##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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
    June 30, 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

23-2472830(State or other jurisdiction
    of
    incorporation or organization)

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

02139-4234(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 July 31,Class

2006Common Stock, $.01 par value


100,922,394Non-Voting Common Stock,
    $.01 par value


382,632




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##### 



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

Unaudited Condensed
    Consolidated Financial Statements:Condensed
    Consolidated Balance Sheets  June 30, 2006 and
    March 31, 2006


3Condensed
    Consolidated Statements of Operations  For the Three
    Months Ended June 30, 2006 and 2005


4Condensed
    Consolidated Statements of Cash Flows  For the Three
    Months Ended June 30, 2006 and 2005


5Notes to Unaudited
    Condensed Consolidated Financial Statements


6Item 2.

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


14Item 3.

Quantitative and
    Qualitative Disclosures about Market Risk


21Item 4.

Controls and
    Procedures


22PART II 
    OTHER INFORMATIONItem 1A.

Risk
    Factors


24Item 2.

Unregistered Sales
    of Equity Securities and Use of Proceeds


25Item 5.

Other
    Information


25Item 6.

Exhibits


25Signatures


26Exhibit Index:


27Ex-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Certifications of CEO & CFO pursuant to Section 906   2




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##### Table of Contents



PART 1.
    FINANCIAL INFORMATION  Item 1.
    Unaudited
    Condensed Consolidated Financial Statements:  ALKERMES,
    INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS  June 30,


March 31,2006


2006(In thousands, except share and per share amounts)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
107,923


$
33,578Investments  short-term


260,616



264,389Receivables


41,353



39,802Inventory, net


11,378



7,341Prepaid expenses and other current
    assets


4,802



2,782Total current assets


426,072



347,892PROPERTY, PLANT AND EQUIPMENT:Land


301



301Building and improvements


21,186



20,966Furniture, fixtures and equipment


63,752



61,086Equipment under capital lease


464



464Leasehold improvements


45,971



45,842Construction in progress


27,158



23,555158,832



152,214Less: accumulated depreciation and
    amortization


(42,586
)


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


116,246



112,917RESTRICTED INVESTMENTS 
    long-term


5,145



5,145OTHER ASSETS


10,290



11,209TOTAL ASSETS

$
557,753


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

$
28,992


$
36,141Accrued interest


2,985



3,239Accrued restructuring costs


855



852Unearned milestone
    revenue  current portion


56,320



83,338Deferred revenue 
    current portion


200



200Convertible subordinated
    notes  current portion


676



676Long-term debt  current
    portion


1,239



1,214Total current liabilities


91,267



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


154,427



153,653CONVERTIBLE SUBORDINATED
    NOTES  LONG-TERM PORTION






124,346LONG-TERM DEBT


1,200



1,519UNEARNED MILESTONE
    REVENUE  LONG-TERM PORTION


124,319



16,198DEFERRED REVENUE 
    LONG-TERM PORTION


700



750OTHER LONG-TERM LIABILITIES


6,677



6,821TOTAL LIABILITIES


378,590



428,947REDEEMABLE CONVERTIBLE PREFERRED
    STOCK, par value, $0.01 per share; authorized and issued,
    1,500 shares at June 30, 2006 and March 31, 2006
    (at liquidation preference)


15,000



15,000COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Capital stock, par value,
    $0.01 per share; authorized, 4,550,000 shares
    (includes 2,997,000 shares of preferred stock); issued, noneCommon stock, par value,
    $0.01 per share; authorized, 160,000,000 shares;
    101,041,464 and 91,744,680 shares issued, 100,906,834 and
    91,744,680 shares outstanding at June 30, 2006 and
    March 31, 2006, respectively


1,010



917Nonvoting common stock, par value,
    $0.01 per share; authorized 450,000 shares; issued and
    outstanding, 382,632 shares at June 30, 2006 and
    March 31, 2006


4



4Treasury stock, at cost (134,630
    and 0 shares at June 30, 2006 and March 31, 2006,
    respectively)


(2,627
)


Additional paid-in capital


798,084



664,596Deferred compensation






(374
)Accumulated other comprehensive
    income


1,398



1,064Accumulated deficit


(633,706
)


(632,991
)Total shareholders equity


164,163



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

$
557,753


$
477,163    3




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ALKERMES,
    INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF
    OPERATIONS
  Three Months


Three MonthsEnded


EndedJune 30,


June 30,2006


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

$
22,193


$
13,983Royalty revenues


5,139



3,604Research and development revenue
    under collaborative arrangements


14,464



7,251Net collaborative profit


9,742



Total revenues


51,538



24,838EXPENSES:Cost of goods manufactured


9,338



4,517Research and development


25,863



21,622Selling, general and administrative


16,530



8,952Total expenses


51,731



35,091OPERATING LOSS


(193
)


(10,253
)OTHER INCOME (EXPENSE):Interest income


4,335



1,631Interest expense


(5,473
)


(5,169
)Derivative loss related to
    convertible subordinated notes






(266
)Other income (expense), net


787



320Total other income (expense)


(351
)


(3,484
)LOSS BEFORE INCOME TAXES


(544
)


(13,737
)INCOME TAXES


171



NET LOSS

$
(715
)

$
(13,737
)LOSS PER COMMON SHARE, BASIC AND
    DILUTED

$
(0.01
)

$
(0.15
)WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING, BASIC AND DILUTED


93,784



90,410    4




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ALKERMES,
    INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
  Three Months


Three MonthsEnded


EndedJune 30, 2006


June 30, 2005(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net loss

$
(715
)

$
(13,737
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Depreciation and amortization


2,826



2,578Stock-based compensation


8,347



58Other non-cash charges


1,215



1,303Derivative loss related to
    convertible subordinated notes






266Gain on investments


(846
)


(308
)Loss on sale of equipment


5



Changes in assets and liabilities:Receivables


(1,551
)


(9,004
)Inventory, prepaid expenses and
    other current assets


(5,401
)


(776
)Accounts payable, accrued expenses
    and accrued interest


(7,370
)


1,006Accrued restructuring costs


(159
)


(322
)Unearned milestone revenue


81,103



160,000Deferred revenue


(50
)


100Other long-term liabilities


18



108Net cash provided by operating
    activities


77,422



141,272CASH FLOWS FROM INVESTING
    ACTIVITIES:Additions to property, plant and
    equipment


(6,160
)


(5,301
)Proceeds from the sale of equipment






1Purchases of short and long-term
    investments


(63,374
)


(326,173
)Sales and maturities of short and
    long-term investments


67,096



165,431Decrease in other assets


14



18Net cash used in investing
    activities


(2,424
)


(166,024
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from issuance of common
    stock


2,268



351Payment of debt


(294
)


(273
)Purchase of treasury stock


(2,627
)


Net cash (used in) provided by
    financing activities


(653
)


78NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


74,345



(24,674
)CASH AND CASH
    EQUIVALENTS  Beginning of period


33,578



47,485CASH AND CASH
    EQUIVALENTS  End of period

$
107,923


$
22,811SUPPLEMENTARY INFORMATION:Cash paid for interest

$
4,511


$
2,057Noncash activities:Conversion of
    2.5% convertible subordinated notes into common stock

$
125,000


$
    5




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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
  Inventory Costs Inventory Pricing,
  Share-Based Payment
  Accounting for Uncertainty in Income
    Taxes Accounting
    for Income Taxes.
 6




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ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    COMPREHENSIVE
    LOSS    Three Months


Three MonthsEnded


Ended(In thousands)

June 30, 2006


June 30, 2005Net loss

$
(715
)

$
(13,737
)Unrealized gain on marketable
    securities


334



136Comprehensive loss

$
(381
)

$
(13,601
)   3.
    LOSS PER
    COMMON SHARE      Three Months


Three MonthsEnded


EndedJune 30, 2006


June 30, 2005Stock options and awards


19,546,023



17,780,394Shares issuable on conversion of
    2.5% convertible subordinated notes


7,438,413



9,025,275Shares issuable on conversion of
    3.75% convertible subordinated notes


9,978



9,978Shares issuable on conversion of
    convertible preferred stock


630,385



2,285,714Total


27,624,799



29,101,361   4.
    INVENTORY  first-in,
  (In thousands)

June 30, 2006


March 31, 2006Raw materials

$
3,321


$
3,757Work in process


3,667



2,083Finished goods


4,390



1,501Total(1)

$
11,378


$
7,341     (1)
    
    Net of allowances for inventory losses of $0.8 million as
    of June 30, 2006 and March 31, 2006.  5.
    CONVERTIBLE
    SUBORDINATED NOTES  2.5% Convertible Subordinated Notes
 7




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ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    6.
    RESTRUCTURING  ®
    Balance





BalanceMarch 31,





June 30,Type of Liability

2006


Payments


2006(In thousands)2004 Restructuring:Employee separation

$
9


$



$
9Facility closure


2,359



(159
)


2,200Total

$
2,368


$
(159
)

$
2,209   7.
    SHAREHOLDERS
    EQUITY      8.
    SHARE-BASED
    PAYMENTS  Accounting for Stock-Based Compensation Accounting
    for Stock Issued to Employees
     8




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ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three MonthsEndedJune 30, 2006(In thousands)Cost of goods manufactured

$
260Research and development


2,836Selling, general and administrative


5,251Share-based compensation expense

$
8,347          9




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ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Three MonthsEndedJune 30, 2006Expected option term


4-5 yearsExpected stock volatility


50
%Risk-free interest rate


4.98
%Expected annual dividend yield


     Accounting for Stock-Based Compensation 
    Transition and Disclosure
  Three MonthsEndedJune 30, 2005(In thousands, except per share amounts)Net loss  as reported

$
(13,737
)Add: employee share-based
    compensation expense as reported in the unaudited condensed
    consolidated statement of operations


58Deduct: employee share-based
    compensation expense determined under the fair-value method for
    all options and awards


(5,813
)Net loss  pro-forma

$
(19,492
)Basic and diluted loss per common
    share:Basic and diluted  as
    reported

$
(0.15
)Basic and diluted 
    pro-forma

$
(0.22
)     Three MonthsEndedJune 30, 2005Expected option term


4 yearsExpected stock volatility


54
%Risk-free interest rate


3.72
%Expected annual dividend yield


  10




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Stock
    Options And Award Plans
    Sub-Committee Sub-Committee
  Sub-Committee Sub-Committee
         11




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


Awards OutstandingWeightedWeighted


Average





WeightedAverage


Remaining





AverageNumber of


Exercise


Contractual


Number of


Grant DateShares


Price


Term


Shares


Fair ValueOutstanding at March 31, 2006


18,733,823


$
16.09



6.71



91,000


$
8.15Granted


875,430



20.79







297,500



18.99Exercised


(220,703
)


10.27











Vesting of restricted stock














(74,375
)


18.99Cancelled


(155,652
)


16.31







(1,000
)


11.45Outstanding at June 30, 2006


19,232,898


$
16.37



6.62



313,125


$
15.86Exercisable at June 30, 2006


11,497,341


$
17.07



5.37






$
     Options Outstanding


Options ExercisableWeighted-


Weighted-





Weighted-Average


Average





AverageNumber


Remaining


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Contractual Life


Price


Exercisable


Price(In years)$ 0.30 - $ 7.69


2,664,774



5.65


$
6.56



2,064,839


$
6.567.72 - 12.16


2,881,899



6.36



10.73



1,941,618



10.4412.19 - 14.57


2,089,023



7.63



13.38



878,262



13.6714.76 - 16.33


2,847,628



8.31



15.01



810,086



15.0616.69 - 18.60


3,551,322



6.79



17.65



1,730,214



16.7618.61 - 28.25


2,881,652



6.96



21.16



1,755,722



21.1428.30 - 96.88


2,316,600



4.40



31.15



2,316,600



31.15$ 0.30 - $96.88


19,232,898



6.62


$
16.37



11,497,341


$
17.07    12




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##### Table of Contents



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


Stock AwardsWeightedWeighted





AverageNumber of


Average


Number of


Grant DateShares


Fair Value


Shares


Fair ValueUnvested at March 31, 2006


7,373,398


$
16.97



91,000


$
8.15Granted


875,430



20.79



297,500



18.99Vested


(389,809
)


16.88



(74,375
)


18.99Cancelled


(123,462
)


13.56



(1,000
)


11.45Unvested at June 30, 2006


7,735,557


$
16.91



313,125


$
15.86           9.
    INCOME
    TAXES     13




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Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  ® ® ®
    Forward-Looking
    Statements
    ® ®
 14




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##### Table of Contents



and/or scale-up Share-Based Payment
 15




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##### Table of Contents



Product
    Developments
  VIVITROL
    AIR
    Insulin
  th
    Exenatide
    LAR
  ® th 12-week
  Critical
    Accounting Policies
  Form 10-K/A Form 10-K/A
  
    Revenue recognition;
    Derivatives embedded in certain debt securities;
    Warrant valuation;
    Cost of goods manufactured;
    Research and development expenses;
    Restructuring charges; 16




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
    Accrued expenses;
    Income taxes; and
    Share-based compensation.  Results
    of Operations
                 17




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##### Table of Contents



June 30,2006(In thousands)Milestone revenue  cost
    recovery:Alkermes expenses incurred on
    behalf of the collaboration

$
8,355Cephalon net losses incurred on
    behalf of the collaboration


18,873Alkermes expenses for which
    Alkermes was solely responsible


196Total milestone
    revenue  cost recovery


27,424Milestone revenue 
    licenses


1,191Total milestone
    revenue  cost recovery and licenses


28,615Payments made to Cephalon to
    reimburse their net losses


(18,873
)Net collaborative profit

$
9,742   Revenue Arrangements with Multiple
    Deliverables (EITF 00-21). 12-month
         18




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Embedded Derivatives: Application of
    Paragraph 13(b) to Call Options That Are Exercisable Only
    by the Debtor.
   19




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##### Table of Contents



Financial
    Condition
      available-for-sale
      Liquidity
    and Capital Resources
   20




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##### Table of Contents



and/or
      Contractual
    Obligations
  Form 10-K/A
  Off-Balance
    Sheet Arrangements
    Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk   21




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##### Table of Contents



available-for-sale;
  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
 22




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Form 10-K/A
  (b)  Change
    in Internal Control over Financial Reporting
     23




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##### Table of Contents



PART II.
    OTHER INFORMATION Item 1A.  Risk
    Factors  Form 10-K/A
  We
    face risks related to the restatement of our financial
    statements and a pending informal SEC investigation regarding
    our past practices with respect to equity
    incentives.         24




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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)(b)


per Share


Announced Program(a)(b)


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





$







$
15,000May 1 through May 31


65,500



19.27



65,500



13,735June 1 through June 30


69,130



19.75



69,130



12,373Total


134,630


$
19.52



134,630     (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 5.
    Other
    Information    Item 6.
    Exhibits    Exhibit Index
  ExhibitNo.10
.1

Alkermes Fiscal 2007 Named
    Executive Bonus Plan (filed as exhibit 10.1 to the Current
    Report on Form 8-K on May 8, 2006 and incorporated
    herein by reference).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).  25




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SIGNATURES













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



















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

















26



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##### Table of Contents

EXHIBIT INDEX



|        |    |    |  |                                                                                                                                                                           
|------- | -- | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |   
|No.     |    |   
|       
|        | 10 | .1 |  | Alkermes Fiscal 2007 Named
    Executive Bonus Plan (filed as exhibit 10.1 to the Current
    Report on Form 8-K on May 8, 2006 and incorporated
    herein by reference).
|        | 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).              



27