of Contents



Exenatide
    LAR
  ® 12-week
  ALKS
    29
    ALKS
    27
    ®
    Extended-release
    naltrexone
    Critical
    Accounting Policies
  Form 10-K/A
 25




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##### Table of Contents



Form 10-K/A
  
    Revenue recognition;
    Cost of goods manufactured;
    Research and development expenses;
    Restructuring charges;
    Warrant valuation;
    Accrued expenses;
    Derivatives embedded in certain debt securities; and
    Income taxes.  Form 10-K/A
  Share-based Compensation.
    Measurement of Redeemable Convertible Preferred
    Stock.
 26




---



##### Table of Contents



Results
    of Operations
                 27




---



##### Table of Contents



28




---



##### Table of Contents



Three Months


Nine MonthsEnded


EndedDecember 31,


December 31,(In thousands)

2006


2005


2006


2005Milestone revenue  cost
    recovery:Alkermes expenses incurred on
    behalf of the collaboration

$
7,199


$
6,078


$
25,672


$
12,634Cephalon net losses incurred on
    behalf of the collaboration






5,362



24,816



6,556Alkermes expenses for which
    Alkermes was solely responsible


51



6,446



348



12,284Total milestone
    revenue  cost recovery


7,250



17,886



50,836



31,474Milestone revenue 
    licenses


1,195







3,778



Total milestone
    revenue  cost recovery and licenses


8,445



17,886



54,614



31,474Payments made to Cephalon to
    reimburse their net losses






(5,362
)


(24,816
)


(6,556
)Net collaborative profit

$
8,445


$
12,524


$
29,798


$
24,918   00-21, Revenue Arrangements with Multiple Deliverables 00-21). 12-month
    Cephalon
  Form 10-K/A
 29




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30




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##### Table of Contents



Form 10-K/A
        Financial
    Condition
     31




---



##### Table of Contents



available-for-sale
               32




---



##### Table of Contents



Liquidity
    and Capital Resources
        and/or
    Form 10-K/A
  Cephalon
 33




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##### Table of Contents



Lilly
      Contractual
    Obligations
  Form 10-K/A
  Off-Balance
    Sheet Arrangements
    Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk  available-for-sale;
 34




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##### Table of Contents



available-for-sale
        Foreign
    Currency Exchange Rate Risk
      Item 4.
    Controls
    and Procedures  (a)
    Evaluation
    of Disclosure Controls and Procedures  Rule 13a-15(b) Form 10-K/A
 35




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##### Table of Contents



Form 10-K/A Form 10-K/A
    and/or Sub-Committee,
  (b)
    Change
    in Internal Control over Financial Reporting   36




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##### Table of Contents



PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings        Item 1A.
    Risk
    Factors  Form 10-K/A
  We
    face risks related to an ongoing informal SEC inquiry into, and
    private litigation relating to, our past practices with respect
    to equity incentives.
   37




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##### Table of Contents



(Legal Proceedings) Form 10-Q
     38




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##### Table of Contents



Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Total


Approximate DollarNumber of Shares


Value of SharesTotal Number


Average


Purchased as


That May Yetof Shares


Price Paid


Part of a Publicly


be PurchasedPeriod

Purchased(a)


per Share


Announced Program(a)


Under the Program(in thousands, except share and per share amounts)April 1 through June 30


134,630


$
19.52



134,630


$
12,373July 1 through
    September 30


689,047



14.32



689,047



2,508October 1 through
    October 31














2,508November 1 through
    November 30














2,508December 1 through
    December 31














2,508Total  as of
    December 31, 2006


823,677


$
15.17



823,677     (a)
    
    In September 2005, our Board of Directors authorized a share
    repurchase program of up to $15.0 million of common stock
    to be repurchased in the open market or through privately
    negotiated transactions. The repurchase program has no set
    expiration date and may be suspended or discontinued at any
    time. We publicly announced the share repurchase program in our
    press release for the fiscal 2006 second quarter financial
    results dated November 3, 2005.    Item 6.
    Exhibits    Exhibit Index
  ExhibitNo.10
.1

1998 Equity Incentive Plan.10
.2

1999 Stock Option Plan.10
.3

2002 Restricted Stock Award Plan.31
.1

Rule 13a-14(a)/15d-14(a)
    Certification (furnished herewith).31
.2

Rule 13a-14(a)/15d-14(a)
    Certification (furnished herewith).32
.1

Certification pursuant to 18
    U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the
    Sarbanes-Oxley
    Act of 2002 (furnished herewith).  39




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SIGNATURES    
  By:
    /s/  Richard
    F. Pops      By:
    /s/  James
    M. Frates       40




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##### Table of Contents



EXHIBIT INDEX  ExhibitNo.10
.1

1998 Equity Incentive Plan.10
.2

1999 Stock Option Plan.10
.3

2002 Restricted Stock Award Plan.31
.1

Rule 13a-14(a)/15d-14(a)
    Certification (furnished herewith).31
.2

Rule 13a-14(a)/15d-14(a)
    Certification (furnished herewith).32
.1

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the
    Sarbanes-Oxley
    Act of 2002 (furnished herewith).  41