##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
  þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    December 31, 2005o

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)

02139-4136(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 6,Class

2006Common Stock, $.01 par value


91,488,864Non-Voting Common Stock,
    $.01 par value


382,632




---



##### 



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

Condensed
    Consolidated Financial Statements (Unaudited):Condensed
    Consolidated Balance Sheets  December 31,
    2005 and March 31, 2005


3Condensed
    Consolidated Statements of Operations  For the
    Three and Nine Months Ended December 31, 2005 and 2004


4Condensed
    Consolidated Statements of Cash Flows  For the
    Nine Months Ended December 31, 2005 and 2004


5Notes to Unaudited
    Condensed Consolidated Financial Statements


6Item 2.

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


15Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


28Item 4.

Controls and
    Procedures


28PART II  OTHER
    INFORMATIONItem 1.

Legal
    Proceedings


29Item 2.

Unregistered Sales
    of Equity Securities and Use of Proceeds


29Item 6.

Exhibits


30Signatures


31Exhibit Index


32Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO   2




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##### Table of Contents



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


March 31,2005


2005(In thousands, except share and
    per share amounts)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
23,957


$
47,485Investments  short-term


289,848



155,082Receivables, net


33,414



18,815Inventory, net


8,552



3,766Prepaid expenses and other current
    assets


2,890



2,580Total current assets


358,661



227,728PROPERTY, PLANT AND EQUIPMENT:Land


301



269Building and improvements


20,169



19,150Furniture, fixtures and equipment


77,619



66,805Equipment under capital lease


464



464Leasehold improvements


45,344



45,991Construction in progress


18,951



11,307162,848



143,986Less accumulated depreciation and
    amortization


(54,757
)


(48,798
)Property, plant and
    equipment  net


108,091



95,188RESTRICTED
    INVESTMENTS  long-term


5,147



4,903OTHER ASSETS


10,656



11,055TOTAL ASSETS

$
482,555


$
338,874LIABILITIES, REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
    EQUITYCURRENT LIABILITIES:Accounts payable and accrued
    expenses

$
26,468


$
18,803Accrued interest


4,027



2,248Accrued restructuring costs


882



1,228Unearned milestone
    revenue  current portion


104,197



Derivative liability related to
    convertible subordinated notes


1,349



265Long-term
    debt  current portion


1,191



1,124Total current liabilities


138,114



23,668NON-RECOURSE RISPERDAL CONSTA
    SECURED 7% NOTES


152,897



150,730CONVERTIBLE SUBORDINATED NOTES


123,605



123,022LONG-TERM DEBT


1,831



2,733UNEARNED MILESTONE
    REVENUE  LONG-TERM PORTION


24,329



OTHER LONG-TERM LIABILITIES


4,681



4,609Total liabilities


445,457



304,762REDEEMABLE CONVERTIBLE PREFERRED
    STOCK, par value, $.01 per share; authorized and issued,
    1,500 and 3,000 shares at December 31, 2005 and
    March 31, 2005, respectively (at liquidation preference)


15,000



30,000COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Capital stock, par value,
    $.01 per share; authorized, 4,550,000 shares (includes
    2,997,000 shares of preferred stock); issued, noneCommon stock, par value,
    $.01 per share; authorized, 160,000,000 shares; issued
    and outstanding, 91,237,182 and 89,999,526 shares at
    December 31, 2005 and March 31, 2005, respectively


912



900Nonvoting common stock, par value,
    $.01 per share; authorized 450,000 shares; issued and
    outstanding, 382,632 shares at December 31, 2005 and
    March 31, 2005


4



4Additional paid-in capital


649,422



630,492Deferred compensation


(460
)


Accumulated other comprehensive loss


(139
)


(221
)Accumulated deficit


(627,641
)


(627,063
)Total shareholders equity


22,098



4,112TOTAL LIABILITIES, REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY

$
482,555


$
338,874     3




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##### Table of Contents



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


Three Months


Nine Months


Nine MonthsEnded


Ended


Ended


EndedDecember 31, 2005


December 31, 2004


December 31, 2005


December 31, 2004(In thousands, except per share
    amounts)REVENUES:Manufacturing revenues

$
14,715


$
13,922


$
42,224


$
27,829Royalty revenues


4,228



2,652



11,867



6,647Research and development revenue
    under collaborative arrangements


9,951



7,011



33,935



18,617Net collaborative profit


12,524







24,918



Total revenues


41,418



23,585



112,944



53,093EXPENSES:Cost of goods manufactured


6,077



4,930



14,954



12,561Research and development


22,501



20,058



63,493



66,780Selling, general and administrative


9,332



6,868



27,393



21,286Restructuring














11,896Total expenses


37,910



31,856



105,840



112,523OPERATING INCOME (LOSS)


3,508



(8,271
)


7,104



(59,430
)OTHER INCOME (EXPENSE):Interest income


3,278



646



7,928



1,936Interest expense


(5,177
)


(1,158
)


(15,497
)


(3,532
)Derivative (loss) income related
    to convertible subordinated notes


(315
)


(347
)


(1,084
)


2,343Other income (expense), net


113



131



971



(729
)Total other income (expense)


(2,101
)


(728
)


(7,682
)


18NET INCOME (LOSS)

$
1,407


$
(8,999
)

$
(578
)

$
(59,412
)EARNINGS (LOSS) PER COMMON SHARE:BASIC

$
0.02


$
(0.10
)

$
(0.01
)

$
(0.66
)DILUTED

$
0.01


$
(0.10
)

$
(0.01
)

$
(0.66
)WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING:BASIC


91,505



90,176



90,826



90,011DILUTED


96,720



90,176



90,826



90,011     4




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##### Table of Contents



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


Nine MonthsEnded


EndedDecember 31, 2005


December 31, 2004(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net loss

$
(578
)

$
(59,412
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


7,856



8,006Restructuring charges






11,896Other non-cash charges


4,410



3,046Derivative loss (income) related to
    convertible subordinated notes


1,084



(2,343
)(Gain) loss on warrants held


(1,000
)


729Gain on sale of equipment


(54
)


(40
)Changes in assets and liabilities:Receivables


(14,599
)


(2,845
)Inventory, prepaid expenses and
    other current assets


(5,096
)


(1,513
)Accounts payable, accrued expenses
    and accrued interest


9,444



1,678Accrued restructuring costs


(780
)


(1,235
)Unearned milestone revenues


128,526



Deferred revenue






(17,173
)Other long-term liabilities


506



Net cash provided by (used in)
    operating activities


129,719



(59,206
)CASH FLOWS FROM INVESTING
    ACTIVITIES:Additions to property, plant and
    equipment


(20,809
)


(12,696
)Proceeds from the sale of equipment


105



66Purchases of
    available-for-sale
    investments


(613,813
)


(19,101
)Sales of
    available-for-sale
    investments


478,933



110,513Decrease (increase) in other assets


95



(130
)Net cash (used in) provided by
    investing activities


(155,489
)


78,652CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from issuance of common
    stock


3,077



2,756Borrowings under long term debt






3,676Payment of debt


(835
)


(61
)Net cash provided by financing
    activities


2,242



6,371NET (DECREASE) INCREASE IN CASH AND
    CASH EQUIVALENTS


(23,528
)


25,817CASH AND CASH
    EQUIVALENTS  Beginning of period


47,485



9,899CASH AND CASH
    EQUIVALENTS  End of period

$
23,957


$
35,716SUPPLEMENTARY INFORMATION:Cash paid for interest

$
10,371


$
1,600SUPPLEMENTARY DISCLOSURE OF
    NON-CASH ITEMS:Conversion of Redeemable
    Convertible Preferred Stock into common 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
    Principles of Consolidation
  Use of Estimates
  New
    Accounting Pronouncements
  Share-Based
    Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
    Embedded Derivatives: Application of
    Paragraph 13(b) to Call Options That are Exercisable Only
    by the Debtor
 6




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for Derivative Instruments
    and Hedging Activities Form 10-K)
  2.
    LICENSE
    AND COLLABORATION AGREEMENT AND SUPPLY AGREEMENT WITH
    CEPHALON  tm
     7




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Revenue
    Recognition Related to the License and Collaboration Agreement
    and Supply Agreement (together, the Agreements) with
    Cephalon
  Revenue Recognition in Financial Statements, Issue 00-21, Revenue Arrangements with Multiple
    Deliverables
    Issue 00-21.
 8




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Manufacturing
    Revenues Related to the Cephalon Agreements
      Net
    Collaborative Profit Related to the Cephalon
    Agreements
     9




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Issue 00-21
        3.
    COMPREHENSIVE
    INCOME (LOSS)    Three Months


Three Months


Nine Months


Nine MonthsEnded


Ended


Ended


EndedDecember 31, 2005


December 31, 2004


December 31, 2005


December 31, 2004(In thousands)Net income (loss)

$
1,407


$
(8,999
)

$
(578
)

$
(59,412
)Unrealized (loss) gain on
    marketable securities


(52
)


(85
)


82



(668
)Comprehensive income (loss)

$
1,355


$
(9,084
)

$
(496
)

$
(60,080
)   4.
    EARNINGS
    (LOSS) PER COMMON SHARE   10




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##### Table of Contents



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


Nine Months EndedDecember 31,


December 31,2005


2004


2005


2004(In thousands)Numerator:Net income (loss)

$
1,407


$
(8,999
)

$
(578
)

$
(59,412
)Denominator:Weighted average number of common
    shares outstanding


91,505



90,176



90,826



90,011Effect of dilutive securities:Stock options


4,180











Stock awards


86











Redeemable convertible preferred
    stock


949











Dilutive common share equivalents


5,215











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


96,720



90,176



90,826



90,011     Three Months Ended


Nine Months EndedDecember 31,


December 31,2005


2004


2005


2004(In thousands)Numerator:Adjustment for interest

$
787


$
787


$
2,361


$
2,361Adjustment for derivative loss
    (income)


315



347



1,084



(2,343
)Total

$
1,102


$
1,134


$
3,445


$
18Denominator:Stock options






18,123



19,196



18,123Stock awards






100



83



100Redeemable convertible preferred
    stock






2,548



2,835



2,0202.5% convertible subordinated
    notes


9,025



9,025



9,025



9,0253.75% convertible
    subordinated notes


10



10



10



10Total


9,035



29,806



31,149



29,278   5.
    STOCK-BASED
    COMPENSATION   11




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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 Ended


Nine Months EndedDecember 31,


December 31,2005


2004


2005


2004(In thousands, except per share
    amounts)Net income
    (loss)  as reported

$
1,407


$
(8,999
)

$
(578
)

$
(59,412
)Add  stock-based
    compensation expense as reported in the consolidated statements
    of operations


47



74



162



235Deduct  total
    stock-based compensation expense determined under the fair-value
    method for all options and awards


(5,540
)


(5,023
)


(16,651
)


(14,226
)Net loss  pro-forma

$
(4,086
)

$
(13,948
)

$
(17,067
)

$
(73,403
)Reported earnings (loss) per
    common share:Basic

$
0.02


$
(0.10
)

$
(0.01
)

$
(0.66
)Diluted

$
0.01


$
(0.10
)

$
(0.01
)

$
(0.66
)Pro forma loss per common share:Basic

$
(0.04
)

$
(0.15
)

$
(0.19
)

$
(0.82
)Diluted

$
(0.04
)

$
(0.15
)

$
(0.19
)

$
(0.82
)     Three Months


Three Months


Nine Months


Nine MonthsEnded


Ended


Ended


EndedDecember 31,


December 31,


December 31,


December 31,2005


2004


2005


2004Expected life (years)


5



4



5



4Risk-free interest rate


4.35
%


3.63
%


4.08
%


3.60
%Expected stock price volatility


49
%


71
%


50
%


71
%Weighted average fair value per
    share of options granted during the period

$
8.70


$
8.11


$
8.18


$
7.65  12




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   6.
    INVENTORY  first-in,
  December 31,


March 31,2005


2005(In thousands)Raw materials

$
4,267


$
1,667Work-in-process


1,596



992Finished goods


2,689



1,107Total

$
8,552


$
3,766   7.
    RESTRUCTURING        Balance








BalanceMarch 31,


Charges/





December 31,Type of Liability

2005


Adjustments


Payments


2005(Unaudited)(In thousands)2004 RestructuringEmployee separation costs

$
9


$



$



$
9Facility closure costs


2,965







(424
)


2,5412,974







(424
)


2,5502002 RestructuringEmployee separation costs














Facility closure costs


389



(34
)


(355
)


389



(34
)


(355
)


Total

$
3,363


$
(34
)

$
(779
)

$
2,550   8.
    REDEEMABLE
    CONVERTIBLE PREFERRED STOCK   13




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##### Table of Contents



ALKERMES,
    INC. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    LITIGATION  No. 03-CV-12091-RCL
   14




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  tm once-a-month
  Forward-Looking
    Statements
    scale-up
 15




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##### Table of Contents



and/or scale-up
  License
    and Collaboration Agreement and Supply Agreement with
    Cephalon
   16




---



##### Table of Contents



Product
    Developments
  VIVITROL
    AIR
    Insulin
   17




---



##### Table of Contents



AIR
    parathyroid hormone (PTH)
      Exenatide
    LAR
  tm
   18




---



##### Table of Contents



Product
    Summary
    CollaborativeProduct Candidate

Indication

Stage(1)

PartnerRISPERDAL® CONSTA®

Schizophrenia

Marketed

JanssenVIVITROLtm

Alcohol Dependence

Approvable letter issued by the FDA

CephalonAIR® Insulin

Diabetes

Phase III

LillyVIVITROLtm

Opioid Dependence

Phase II

CephalonExenatide LAR

Diabetes

Phase II

AmylinAIR® hGH

Growth Hormone Deficiency

Phase I

LillyAIR® Epinephrine

Anaphylaxis

Phase I

Not applicableAIR® PTH

Osteoporosis

Preclinical

LillyOthers

Various

Preclinical

Undisclosed     (1)
    
    Phase I clinical trials indicates that the
    compound is being tested in humans for safety and preliminary
    indications of biological activity in a limited patient
    population. Phase II clinical trials indicates
    that the trial is being conducted in patients and is to provide
    information on dosing and preliminary evidence of efficacy.
    Phase III clinical trials indicates that the
    trial is being conducted in patients and is seeking statistical
    evidence of the safety and efficacy of the compound.
    Preclinical indicates that we or our partners are
    conducting formulation, efficacy, pharmacology
    and/or
    toxicology testing of a compound in animal models or biochemical
    assays.  Critical
    Accounting Policies
  Form 10-K Form 10-K
  
    Revenue recognition;
    Derivatives embedded in certain debt securities;
    Warrant valuation;
    Cost of goods manufactured;
    Research and development expenses;
    Restructuring charges;
    Accrued expenses; and
    Stock options and awards.  Revenue
    Recognition Policies
  Revenue
    Recognition Related to the License and Collaboration Agreement
    and Supply Agreement (together, the Agreements) with
    Cephalon
  Revenue
    Recognition in Financial Statements, Issue 00-21, Revenue Arrangements with Multiple
    Deliverables
 19




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##### Table of Contents



Issue 00-21.
  Manufacturing
    Revenues Related to the Cephalon Agreements
     20




---



##### Table of Contents



Net
    Collaborative Profit Related to the Cephalon
    Agreements
    Issue 00-21
        Manufacturing
    Revenues
   21




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##### Table of Contents



Royalty
    Revenues
    Research
    and Development Revenue Under Collaborative
    Arrangements
    Results
    of Operations
           22




---



##### Table of Contents



23




---



##### Table of Contents



Three Months


Nine MonthsEnded


EndedNet Collaborative Profit
    Summary

December 31, 2005


December 31, 2005(In thousands)Milestone
    revenue    cost recovery:Alkermes expenses to collaboration

$
6,078


$
12,634Cephalon net losses to
    collaboration


5,362



6,556Alkermes expenses related to
    VIVITROL for which Alkermes is responsible


6,446



12,284Total milestone
    revenue    cost recovery


17,886



31,474Milestone
    revenue    license






Payments made to Cephalon


(5,362
)


(6,556
)Net collaborative profit

$
12,524


$
24,918        24




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##### Table of Contents



Balance








BalanceMarch 31,


Charges/





December 31,Type of Liability

2005


Adjustments


Payments


2005(In thousands)2004 RestructuringEmployee separation costs

$
9


$



$



$
9Facility closure costs


2,965







(424
)


2,5412,974







(424
)


2,5502002 RestructuringEmployee separation costs














Facility closure costs


389



(34
)


(355
)


389



(34
)


(355
)


Total

$
3,363


$
(34
)

$
(779
)

$
2,550      25




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##### Table of Contents



Financial
    Condition
      available-for-sale
      Liquidity
    and Capital Resources
   26




---



##### Table of Contents



Contractual
    Obligations
  Form 10-K
  Off-Balance
    Sheet Arrangements
   27




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##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk  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)
 28




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##### Table of Contents



(b)  Change
    in Internal Control over Financial Reporting
   PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  03-CV-12091-RCL
    Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds   29




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##### Table of Contents



Item 6.
    Exhibits    Exhibit Index
  ExhibitNo.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).  30




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##### Table of Contents



SIGNATURES    
  By:
    /s/  Richard F. Pops          By:
    /s/  James M. Frates           31




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##### Table of Contents



EXHIBIT INDEX  ExhibitNo.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).  32