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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, DC 20549**

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**FORM 10-Q**

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**(Mark One)**

| **|X|  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**                                                                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                      |
| **For the quarterly period ended June 30, 2006**                                                                                                                                                                                                                                         |
| **OR**                                                                                                                                                                                                                                                                                   |
| **|_|  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 0-28494**                                                                                                                                                                                                                                                       |
| **MILLENNIUM PHARMACEUTICALS, INC.**                                                                                                                                                                                                                                                     |
| (Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                   |

| **Delaware**                                                  |   | **04-3177038**                                |
|---------------------------------------------------------------|--------|-----------------------------------------------|
| (State or other jurisdictionof incorporation or organization) |   | (I.R.S. EmployerIdentification No.) |

**40 Landsdowne Street, Cambridge, Massachusetts 02139**(Address of principal executive offices) (zip code)

**(617)  679-7000**(Registrant's telephone number, including area code)

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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 |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "acceleratedfiler and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): 

| Large accelerated filer  |X| | Accelerated filer  |_| | Non-accelerated filer  |_| |
|----------------------------------------|----------------------------------|--------------------------------------|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes |_| No |X|

Number of shares of the registrant's Common Stock, $0.001 par value, outstanding on August 2, 2006: 315,324,347

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**MILLENNIUM PHARMACEUTICALS, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED JUNE 30, 2006**

**TABLE OF CONTENTS**

|             |                                                                                                     | Page                       |   |
|------------------|----------------------------------------------------------------------------------------------------------|----------------------------|--------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                |                       |   |
|             |                                                                                                     |                       |   |
| Item 1.          | Condensed Consolidated Financial Statements                                                              |                       |   |
|             |                                                                                                     |                       |   |
|             | Condensed Consolidated Balance Sheets as ofJune 30, 2006 and December 31, 2005                           | 3      |   |
|             |                                                                                                     |                       |   |
|             | Condensed Consolidated Statements of Operations for thethree and six months ended June 30, 2006 and 2005 | 4      |   |
|             |                                                                                                     |                       |   |
|             | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005          | 5      |   |
|             |                                                                                                     |                       |   |
|             | Notes to Condensed Consolidated Financial Statements                                                     | 6      |   |
|             |                                                                                                     |                       |   |
| Item 2.          | Management's Discussion and Analysis of FinancialCondition and Results of Operations                     | 17     |   |
|             |                                                                                                     |                       |   |
|             | Risk Factors That May Affect Results                                                                     | 29     |   |
|             |                                                                                                     |                       |   |
| Item 3.          | Quantitative and Qualitative Disclosures About Market Risk                                               | 40     |   |
|             |                                                                                                     |                       |   |
| Item 4.          | Controls and Procedures                                                                                  | 41     |   |
|             |                                                                                                     |                       |   |
| **PART II** | **OTHER INFORMATION**                                                                                    |                       |   |
|             |                                                                                                     |                       |   |
| Item 4.          | Submission of Matters to a Vote of Security Holders                                                      | 42     |   |
|             |                                                                                                     |                       |   |
| Item 6.          | Exhibits                                                                                                 | 42     |   |
|             |                                                                                                     |                       |   |
|             | Signatures                                                                                               | 43     |   |
|             |                                                                                                     |                       |   |
|             | Exhibit Index                                                                                            | 44     |   |
|             |                                                                                                     |                       |   |

*The following Millenniumtrademarks are used in this Quarterly Report on Form 10-Q:* Millennium®, theMillennium “M” logo and design (registered), Millennium PharmaceuticalsTM,VELCADE® (bortezomib) for Injection, and INTEGRILIN® (eptifibatide) Injection. Allare covered by registrations or pending applications for registration in the U.S. Patentand Trademark Office and many other countries. ReoPro® (abciximab) is a trademark ofEli Lilly & Company, Aggrastat® (tirofiban) is a trademark ofMerck & Co., Inc., Thalomid® (thalidomide) and Revlimid® (lenalidomide) aretrademarks of Celgene Corporation and Angiomax® (bivalirudin) is a trademark of TheMedicines Company. *Other trademarks used in this Quarterly Report on Form 10-Q arethe property of their respective owners.*

2

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**PART I     FINANCIAL INFORMATION**

**Item 1.    Condensed Consolidated Financial Statements**

**Millennium Pharmaceuticals, Inc.Condensed Consolidated Balance Sheets**

|                                                                                                                                                                                                     | June 30, 2006 |   | December 31, 2005 |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|--------|-------------------|------------|
||
||
||
| Current assets:                                                                                                                                                                                          |          |   |              |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                |          |   | $                 | 10,461     |   | $ | 5,029 |   |
| Marketable securities                                                                                                                                                                                    |          |   |              | 615,542    |   |   | 640,559 |   |
| Accounts receivable, net of allowances of $521 in 2006 and $2,504 in     2005                                                                                                        |          |   |              | 69,009     |   |   | 64,338 |   |
| Inventory                                                                                                                                                                                                |          |   |              | 13,623     |   |   | 15,824 |   |
| Prepaid expenses and other current assets                                                                                                                                                                |          |   |              | 11,512     |   |   | 15,346 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|     Total current assets                                                                                                                                                             |          |   |              | 720,147    |   |   | 741,096 |   |
| Property and equipment, net                                                                                                                                                                              |          |   |              | 167,534    |   |   | 183,059 |   |
| Restricted cash                                                                                                                                                                                          |          |   |              | 7,431      |   |   | 8,486 |   |
| Other assets                                                                                                                                                                                             |          |   |              | 18,138     |   |   | 16,716 |   |
| Goodwill                                                                                                                                                                                                 |          |   |              | 1,212,437  |   |   | 1,210,926 |   |
| Developed technology, net                                                                                                                                                                                |          |   |              | 288,607    |   |   | 305,337 |   |
| Intangible assets, net                                                                                                                                                                                   |          |   |              | 61,768     |   |   | 62,012 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|     Total assets                                                                                                                                                                     |          |   | $                 | 2,476,062  |   | $ | 2,527,632 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|                                                                                                                                                                                                     |          |   |              |       |   |   |   |   |
| **Liabilities and Stockholders' Equity**                                                                                                                                                                 |          |   |              |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                     |          |   |              |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                         |          |   | $                 | 20,512     |   | $ | 31,137 |   |
| Accrued expenses                                                                                                                                                                                         |          |   |              | 53,405     |   |   | 60,325 |   |
| Current portion of restructuring                                                                                                                                                                         |          |   |              | 32,817     |   |   | 35,362 |   |
| Current portion of deferred revenue                                                                                                                                                                      |          |   |              | 18,654     |   |   | 27,745 |   |
| Current portion of capital lease obligations                                                                                                                                                             |          |   |              | 1,446      |   |   | 4,136 |   |
| Current portion of long-term debt                                                                                                                                                                        |          |   |              | 99,571     |   |   | 5,890 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|     Total current liabilities                                                                                                                                                        |          |   |              | 226,405    |   |   | 164,595 |   |
| Other long-term liabilities                                                                                                                                                                              |          |   |              | 716        |   |   | 48 |   |
| Restructuring, net of current portion                                                                                                                                                                    |          |   |              | 53,189     |   |   | 69,541 |   |
| Deferred revenue, net of current portion                                                                                                                                                                 |          |   |              | 13,133     |   |   | 15,973 |   |
| Capital lease obligations, net of current portion                                                                                                                                                        |          |   |              | 75,641     |   |   | 76,226 |   |
| Long-term debt                                                                                                                                                                                           |          |   |              | —     |   |   | 99,571 |   |
|                                                                                                                                                                                                     |          |   |              |       |
| Commitments and contingencies                                                                                                                                                                            |          |   |              |       |   |   |   |   |
|                                                                                                                                                                                                     |          |   |              |       |
| **Stockholders' equity:**                                                                                                                                                                                |          |   |              |       |   |   |   |   |
| Preferred Stock, $0.001 par value; 5,000 shares authorized,     none issued                                                                                                          |          |   |              | —     |   |   | — |   |
| Common Stock, $0.001 par value; 500,000 shares authorized:    315,215 shares at June 30, 2006 and 311,121 shares at     December 31, 2005 issued and outstanding |          |   |              | 315        |   |   | 311 |   |
| Additional paid-in capital                                                                                                                                                                               |          |   |              | 4,618,765  |   |   | 4,582,204 |   |
| Deferred compensation                                                                                                                                                                                    |          |   |              | —     |   |   | (4,219 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                     |          |   |              | (6,556     | ) |   | (9,580 | ) |
| Accumulated deficit                                                                                                                                                                                      |          |   |              | (2,505,546 | ) |   | (2,467,038 | ) |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|     Total stockholders' equity                                                                                                                                                       |          |   |              | 2,106,978  |   |   | 2,101,678 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |
|     Total liabilities and stockholders' equity                                                                                                                                       |          |   | $                 | 2,476,062  |   | $ | 2,527,632 |   |
|                                                                                                                                                                                                     |          |   |                   |            |   |  |  |   |

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

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**Millennium Pharmaceuticals, Inc.Condensed Consolidated Statements of Operations(unaudited)**

|                                                                                                                            | Three Months Ended June 30, |   | Six Months Ended June 30, |    |
|---------------------------------------------------------------------------------------------------------------------------------|----------------------------------|--------|--------------------------------|---------|
||
||
| Revenues:                                                                                                                       |                             |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |
|     Net product sales                                                                                       |                             |   | $                              | 58,786  |   | $ | 43,892 |   |   |   | $ | 112,159 |   | $ | 88,687 |   |
|     Co-promotion revenue                                                                                    |                             |   |                           | —  |   |   | 47,661 |   |   |   |   | — |   |   | 90,487 |   |
|     Revenue under strategic alliances                                                                       |                             |   |                           | 27,165  |   |   | 19,092 |   |   |   |   | 65,794 |   |   | 55,182 |   |
|     Royalties                                                                                               |                             |   |                           | 34,172  |   |   | — |   |   |   |   | 64,645 |   |   | — |   |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
|         Total revenues                                                                  |                             |   |                           | 120,123 |   |   | 110,645 |   |   |   |   | 242,598 |   |   | 234,356 |   |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
| Costs and expenses:                                                                                                             |                             |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |
|     Cost of sales (excludes amortization of       acquired intangible assets) |                             |   |                           | 14,102  |   |   | 16,680 |   |   |   |   | 29,930 |   |   | 31,261 |   |
|     Research and development (Note 1)                                                                       |                             |   |                           | 79,309  |   |   | 86,939 |   |   |   |   | 161,907 |   |   | 173,093 |   |
|     Selling, general and administrative (Note 1)                                                            |                             |   |                           | 37,391  |   |   | 52,060 |   |   |   |   | 72,856 |   |   | 103,697 |   |
|     Restructuring                                                                                           |                             |   |                           | 1,554   |   |   | 2,999 |   |   |   |   | 4,385 |   |   | 4,106 |   |
|     Amortization of intangibles                                                                             |                             |   |                           | 8,487   |   |   | 8,500 |   |   |   |   | 16,974 |   |   | 17,000 |   |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
|         Total costs and expenses                                                        |                             |   |                           | 140,843 |   |   | 167,178 |   |   |   |   | 286,052 |   |   | 329,157 |   |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
| Loss from operations                                                                                                            |                             |   |                           | (20,720 | ) |   | (56,533 | ) |   |   |   | (43,454 | ) |   | (94,801 | ) |
|                                                                                                                            |                             |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                                                                                         |                             |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |
|     Investment income, net                                                                                  |                             |   |                           | 5,777   |   |   | 14,737 |   |   |   |   | 10,402 |   |   | 19,179 |   |
|     Interest expense                                                                                        |                             |   |                           | (2,724  | ) |   | (2,315 | ) |   |   |   | (5,456 | ) |   | (4,903 | ) |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
| Net loss                                                                                                                        |                             |   | $                              | (17,667 | ) | $ | (44,111 | ) |   |   | $ | (38,508 | ) | $ | (80,525 | ) |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
| *Amounts per common share:*                                                                                                     |                             |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss per share, basic and diluted                                                                                           |                             |   | $                              | (0.06   | ) | $ | (0.14 | ) |   |   | $ | (0.12 | ) | $ | (0.26 | ) |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |
| Weighted average shares, basic and diluted                                                                                      |                             |   |                           | 313,321 |   |   | 307,570 |   |   |   |   | 312,575 |   |   | 307,082 |   |
|                                                                                                                            |                             |   |                                |         |   |  |  |   |   |   |  |  |   |  |  |   |

Note 1:  Upon adoption of SFAS No. 123 (revised 2004), “Share Based Payments,” (“SFAS No. 123R”) on January 1, 2006,the Company beganrecording stock-based compensation expense in its condensed consolidated statements ofoperations. No stock-based compensation expense was recognized under SFAS No. 123R in anyprior periods. See Note 6 to the condensed consolidated financial statements for furtherdiscussion. Stock-based compensation expense is allocated in the condensed consolidated statementsof operations expense lines as follows: 

|                                | Three Months Ended June 30, |   | Six Months Ended June 30, |   |
|-------------------------------------|-----------------------------|--------|---------------------------|--------|
||
|                                |                        |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Research and development            |                        | $      | 5,998                     |   | $ | — |   |   | $ | 12,332 |   | $ | — |   |
| Selling, general and administrative |                        |   | 5,483                     |   |   | — |   |   |   | 9,649 |   |   | — |   |
|                                |                             |   |                           |   |   |  |   |  |   |
| Total                               |                        | $      | 11,481                    |   | $ | — |   |   | $ | 21,981 |   | $ | — |   |
|                                |                             |   |                           |   |   |  |   |  |   |

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

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**Millennium Pharmaceuticals, Inc.Condensed Consolidated Statements of Cash Flows(unaudited)**

|                                                                                        | Six Months Ended June 30, |   |
|---------------------------------------------------------------------------------------------|--------------------------------|--------|
||
||
| **Cash Flows from Operating Activities:**                                                   |                           |   |   |   |   |   |   |   |
| Net loss                                                                                    |                           |   | $ | (38,508 | ) | $ | (80,525 | ) |
| Adjustments to reconcile net loss to cash used in operating activities:                     |                           |   |   |   |   |   |   |   |
|     Depreciation and amortization                                       |                           |   |   | 33,252 |   |   | 39,883 |   |
|     Non-cash restructuring charges                                      |                           |   |   | 4,368 |   |   | — |   |
|     Amortization and write-off of deferred financing costs              |                           |   |   | 218 |  |   | 226 |   |
|     Realized loss on securities, net                                    |                           |   |   | 3,078 |   |   | 1,521 |   |
|     Realized gain on sale of investment in TransForm Pharmaceuticals    |                           |   |   | — |   |   | (10,465 | ) |
|     401K match stock compensation                                       |                           |   |   | 2,838 |   |   | 3,057 |   |
|     Stock-based compensation expense under SFAS No. 123R                |                           |   |   | 21,981 |   |   | — |   |
| Changes in operating assets and liabilities:                                                |                           |   |   |   |   |   |   |   |
|     Accounts receivable                                                 |                           |   |   | (4,671 | ) |   | 3,025 |   |
|     Inventory                                                           |                           |   |   | 2,201 |   |   | 3,942 |   |
|     Prepaid expenses and other current assets                           |                           |   |   | 3,834 |   |   | (95 | ) |
|     Restricted cash and other assets                                    |                           |   |   | (1,620 | ) |   | (3,523 | ) |
|     Accounts payable and accrued expenses                               |                           |   |   | (36,272 | ) |   | (39,168 | ) |
|     Advance from Schering-Plough                                        |                           |   |   | — |   |   | (49,250 | ) |
|     Deferred revenue                                                    |                           |   |   | (11,931 | ) |   | 20,769 |   |
|     Other long-term liabilities                                         |                           |   |   | 668 |   |   | — |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
| Net cash used in operating activities                                                       |                           |   |   | (20,564 | ) |   | (110,603 | ) |
|                                                                                        |                           |   |  |  |   |  |  |   |
|                                                                                        |                           |   |   |   |   |   |   |   |
| **Cash Flows from Investing Activities:**                                                   |                           |   |   |   |   |   |   |   |
| Investments in marketable securities                                                        |                           |   |   | (179,640 | ) |   | (141,974 | ) |
| Proceeds from sales and maturities of marketable securities                                 |                           |   |   | 206,428 |   |   | 256,537 |   |
| Proceeds from sale of investment in TransForm Pharmaceuticals                               |                           |   |   | — |   |   | 10,585 |   |
| Purchases of property and equipment                                                         |                           |   |   | (5,552 | ) |   | (6,430 | ) |
| Other investing activities                                                                  |                           |   |   | (1,379 | ) |   | (4,507 | ) |
|                                                                                        |                           |   |  |  |   |  |  |   |
| Net cash provided by investing activities                                                   |                           |   |   | 19,857 |   |   | 114,211 |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
|                                                                                        |                           |   |   |   |   |   |   |   |
| **Cash Flows from Financing Activities:**                                                   |                           |   |   |   |   |   |   |   |
| Net proceeds from employee stock purchases                                                  |                           |   |   | 15,966 |   |   | 8,625 |   |
| Repayment of long-term debt                                                                 |                           |   |   | (5,890 | ) |   | — |   |
| Principal payments on capital leases                                                        |                           |   |   | (3,275 | ) |   | (6,901 | ) |
|                                                                                        |                           |   |  |  |   |  |  |   |
| Net cash provided by financing activities                                                   |                           |   |   | 6,801 |   |   | 1,724 |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
|                                                                                        |                           |   |   |   |   |   |   |   |
| Increase in cash and cash equivalents                                                       |                           |   |   | 6,094 |   |   | 5,332 |   |
| Equity adjustment from foreign currency translation                                         |                           |   |   | (662 | ) |   | 140 |   |
| Cash and cash equivalents, beginning of period                                              |                           |   |   | 5,029 |   |   | 14,436 |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
| Cash and cash equivalents, end of period                                                    |                           |   | $ | 10,461 |   | $ | 19,908 |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
|                                                                                        |                           |   |   |   |   |   |   |   |
| **Supplemental Cash Flow Information:**                                                     |                           |   |   |   |   |   |   |   |
| Cash paid for interest                                                                      |                           |   | $ | 5,165 |   | $ | 4,942 |   |
|                                                                                        |                           |   |  |  |   |  |  |   |
| **Supplemental Disclosure of Noncash Investing Activities:**                                |                           |   |   |   |   |   |   |   |
| Receipt of shares of SGX Pharmaceuticals, Inc. common stock in exchange for note receivable |                           |   | $ | 6,000 |   | $ | — |   |
|                                                                                        |                           |   |  |  |   |  |  |   |

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements

1.   Basis ofPresentation 

        Theaccompanying condensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion of management, alladjustments, consisting of normal recurring accruals and revisions of estimates,considered necessary for a fair presentation of the accompanying condensed consolidatedfinancial statements have been included. Interim results for the three and six monthsended June 30, 2006 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2006. For further information, refer to the consolidatedfinancial statements and accompanying footnotes included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2005, which was filedwith the Securities and Exchange Commission (“SEC”) on March 8, 2006. 

        Theinformation presented in the condensed consolidated financial statements and relatedfootnotes at June 30, 2006, and for the three and six months ended June 30, 2006 and 2005,is unaudited and the condensed consolidated balance sheet amounts and related footnotes atDecember 31, 2005, have been derived from audited financial statements.

2.   Summaryof Significant Accounting Policies 

Reclassifications 

        Certain prioryear amounts in operating activities of the condensed consolidated statements of cashflows have been reclassified to conform to the current year presentation. Thisreclassification has no impact on previously reported net loss or net cash used inoperating activities. 

        Certainprior year amounts included in accrued expenses of the condensed consolidated balancesheets have been reclassified to accounts payable to conform to the current yearpresentation. This reclassification has no impact on previously reported net loss orcurrent liabilities. 

Cash Equivalents,Marketable Securities and Other Investments 

        Cashequivalents consist principally of money market funds and corporate bonds with maturitiesof three months or less at the date of purchase. Marketable securities consist primarilyof investment-grade corporate bonds, asset-backed debt securities andU.S. government agency debt securities. Other investments representownership in private companies in which the Company holds less than a 20 percent ownershipposition and does not otherwise exercise significant influence. The Company carries suchinvestments at cost unless significant influence can be exercised over the investee, inwhich case such securities are recorded using the equity method. As a matter of policy,the Company monitors these investments in private companies on a quarterly basis anddetermines whether any impairment in their value would require a charge to currentearnings, based on the implied value from any recent rounds of financing completed by theinvestee, market prices of comparable public companies and general market conditions.These other investments are included in other long term assets at June 30, 2006 andDecember 31, 2005. 

        Managementdetermines the appropriate classification of marketable securities at the time of purchaseand reevaluates such designation at each balance sheet date. Marketable securities at June30, 2006 and December 31, 2005 are classified as “available-for-sale.”Available-for-sale securities are carried at fair value, with the unrealized gains andlosses reported in a separate component of stockholders’ equity. The cost of debtsecurities in this category is adjusted for amortization of premiums and accretion ofdiscounts to maturity. Such amortization and accretion are included in investment income.Realized gains and losses and declines in value judged to be other-than-temporary onavailable-for-sale securities and other investments are included in investment income. Thecost of securities sold is based on the specific identification method. Interest anddividends on securities classified as available-for-sale are included in investmentincome. 

        Duringthe three and six months ended June 30, 2006, the Company did not record significantrealized gains on marketable securities. During the three and six months ended June 30,2006, the Company recorded realized losses on marketable securities of $1.1 million and$3.1 million, respectively. During the three months ended June 30, 2005, the Company didnot record realized gains on marketable securities and recorded realized losses onmarketable securities of $0.8 million. During the six months endedJune 30, 2005, the Company recorded realized gains on marketable securities of $0.1million and realized losses on marketable securities of $1.6million. 

6

----

MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        Duringthe three months ended June 30, 2005, the Company recorded a realized gain ofapproximately $10.5 million from the sale of its cost method investment in TransFormPharmaceuticals, Inc. (“TransForm”). The Company expects to record an additionalrealized gain of up to approximately $2.8 million in the second half of 2006 upon thefinal settlement of the escrowed portion of the sale proceeds. TransForm, a companyspecializing in the discovery of formulations and novel crystalline forms of drugmolecules, was acquired by Johnson & Johnson in a cash-for-stock transaction thatclosed in April 2005. 

Segment Information 

        Statementof Financial Accounting Standards (“SFAS”) No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFASNo. 131”), establishes standards for the way that public business enterprisesreport information about operating segments in their financial statements. SFASNo. 131 also establishes standards for related disclosures about products andservices, geographic areas, and major customers. 

        TheCompany operates in one business segment, which focuses on the research, development andcommercialization of therapeutic products. All of the Company’s product sales arecurrently related to sales of VELCADE® (bortezomib) for Injection. All of theCompany’s co-promotion revenue reported in prior periods was related to sales and development ofINTEGRILIN® (eptifibatide) Injection through August 31, 2005. The remainder ofthe Company’s total revenue is related to its strategic alliances and royalties. 

        Revenuesfrom Ortho Biotech Products, L.P. (“Ortho Biotech”), a member of theJohnson & Johnson Family Of Companies, including license fees, milestones,distribution fees on sales outside of the United States and expense reimbursement accounted forapproximately 14 percent and eight percent of total revenues for the three months ended June30, 2006 and 2005, respectively, and 17 percent and 15 percent of total revenues for thesix months ended June 30, 2006 and 2005, respectively. 

        Revenuesfrom Schering-Plough Ltd. and Schering Corporation (collectively “SGP”),including license fees, royalties on sales of INTEGRILIN in the United States and otherterritories and manufacturing-related reimbursement accounted for approximately 30 percentand 31 percent of total revenues for the three and six months ended June 30, 2006,respectively. There was no revenue other than co-promotion revenue recorded from SGPduring the three and six months ended June 30, 2005, respectively. 

        Therewere no other significant customers under strategic alliances and royalties in the threeand six months ended June 30, 2006 and 2005. 

Information ConcerningMarket and Source of Supply Concentration 

        INTEGRILINhas received regulatory approvals in the United States, the countriesof the European Union and a number of other countries for various indications. The Companyand SGP co-promoted INTEGRILIN in the United States and shared anyprofits and losses through August 31, 2005. In September 2005, SGP acquired theexclusive development and commercialization rights to INTEGRILIN in theUnited States from the Company. The Company continues to manage thesupply chain for INTEGRILIN at the expense of SGP for products sold in the SGPterritories. In the European Union, GlaxoSmithKline plc (“GSK”) exclusivelymarkets INTEGRILIN. 

        TheCompany relies on third-party contract manufacturers for the clinical and commercialproduction of INTEGRILIN. The Company has three approved manufacturers that provideeptifibatide, the active pharmaceutical ingredient (“API”) necessary to makeINTEGRILIN for both clinical trials and commercial supply. Solvay, Societe Anonyme(“Solvay”), one of the current manufacturers, owns the process technology usedby it and one other manufacturer for the production of the API. The Company entered intoan agreement with Solvay in January 2003 for an initial term of four years andone-year renewal periods thereafter. In June 2006, the Company received FDA approval ofits own alternative process technology utilized by the third manufacturer for the production of eptifibatide for approval inthe United States and is currently seeking approval in Europe and othercountries, as required. Beginning July 1, 2006, SGP will purchase the majority of its APIdirectly from the manufacturer. The Company has two manufacturers that currently performfill/finish services for INTEGRILIN and a new packaging supplier for theUnited States. The FDA or other regulatory agencies must approve theprocesses or the facilities that may be used for the manufacture of the Company’smarketed products. Materials in process at these alternative suppliers are included ininventory. 

7

----

MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        TheCompany also relies on third-party contract manufacturers for the manufacturing,fill/finish and packaging of VELCADE for both commercial purposes and for ongoing clinicaltrials. The Company has established long-term supply relationships for the production of commercial suppliesof VELCADE. The Company works with one manufacturer under a long-term supply agreement to complete fill/finish for VELCADE. The Company is currentlyqualifying a second fill/finish supplier in order to mitigate its risk of VELCADE supplyinterruption. Materials in process at these alternative suppliers are included ininventory. 

        During2004, the Company began distributing VELCADE in the United Statesthrough a sole-source open access distribution model where the Company sells directly to an independent third partywho in turn distributes to the wholesaler base. In April 2006, the Company’sdistributor added a second distribution site to its network in order to improve access tothe product for physicians in the western United States. 

Inventory 

        Inventoryconsists of currently marketed products, including VELCADE and INTEGRILIN, and from timeto time, product candidates awaiting regulatory approval, which are capitalized basedupon management’s judgment of probable near term commercialization. The Companyassesses the probability of commercialization based upon several factors includingestimated launch date, time to manufacture and shelf life. At June 30, 2006 andDecember 31, 2005, inventory does not include amounts for products that have not beenapproved for sale. 

        Inventoriesare stated at the lower of cost (first in, first out) or market. Inventories are reviewedperiodically for slow-moving or obsolete status based on sales activity, both projectedand historical. 

        Inventoryconsists of the following (in thousands): 

|            |   | **June 30, 2006** |   | **December 31, 2005** |
|-----------------|--------|-------------------|--------|-----------------------|
| Raw materials   |   | $                 | 6,798  |                  | $ | 7,632 |
| Work in process |   |              | 6,125  |                  |   | 7,370 |
| Finished goods  |   |              | 700    |                  |   | 822 |
|            |   |                   |   |                       |
|            |   | $                 | 13,623 |                  | $ | 15,824 |
|            |   |                   |   |                       |

Goodwill and IntangibleAssets 

        Intangibleassets consist of specifically identified intangible assets. Goodwill is the excess of anypurchase price over the estimated fair market value of net tangible assets acquired notallocated to specific intangible assets. 

        Intangibleassets consist of the following (in thousands): 

|                                                                                                                | June 30, 2006 |   | December 31, 2005 |
|---------------------------------------------------------------------------------------------------------------------|---------------|--------|-------------------|
||
| Developed technology                                                                                                |          | $      | 435,000           |   | $ | (146,393 | ) |   |   |   | $ | 435,000 |   | $ | (129,663 | ) |
|                                                                                                                |          |        |              |  |   |  |   |  |   |  |   |
| Core technology                                                                                                     |          | $      | 18,712            |   | $ | (18,712 | ) |   |   |   | $ | 18,712 |   | $ | (18,712 | ) |
| Other                                                                                                               |          |   | 17,060            |   |   | (14,292 | ) |   |   |   |   | 17,060 |   |   | (14,048 | ) |
|                                                                                                                |          |        |              |  |   |   |   |  |   |  |   |
|     Total amortizable intangible assets, excluding     developed technology |          |   | 35,772            |   |   | (33,004 | ) |   |   |   |   | 35,772 |   |   | (32,760 | ) |
| Total indefinite-lived trademark                                                                                    |          |   | 59,000            |   |   | — |   |   |   |   |   | 59,000 |   |   | — |   |
|                                                                                                                |          |        |              |  |   |   |   |  |   |  |   |
| Total intangible assets, excluding developed technology                                                             |          | $      | 94,772            |   | $ | (33,004 | ) |   |   |   | $ | 94,772 |   | $ | (32,760 | ) |
|                                                                                                                |          |        |              |  |   |   |   |  |   |  |   |

        Amortizationof intangibles is computed using the straight-line method over the useful lives of therespective assets as follows: 

| Developed technology | 13 years      |
|----------------------|---------------|
| Core technology      | 4 years       |
| Other                | 2 to 12 years |

8

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        Amortizationexpense was approximately $8.5 million in each of the three months ended June 30, 2006 and2005. Amortization expense was approximately $17.0 million in each of the six months endedJune 30, 2006 and 2005. The Company expects to incur amortization expense of approximately$34.0 million for each of the next five years. 

        Asrequired by SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwilland indefinite lived intangible assets are not amortized but are reviewed annually forimpairment, or more frequently if impairment indicators arise. Separable intangible assetsthat are not deemed to have an indefinite life are amortized over their useful lives andreviewed for impairment when events or changes in circumstances suggest that the assetsmay not be recoverable. The Company tests for goodwill impairment annually, onOctober 1, and whenever events or changes in circumstances suggest that the carryingamount may not be recoverable. 

        OnOctober 1, 2005, the Company performed its annual goodwill impairment test anddetermined that no impairment existed on that date. The Company continually monitorsbusiness and market conditions, including the restructured relationship with SGP, toassess whether an impairment indicator exists. If the Company were to determine that animpairment indicator exists, it would be required to perform an impairment test, whichmight result in a material impairment charge to the statement of operations. 

        Goodwillas of June 30, 2006 and December 31, 2005 consists of the excess purchase price over the estimated fair value ofnet tangible and intangible assets primarily related to the Company’s acquisitions ofCOR Therapeutics, Inc., LeukoSite, Inc.(“LeukoSite”) and Cambridge Discovery Chemistry, LTD. The carrying value may beadjusted as a result of the continued settlement of contingent consideration arising fromthe LeukoSite acquisition. 

Revenue Recognition 

        TheCompany recognizes revenue from the sale of its products, its co-promotion collaborationthrough August 31, 2005, strategic alliances and royalties. The Company’srevenue arrangements with multiple elements are divided into separate units of accountingif specified criteria are met, including whether the delivered element has stand-alonevalue to the customer and whether there is objective and reliable evidence of the fairvalue of the undelivered items. The consideration received is allocated among the separateunits based on their respective fair values, and the applicable revenue recognitioncriteria are applied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned. 

*Net product sales*

        TheCompany records product sales of VELCADE when delivery has occurred, title has transferred, collection is reasonably assured and the Company has no further obligations.Allowances are recorded as a reduction to product sales for estimated returns anddiscounts at the time of sale. Costs incurred by the Company for shipping and handling arerecorded in cost of sales. 

*Co-promotion revenue*

        ThroughAugust 31, 2005, co-promotion revenue included the Company’s share of profitsfrom the sale of INTEGRILIN in co-promotion territories by SGP. Also included inco-promotion revenue were reimbursements from SGP of the Company’smanufacturing-related costs, development costs, advertising and promotional expensesassociated with the sale of INTEGRILIN within co-promotion territories and royalties fromSGP on sales of INTEGRILIN outside of the co-promotion territory other than Europe.The Company recognized revenue when SGP shipped INTEGRILIN to wholesalers and recorded itnet of allowances, if any. The Company deferred specified manufacturing-related expensesuntil the time SGP shipped related product to its customers inside and outside ofco-promotion territories and outside of Europe. 

        BeginningSeptember 1, 2005 as a result of the Company’s transition from a co-promotion toa royalty arrangement for INTEGRILIN in the United States, the Companyno longer reports co-promotion revenue. 

*Revenue under strategicalliances*

        TheCompany recognizes revenue under strategic alliances from nonrefundable license payments,milestone payments, reimbursement of research and development costs and reimbursement ofmanufacturing-related costs. Nonrefundable upfront fees for which no further performanceobligations exist are recognized as revenue on the earlier of when payments are receivedor collection is assured. 

9

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        Nonrefundableupfront licensing fees and guaranteed, time-based payments that require continuinginvolvement in the form of research and development, manufacturing or othercommercialization efforts by the Company are recognized as revenue: 

|   | • |   | ratably over the development period if development risk is significant;                                                         |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                            |
|   | • |   | ratably over the manufacturing period or estimated product useful life if development riskhas been substantially eliminated; or |
|   |   |   |                                                                                                                            |
|   | • |   | based upon the level of research services performed during the period of the researchcontract.                                  |

        Milestonepayments are recognized as revenue when the performance obligations, as defined in thecontract, are achieved. Performance obligations typically consist of significantmilestones in the development life cycle of the related technology or product candidate,such as initiation of clinical trials, filing for approval with regulatory agencies andapprovals by regulatory agencies. 

        Reimbursementsof research and development costs are recognized as revenue as the related costs areincurred. 

*Royalties*

        Beginningon September 1, 2005, in connection with the closing of the Company’s amendedcollaboration agreement with SGP, as discussed in Note 4, the Company began to recordroyalty income. Royalties are recognized as revenue when earned. Royalties may include: 

|   | • |   | royalties earned on sales of INTEGRILIN in the United States and otherterritories around the world, as provided by SGP; |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                    |
|   | • |   | royalties, or distribution fees, earned on international sales of VELCADE, as provided by Ortho Biotech;                |
|   |   |   |                                                                                                                    |
|   | • |   | royalties earned on sales of INTEGRILIN in Europe, as provided by GSK; and                                              |
|   |   |   |                                                                                                                    |
|   | • |   | other royalties.                                                                                                        |

Advertising andPromotional Expenses 

        Advertisingand promotional expenses are expensed as incurred. During the three months ended June 30,2006 and 2005, advertising and promotional expenses were $5.3 million and$10.5 million, respectively. During the six months ended June 30, 2006 and 2005,advertising and promotional expenses were $10.6 million and $22.1 million, respectively. 

Net Loss Per Common Share 

        Basicnet loss per common share is computed using the weighted-average number of common sharesoutstanding during the period, excluding restricted stock that has been issued but is notyet vested. Diluted net loss per share is based upon the weighted average number of commonshares outstanding during the period, plus additional weighted average common equivalentshares outstanding during the period when the effect is not anti-dilutive. Commonequivalent shares result from the assumed exercise of outstanding stock options andwarrants (the proceeds of which are then assumed to have been used to repurchaseoutstanding stock using the treasury stock method), the assumed conversion of convertiblenotes and the vesting of unvested restricted shares of common stock. Options and warrantsto purchase shares of common stock that were not included in the calculation of dilutedshares because the effect of including the options and warrants would have beenanti-dilutive were 1.0 million and 1.3 million for the three and six months ended June 30,2006, respectively, and 1.6 million and 1.7 million for the three and six months ended June 30, 2005, respectively. 

10

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

Comprehensive Loss 

        Comprehensiveloss is composed of net loss, change in unrealized gains and losses on marketablesecurities and cumulative foreign currency translation adjustments. The following tabledisplays comprehensive loss (in thousands): 

|                                            | Three Months EndedJune 30, |    | Six Months EndedJune 30, |   |
|-------------------------------------------------|----------------------------|---------|--------------------------|--------|
||
| Net loss                                        | $                          | (17,667 | )                        | $      | (44,111 | ) | $ | (38,508 | ) | $ | (80,525 | ) |
| Unrealized gain (loss) on marketable securities |                       | (5,130  | )                        |   | 3,307 |   |   | 3,686 |   |   | (1,351 | ) |
| Cumulative translation adjustments              |                       | (657    | )                        |   | 61 |   |   | (662 | ) |   | 140 |   |
|                                            |                            |         |                     |        |  |   |  |  |   |  |  |   |
|     Comprehensive loss      | $                          | (23,454 | )                        | $      | (40,743 | ) | $ | (35,484 | ) | $ | (81,736 | ) |
|                                            |                            |         |                     |        |  |    |  |  |   |  |  |    |

The components of accumulated othercomprehensive loss were as follows (in thousands):   

|                                                                     |   | **June 30, 2006** |   | **December 31, 2005** |   |
|--------------------------------------------------------------------------|--------|-------------------|--------|-----------------------|--------|
| Unrealized loss on marketable securities                                 |   | $                 | (6,055 | )                     | $      | (9,741 | ) |
| Cumulative translation adjustments                                       |   |              | (501   | )                     |   | 161 |   |
|                                                                     |   |                   |   |                       |
|       Accumulated other comprehensive loss |   | $                 | (6,556 | )                     | $      | (9,580 | ) |
|                                                                     |   |                   |   |                       |

Stock-Based CompensationExpense 

        Asdiscussed more fully in Note 6, the Company adopted SFAS No. 123 (revised 2004),“Share Based Payment,” (“SFAS No. 123R”), effectiveJanuary 1, 2006. SFAS 123R requires the recognition of the fair value of stock-basedcompensation in its statements of operations. Stock-based compensation expense primarilyrelates to stock options, restricted stock and stock issued under the Company’s employee stock purchaseplans. 

        Priorto January 1, 2006, the Company followed Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) andrelated interpretations, in accounting for its stock-based compensation plans. Under APB25, when the exercise price of the employee stock options equals the market price of theunderlying stock on the date of grant, no compensation expense was recognized. The Companyelected the modified prospective transition method for adopting SFAS 123R. Under thismethod, the provisions of SFAS 123R apply to all awards granted or modified after the dateof adoption. In addition, the unrecognized expense of awards not yet vested at the date ofadoption, determined under the original provisions of SFAS 123, “Accounting forStock-Based Compensation” (“SFAS 123”), is being recognized in theCompany’s statements of operations in the periods after the date of adoption. Forstock options granted prior to January 1, 2006, the Company calculated stock-basedcompensation expense on a straight-line basis over the requisite service period for eachseparately vesting portion of the award as if the award was, in substance, multipleawards. For restricted stock granted prior to January 1, 2006, the Company calculatedstock-based compensation expense on a straight-line basis over the requisite serviceperiod of the entire award. 

        Asa result of the adoption of SFAS 123R, the Company’s net loss for the three and sixmonths ended June 30, 2006 is $11.5 million, or $0.04 per share, and $22.0 million, or$0.07 per share, respectively, greater than if it had continued to account forshared-based compensation under APB 25. 

11

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        SFAS123R requires the presentation of pro forma information for periods prior to adoption asif the Company had accounted for all stock-based employee compensation expense under thefair value method of that statement. For purposes of this pro forma disclosure, theestimated fair value of the stock options at the date of the grant is amortized to expenseon a straight-line basis over the requisite service period for each separately vestingportion of the award as if the award was, in substance, multiple awards. The Companyaccounted for forfeitures as they occurred. The following table illustrates the effect onnet loss and loss per share for the three and six months ended June 30, 2005, as if theCompany had applied the fair value recognition provisions of SFAS 123R to stock-basedemployee compensation expense (in thousands, except per share amounts): 

|                                                                                                                                    | Three Months EndedJune 30, 2005 |    |   | Six Months EndedJune 30, 2005 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|---------|--------|-------------------------------|--------|
| Net loss                                                                                                                                | $                               | (44,111 | )      |                          | $      | (80,525 | ) |
| Add: Stock-based employee compensation expense as reported in the    Statement of Operations                        |                            | —  |   |                          |   | — |   |
| Deduct: Total stock-based employee compensation expense determined     under fair value based method for all awards |                            | (17,601 | )      |                          |   | (34,010 | ) |
|                                                                                                                                    |                                 |         |   |                          |        |  |   |
| Pro forma net loss                                                                                                                      | $                               | (61,712 | )      |                          | $      | (114,535 | ) |
|                                                                                                                                    |                                 |         |   |                          |        |  |   |
| Amounts per common share:                                                                                                               |                            |    |   |                          |   |   |   |
| Basic and diluted - as reported                                                                                                         | $                               | (0.14   | )      |                          | $      | (0.26 | ) |
|                                                                                                                                    |                                 |         |   |                          |        |  |   |
| Basic and diluted - pro forma                                                                                                           | $                               | (0.20   | )      |                          | $      | (0.37 | ) |
|                                                                                                                                    |                                 |         |   |                          |        |  |   |

Accounting Pronouncements 

        InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections” (“SFAS No. 154”), which replaces Accounting PrinciplesBoard Opinions No. 20, “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements — an Amendment ofAPB Opinion No. 28.”  SFAS No. 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections. It establishesretrospective application, or the earliest practicable dates, as the required method forreporting a change in accounting principle and restatement with respect to the reportingof a correction of an error. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.Although the Company will continue to evaluate the application of SFAS No. 154, theCompany does not currently believe that adoption will have a material impact on results ofoperations, financial position or cash flows. 

        InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109” (the“Interpretation”). The Interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes arecognition threshold and measurement attribute for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. The Interpretation iseffective for fiscal years beginning after December 15, 2006. The Company has notcompleted its evaluation of the Interpretation, but does not currently believe thatadoption will have a material impact on its results of operations, financial position orcash flows. 

3.  Restructuring 

*2005 Strategy Refinement*

        InOctober 2005, the Company announced its 2005 restructuring plan in support of arefined strategy focused on advancing key growth assets, including VELCADE, theCompany’s development pipeline of novel oncology and inflammation molecules andthe Company’s oncology-focused discovery organization. In connection with thestrategy refinement, the Company substantially reduced its effort in inflammationdiscovery and reduced overall headcount, including eliminating INTEGRILIN sales andmarketing positions, positions in inflammation discovery and various other businesssupport groups. 

12

----

MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        TheCompany recorded net restructuring credits of $1.6 million during the three months endedJune 30, 2006 and net restructuring charges of $0.3 million during the six months endedJune 30, 2006 under the 2005 restructuring plan. The restructuring charges primarilyrelated to additional facility related costs associated with vacated buildings andemployee termination benefits as a result of the headcount reductions within inflammationdiscovery and business support groups. Offsetting these charges was a net credit ofapproximately $7.8 million resulting from the earlier than anticipated sublease of one ofthe vacated buildings at a higher rate per square foot than the Company had originallyestimated. 

        Thesecosts are included in restructuring in the statements of operations and in current andlong-term liabilities on the balance sheet at June 30, 2006. The following table displaysthe restructuring activity and liability balances (in thousands): 

|                          | Balance at December 31, 2005 |   | Charges |   | Payments |   | Asset Impairment |   | Balance atJune 30, 2006 |   |
|-------------------------------|-----------------------------------|--------|---------|--------|----------|--------|------------------|--------|-------------------------|--------|
| Termination benefits          |                              | $      | 4,367   |   | $        | 1,006  |             | $      | (3,858                  | )      | $ | — |   | $ | 1,515 |   |
| Facilities                    |                              |   | 24,812  |   |     | (5,172 | )                |   | (3,408                  | )      |   | — |   |   | 16,232 |   |
| Asset impairment              |                              |   | —  |   |     | 4,368  |             |   | —                  |   |   | (4,368 | ) |   | — |   |
| Contract termination          |                              |   | 37      |   |     | 37     |             |   | (74                     | )      |   | — |   |   | — |   |
| Other associated costs        |                              |   | 16      |   |     | 46     |             |   | (38                     | )      |   | — |   |   | 24 |   |
|                          |                              |        |    |        |     |        |             |        |                    |        |   |
|                          |
|     Total |                              | $      | 29,232  |   | $        | 285    |             | $      | (7,378                  | )      | $ | (4,368 | ) | $ | 17,771 |   |
|                          |                              |        |    |        |     |        |             |        |                    |        |

        TheCompany continues to evaluate its strategic alternatives under the refined strategy,including facility consolidation, and as a result, significant material restructuringcharges could result. 

*2003 Restructuring Plan*

        InDecember 2002 and June 2003, the Company realigned its resources to become acommercially-focused biopharmaceutical company. The Company discontinued specifieddiscovery research efforts, reduced overall headcount, primarily in its discovery group,and consolidated its research and development facilities. The Company recordedrestructuring charges of $3.2 million and $4.1 million during the three and six monthsended June 30, 2006, respectively, under the 2003 restructuring plan. The restructuring charges primarilyrelated to adjustments to the Company’s original estimates of the remaining rentalobligations for a vacated facility based upon the Company’s inability to securesubtenants in the time and manner included in its earlier estimates. 

        Thefollowing table displays the restructuring activity and liability balances (in thousands): 

|                          | Balance at December 31, 2005 |   | Charges |   | Payments |   | Balance at June 30, 2006 |   |
|-------------------------------|-----------------------------------|--------|---------|--------|----------|--------|-------------------------------|--------|
| Facilities                    |                              | $      | 75,671  |   | $        | 4,093  |                          | $      | (11,529 | ) | $ | 68,235 |   |
| Other associated costs        |                              |   | —  |   |     | 6      |                          |   | (6 | ) |   | — |   |
|                          |                              |        |    |        |     |        |                          |        |   |
|                          |
|     Total |                              | $      | 75,671  |   | $        | 4,099  |                          | $      | (11,535 | ) | $ | 68,235 |   |
|                          |                              |        |    |        |     |        |                          |        |   |

        The Companyaccounts for its restructuring charges in accordance with SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“SFASNo. 146”). SFAS No. 146 requires that a liability for a cost associatedwith an exit or disposal activity be recognized and measured initially at its fair valuein the period in which the liability is incurred, except for one-time termination benefitsthat meet specified requirements. Costs of termination benefits relate to severancepackages, out-placement services and career counseling for employees affected by restructuring. 

        Inaccordance with SFAS No. 146, the Company’s facilities related expenses andliabilities in both the 2005 and 2003 restructuring plans include estimates of theremaining rental obligations, net of estimated sublease income, for facilities the Companyno longer occupies. The Company validates its estimates and assumptions with independentthird parties having relevant expertise in the real estate market. The Company reviews itsestimates and assumptions on a regular basis, until the outcome is finalized, and makeswhatever modifications are necessary, based on the Company’s best judgment, toreflect any changed circumstances. 

        Theprojected timing of payments of the remaining restructuring liabilities under both the2005 and the 2003 restructuring plans at June 30, 2006 is approximately $32.8 million duethrough June 30, 2007 and $53.2 million due thereafter through 2022. The actual amount andtiming of the payment of the remaining accrued liability is primarily dependent upon theultimate terms of any potential subleases or lease restructuring related to facilities. 

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

4. Revenue and StrategicAlliances 

        TheCompany has entered into research, development, technology transfer and commercializationarrangements with major pharmaceutical and biotechnology companies relating to a broadrange of therapeutic products. These alliances provide the Company with the opportunity toreceive various combinations of license fees, research funding, co-promotion revenue,distribution fees and may provide additional payments contingent upon its achievement ofresearch and regulatory milestones and royalties and/or profit shares if theCompany’s collaborations are successful in developing and commercializing products. 

*Product Alliances*

        OnSeptember 1, 2005, the Company transferred to SGP the exclusive development andcommercialization rights to INTEGRILIN in the United States. Inexchange for these rights, SGP paid the Company approximately $35.5 million in anonrefundable upfront payment that the Company is recognizing as revenue ratably over theCompany’s period of involvement in managing the INTEGRILIN supply chain. In addition, SGP isobligated to pay the Company royalties on product sales of INTEGRILIN over the lifetime ofthe product, with the potential of receiving royalties beyond the 2014 patent expirationdate. 

        Asof September 1, 2005, the Company no longer records co-promotion revenue. The Companynow records royalties on sales of INTEGRILIN in the United States andother territories, as earned on a quarterly basis over the life of the INTEGRILIN product.In each of 2006 and 2007, minimum royalties are set at approximately $85.4 million. Thereare no guaranteed minimum royalty payments beyond 2007. 

        Uponclosing, SGP assumed development obligations relating to INTEGRILIN. The Company continuesto manage the supply chain for INTEGRILIN at the expense of SGP for products sold in theUnited States and other areas outside of the European Union. 

        InJanuary 2005, the Company repaid SGP approximately $49.3 million for advances SGP hadmade for inventory purchases in prior years. 

        Duringthe six months ended June 30, 2006 and 2005, the Company recognized $15.0 million and$20.0 million, respectively, of milestone payments under its alliance with Ortho Biotechrelating to VELCADE and the achievement of agreed-upon sales levels of VELCADE. 

5. Convertible Debt 

        TheCompany had the following convertible notes outstanding at June 30, 2006, for a total of$99.6 million, all of which is included in current liabilities: 

|   | • |   | $83.3 million of principal of 5.5% convertible subordinated notes due January 15,2007, that are convertible into the Company’s common stock at any time prior tomaturity at a price equal to $42.07 per share (the “5.5% notes”); and |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                      |
|   | • |   | $16.3 million of principal of 5.0% convertible subordinated notes due March 1, 2007,that are convertible into the Company’s common stock at any time prior to maturity ata price equal to $34.21 per share (the “5.0% notes”).        |

        Underthe terms of these notes, the Company is required to make semi-annual interest payments onthe outstanding principal balance of the 5.0% notes on March 1 and September 1of each year and of the 5.5% notes on January 15 and July 15 of each year. Allrequired interest payments to date have been made. 

        Inaccordance with the payment terms, the Company paid off the $5.9 million principalbalance on its 4.5% convertible senior notes during the three months ended June 30, 2006. 

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

6. Stock Option Plans 

        Asdiscussed in Note 2, the Company adopted SFAS 123R effective January 1, 2006. SFAS123R requires the recognition of the fair value of stock-based compensation in itsstatements of operations. Stock-based compensation expense primarily relates to stockoptions, restricted stock and the stock issued under the Company’s employee stock purchase plans. Stockoptions are granted to employees at exercise prices equal to the fair market value of theCompany’s stock at the dates of grant. Generally, options have a contractual term often years and vest monthly over a four-year period from grant date, although certainoptions have been, and may in the future, be granted with shorter vesting periods. Options grantedto consultants and other nonemployees generally vest over the period of service to theCompany. Awards of restricted stock are granted to officers and certain employees andgenerally fully vest four years from the grant date, although certain awards have been,and may in the future, be granted with shorter vesting periods. The Company recognizes stock-basedcompensation expense equal to the fair value of stock options on a straight-line basisover the requisite service period for each separately vesting portion of the award as ifthe award was, in substance, multiple awards. Restricted stock awards are recorded ascompensation cost, based on the market value on the date of the grant, on a straight-linebasis over the requisite service period for each separately vesting portion of the awardas if the award was, in substance, multiple awards.  The Company provides newlyissued shares to satisfy stock option exercises, the issuance of restricted stock and stock issued under the Company's employee stock purchase plans. 

        Asa result of the adoption of SFAS 123R, the Company’s net loss for the three and sixmonths ended June 30, 2006 is $11.5 million, or $0.04 per share, and $22.0 million, or$0.07 per share, greater than if it had continued to account for share-based compensationunder APB 25. 

        Inconnection with the adoption of SFAS 123R, the Company reassessed the valuationmethodology for stock options and the related input assumptions. The assessment of thevaluation methodology resulted in the continued use of the Black-Scholes model. In thefourth quarter of 2005, the Company considered implied volatilities of currently tradedoptions to provide an estimate of volatility based upon current trading activity. Afterconsidering other factors such as its stage of development, the length of time the Companyhas been public and the impact of having a marketed product, the Company concluded that ablended volatility rate based upon the most recent three-year and four-year periods ofhistorical performance as well as the implied volatilities of currently traded optionsbetter reflects the expected volatility of its stock going forward. The Company useshistorical data to estimate option exercise and employee termination behavior, adjustedfor known trends, to arrive at the estimated expected life of an option. Upon adoption ofSFAS 123R, the Company validated its estimates and assumptions with an independent thirdparty having the relevant expertise in valuation methodologies. The Company updated theseassumptions during the second quarter to reflect recent historical data. The risk-freeinterest rate for periods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant. The following table summarizes theweighted-average assumptions the Company used in its fair value calculations at the dateof grant: 

|                    | **Stock Options** |                           | **Stock Purchase Plan** |
|-------------------------|-------------------|--------------------------------|-------------------------|
|                    |              | **Three Months EndedJune 30,** |                    | **Six Months EndedJune 30,** |   | **Three Months EndedJune 30,** |   | **Six Months EndedJune 30,** |
|                    | **2006**          |                           | **2005**                |   | **2006** |   | **2005** |   | **2006** |   | **2005** |   | **2006** |   | **2005** |
| Expected life (years)   |              | 3.5                            |                    | 5.4 |   | 3.7 |   | 5.3 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |
| Risk-free interest rate |              | 4.98%                          |                    | 3.73% |   | 4.77% |   | 4.09% |   | 5.06% |   | 3.65% |   | 4.35% |   | 3.46% |
| Volatility              |              | 45%                            |                    | 60% |   | 45% |   | 60% |   | 45% |   | 60% |   | 52% |   | 60% |

        TheCompany has never declared cash dividends on any of its capital stock and does not expectdo so in the foreseeable future. 

        SFAS123R requires the application of an estimated forfeiture rate to current period expense torecognize compensation expense only for those awards expected to vest. The Companyestimates forfeitures based upon historical data, adjusted for known trends, and willadjust its estimate of forfeitures if actual forfeitures differ, or are expected to differfrom such estimates. Subsequent changes in estimated forfeitures will be recognizedthrough a cumulative catch-up adjustment in the period of change and will also impact theamount of stock-based compensation expense in future periods. 

        InDecember 2002, the Company’s Board of Directors reduced the number of sharesauthorized for issuance under some of the Company’s older plans and acquired plans sothat the Company cannot issue new options under those plans. Additionally, at that time, the Board ofDirectors amended some of the Company’s option plans to provide for full vesting ofoptions issued under the plans to optionholders who terminate their employment for goodreason or are terminated without cause within the period one month before and one yearafter a change of control. 

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MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements (continued)

        The2000 Incentive Stock Plan (the “2000 Plan”) allows for the granting of incentiveand nonstatutory stock options, restricted stock awards and other stock-based awards,including the grant of shares based upon specified conditions, the grant of securitiesconvertible into common stock and the grant of stock appreciation rights. The number ofstock option shares authorized is equal to 5% of the number of shares outstanding onApril 12, 2000 plus an annual increase to be made on January 1, 2001, 2002, and2003 equal to 5% of the number of shares outstanding or a lesser amount determined by theBoard of Directors. At June 30, 2006, a total of 40,187,071 shares of common stock havebeen reserved for the exercise of options outstanding and are available for future grantunder the 2000 Plan. 

        The following table presents the combined option activity of the Company’sstock plans for the six months ended June 30, 2006: 

|                                       | Shares of Common Stock Attributable to Options |   | Weighted-Average Exercise Price of Options |   | Weighted-Average Remaining Contractual Term (in years) |   | Aggregate Intrinsic Value (in thousands) |   |
|--------------------------------------------|------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------|--------|------------------------------------------|--------|
| Outstanding at January 1, 2006             |                                           |   | 34,949,289                                 |   | $                                                      | 16.56  |                                     |   |   |   |   |   |   |
| Granted                                    |                                           |   | 3,294,786                                  |   |                                                   | 10.18  |                                     |   |   |   |   |   |   |
| Exercised                                  |                                           |   | (2,141,372                                 | )      |                                                   | 6.46   |                                     |   |   |   |   |   |   |
| Forfeited or expired                       |                                           |   | (4,581,622                                 | )      |                                                   | 21.13  |                                     |   |   |   |   |   |   |
|                                       |                                           |        |                                       |   |                                                   |   |                                     |   |   |
| Outstanding at June 30, 2006               |                                           |   | 31,521,081                                 |   | $                                                      | 15.92  |                                     |   | 6.97 |   | $ | 23,234 |   |
|                                       |                                           |        |                                       |        |                                                   |        |                                     |        |   |
| Vested or expected to vest at June 30,2006 |                                           |   | 30,355,938                                 |   | $                                                      | 16.12  |                                     |   | 0.33 |   | $ | 22,627 |   |
|                                       |                                           |        |                                       |        |                                                   |        |                                     |        |   |
| Exercisable at June 30, 2006               |                                           |   | 19,908,892                                 |   | $                                                      | 19.11  |                                     |   | 5.95 |   | $ | 14,457 |   |
|                                       |                                           |        |                                       |        |                                                   |        |                                     |        |   |

        Theweighted-average grant-date fair value of options granted during the three months endedJune 30, 2006 and 2005 was $3.41 and $4.89, respectively, and during the six months endedJune 30, 2006 and 2005 was $3.92 and $4.73, respectively. The intrinsic value of optionsexercised during the three months ended June 30, 2006 and 2005 amounted to approximately$2.1 million and $0.9 million, respectively, and during the six months endedJune 30, 2006 and 2005 amounted to approximately $7.5 million and $1.8 million,respectively. As of June 30, 2006, the total remaining unrecognized compensation costrelated to nonvested stock option awards amounted to approximately $29.3 million,including estimated forfeitures, which will be recognized over the weighted-averageremaining requisite service period of approximately one and one half years. 

        Asummary of the status of nonvested shares of restricted stock as of June 30, 2006, andchanges during the six months then ended, is presented below: 

|                         | Shares |      |   | Weighted-Average Grant Date Fair Value |   |
|------------------------------|--------|-----------|--------|----------------------------------------|--------|
| Nonvested at January 1, 2006 |   | 480,000   |   |                                   | $      | 9.97 |   |
| Granted                      |   | 1,387,560 |   |                                   |   | 10.44 |   |
| Vested                       |   | —    |   |                                   |   | — |   |
| Forfeited                    |   | (94,495   | )      |                                   |   | 10.50 |   |
|                         |        |           |   |                                   |   |   |   |
| Nonvested at June 30, 2006   |   | 1,773,065 |   |                                   | $      | 10.31 |   |
|                         |        |           |   |                                   |        |  |   |

        Asof June 30, 2006, the total remaining unrecognized compensation cost related to nonvestedrestricted stock awards amounted to approximately $11.8 million, including estimatedforfeitures, which will be recognized over the weighted-average remaining requisiteservice period of approximately two years. No shares of restricted stock vested during thethree and six months ended June 30, 2006 and 2005, respectively. 

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**Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations**

        Ourmanagement’s discussion and analysis of our financial condition and results of ouroperations include the identification of certain trends and other statements that maypredict or anticipate future business or financial results that are subject to importantfactors that could cause our actual results to differ materially from those indicated. See“Risk Factors That May Affect Results.” 

Overview

        Weare a leading biopharmaceutical company focused on discovering, developing andcommercializing innovative products in disease areas with unmet medical needs. Wecurrently market VELCADE, the market leader in the multiple myeloma relapsed setting. Wehave a development pipeline of clinical and preclinical product candidates in ourtherapeutic focus areas of cancer and inflammation, and we have an oncology-focuseddiscovery organization. Strategic business relationships are a key component of ourbusiness. 

        OnOctober 26, 2005, we announced a refined business strategy to focus on advancing keygrowth assets, including VELCADE, our clinical and preclinical pipeline in oncology andinflammation molecules and our oncology-focused discovery organization. As part of ourrefined strategy, we have taken steps to reduce total annual research and development andselling, general and administrative expenses in 2006. These steps build on ourrestructured relationship with Schering-Plough Corporation and Schering-Plough Ltd.,together referred to as SGP. We reduced the size of our company from approximately 1,500 employees atthe end of 2004 to approximately 1,100 employees at the end of 2005, by managingattrition, eliminating INTEGRILIN sales and marketing positions, and reducing the numberof positions in inflammation discovery and in business support groups. We have recordedapproximately $42.8 million of restructuring charges from September 2005 throughJune 2006 in connection with our refined strategy. We continue to evaluate our strategic alternatives under our refinedstrategy, including facility consolidation, and as a result, additional restructuringcharges could result. 

        OnSeptember 1, 2005, SGP obtained the exclusive U.S. development andcommercialization rights for INTEGRILIN from us and paid us a nonrefundable upfrontpayment of approximately $35.5 million. We receive royalties on net product sales ofINTEGRILIN in the United States from SGP for so long as SGP is engaged inthe commercialization and sale of an INTEGRILIN product in the UnitedStates, with the potential of receiving royalties beyond the 2014 patent expiration date.In 2006 and 2007, minimum royalty payments for each year are set at approximately $85.4million. Beyond 2007, we will receive royalties based on a predetermined royalty rate;however, there are no guaranteed minimum royalty payments beyond 2007. In addition, wecontinue to manage the supply of product for INTEGRILIN at the expense of SGP for productssold in the SGP territories. The payments received as a result of managing the supplychain are recorded as strategic alliance revenue. 

        Weexpect our new relationship with SGP to be at least financially equivalent to the formerco-promotion arrangement, taking into account the expected future revenues and anticipatedcosts savings. Strategically, our goal in restructuring the relationship was to increasethe near term certainty of revenues from INTEGRILIN through the guaranteed minimumroyalties for 2006 and 2007, while eliminating the need to further invest our resourcesinto INTEGRILIN sales and marketing and development activities. In addition, therestructured relationship allows us to focus on our key growth assets, including VELCADE,the pipeline and our oncology-focused discovery organization. 

        Ouroverall business strategy is to build a portfolio of innovative, new medicines based onour understanding of particular molecular pathways that affect the establishment andprogression of specific diseases. These molecular pathways include the related effects ofproteins on cellular performance, reproduction and death. We plan to develop andcommercialize many of our products on our own, but will seek development and commercialcollaborators on favorable terms or when we believe that doing so would be advantageous tous. For example, we generally intend to enter into sales and marketing alliances withmajor pharmaceutical companies for products in disease areas that require large salesforces or for markets outside of the United States. 

        Inthe near term, we expect to focus our commercial activities in cancer where we plan tobuild on our commercial and regulatory experience with VELCADE. We also are working toobtain approval to market VELCADE in the United States and, throughOrtho Biotech Products, L.P., a member of the Johnson Family Of Companies, or OrthoBiotech, elsewhere for initial treatment of multiple myeloma and for the treatment ofadditional cancer types. We believe that these additional uses of VELCADE would lead tosignificant expansion of our cancer business. In inflammatory disease, we are advancingnovel product candidates in clinical development as potential treatments for serious andwidely prevalent conditions. 

        InJuly 2006, we brought forward from discovery to development MLN6095, a small moleculeinhibitor of a target that plays a role in inflammatory disease. This is the fifthMillennium discovered molecule to progress to the development pipeline in the pasttwo-and-a-half years. 

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        Inthe long term, we expect to bring new products to market on a regular basis from ourpipeline of discovery and development-stage programs and continue to evaluateopportunities to supplement our pipeline through in-licensing and acquisitions. If we aresuccessful, we would use the revenues from this expanding portfolio of marketed productsto broaden the scope of our operations. 

VELCADE®(bortezomib) for Injection 

        VELCADE,the first of a new class of medicines called proteasome inhibitors, was the firsttreatment in more than a decade to be approved in the United States forpatients with multiple myeloma. We received accelerated approval from the Food and DrugAdministration, or FDA, on May 13, 2003 to market VELCADE for the treatment ofmultiple myeloma patients who have received at least two prior therapies and havedemonstrated disease progression on their most recent therapy, commonly referred to asthird line and beyond. This approval was subject to the completion of and submission ofdata from the phase III APEX clinical trial. 

        InMarch 2005, we received approval from the FDA of our supplemental New DrugApplication, or sNDA, for VELCADE for the treatment of patients with multiple myeloma whohave received at least one prior therapy, commonly referred to as second line therapy.This regulatory decision also marked the completion of the confirmatory trial commitmentthat was necessary for transition from accelerated approval to full approval. 

        InApril 2004, the European Commission granted Marketing Authorization for VELCADE in Europe forthe treatment of multiple myeloma patients who have received at least two prior therapiesand have demonstrated disease progression on their most recent therapy.Under this Authorization, a single license was granted to Millennium for marketing VELCADEin the 15 member states of the European Union, plus Norway andIceland. VELCADE was also approved for marketing in the ten accessionmember countries when those countries officially joined the European Union on May 1,2004. VELCADE has also been approved in a number of other countries, including countrieswithin Latin America and South-East Asia, bringing the total number of approvedcountries to more than 75. 

        InApril 2005, our collaborator, Ortho Biotech, received approval from the EuropeanCommission for VELCADE as a monotherapy for multiple myeloma patients who have received atleast one prior therapy and who have already undergone or are unsuitable for bone marrowtransplantation. 

        TheFDA granted VELCADE fast track designation for relapsed and refractory mantle celllymphoma, an aggressive form of non-Hodgkin’s lymphoma, in November 2004, due tothe high unmet medical need of these patients and based on the strength of data forVELCADE in its clinical trials. This designation allows the FDA to accept on a rollingbasis portions of a marketing application for review prior to the submission of a finaldocument. In June 2006, based on final data from a Phase II trial, we filed a sNDA forVELCADE in the treatment of relapsed or refractory mantle cell lymphoma. The FDA isexpected to give us their deadline to review date, or PDUFA date, in early August. 

        InApril 2006, we initiated a phase III trial of VELCADE in combination with rituximab in therelapsed follicular non-Hodgkin's lymphoma setting.

Our Alliances 

***Ortho BiotechCollaboration
        InJune 2003, we entered into an agreement with Ortho Biotech to collaborate on thecommercialization of and through the agreement with Johnson & JohnsonPharmaceutical Research & Development, L.L.C., or JJPRD, continue clinicaldevelopment of VELCADE. Under the terms of the agreement, we retain all commercializationrights to VELCADE in the United States. Ortho Biotech and itsaffiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of the UnitedStates and Janssen Pharmaceutical K.K. is responsible for Japan. We receive distributionfees from Ortho Biotech and its affiliates from sales of VELCADE outside of theUnited States. We retain an option to co-promote VELCADE with OrthoBiotech at a future date in specified European countries. 

        Weare engaged with JJPRD in an extensive global program for further clinical development ofVELCADE with the purpose of maximizing the commercial potential of VELCADE. This programis investigating the potential of VELCADE to treat multiple forms of solid andhematological tumors, including continued clinical development of VELCADE for multiplemyeloma. JJPRD was responsible for 40% of the joint development costs through 2005 and isresponsible for 45% of those costs after 2005. In addition, we may receive payments fromOrtho Biotech for achieving clinical-development milestones, regulatory milestones outsideof the United States or milestones based upon agreed-upon sales levelsof VELCADE. 

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***INTEGRILIN®(eptifibatide) Injection***

        ThroughAugust 31, 2005, we co-promoted INTEGRILIN in the United States incollaboration with SGP, and shared profits and losses. As of September 1, 2005, SGPmarkets INTEGRILIN in the United States and specified other areasoutside of the European Union. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in theEuropean Union under a license from us. 

***SGP Collaboration***

        InApril 1995, COR Therapeutics, Inc., or COR, entered into a collaborationagreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis.We acquired COR in February 2002. 

        Underour original agreement with SGP, we generally shared any profits or losses from sales inthe United States with SGP based on the amount of promotional effortsthat each party contributed. Since the United States launch of INTEGRILIN inJune 1998, we shared promotional efforts in the United Statesequally with SGP, except for costs associated with marketing programs specific to us. 

        AfterSeptember 1, 2005, under our amended collaboration agreement with SGP, we beganreceiving royalties on sales of INTEGRILIN in the United States. SGPcontinues to pay us royalties on sales of INTEGRILIN in specified territories outside ofthe European Union and reimburses us for manufacturing-related costs. 

***GSK License Agreement***

        InJune 2004, we reacquired the rights to market INTEGRILIN in Europe from SGP andconcurrently entered into a license agreement granting GSK exclusive marketing rights toINTEGRILIN in Europe. In January 2005, the transition of the INTEGRILINmarketing authorizations for the European Union from SGP to GSK was completed, and GSKbegan selling INTEGRILIN in the countries of the European Union. GSK also marketsINTEGRILIN in other European countries where it has received approval of the transfer fromSGP to GSK of the relevant marketing authorizations. Under the terms of the agreement, wehave received license fees and are entitled to future royalties from GSK on INTEGRILINsales in Europe subject to the achievement of specified objectives. 

        Underthe license agreement with GSK, decisions regarding the ongoing marketing of INTEGRILINare generally subject to the oversight of a joint steering committee with equal membershipfrom GSK and us. However, GSK has significant final decision-making authority with respectto European marketing issues. Our agreement with GSK continues until the later ofDecember 31, 2014, or as long as GSK continues to commercialize INTEGRILIN in anyEuropean country. 
Critical AccountingPolicies and Significant Judgments and Estimates 
        Ourmanagement’s discussion and analysis of our financial condition and results ofoperations are based on our condensed consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles. The preparation ofthese financial statements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements as well as the reported revenues andexpenses during the reporting periods. On an ongoing basis, we evaluate our estimates andjudgments, including those related to revenue recognition, inventory, intangible assets,goodwill and stock-based compensation expense. We base our estimates on historicalexperience and on various other factors that we believe are appropriate under thecircumstances, the results of which form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions or conditions. 

        While our significant accounting policies are more fully described in Note 2 to ourconsolidated financial statements included in our Form 10-K, filed with the SEC onMarch 8, 2006, we believe the following accounting policies are most critical to aidin fully understanding and evaluating our reported financial results. 

***Revenue***

        Werecognize revenue from the sale of our products, our co-promotion collaboration throughAugust 31, 2005, our strategic alliances and from royalties based on net sales oflicensed products. We divide our revenue arrangements with multiple elements into separateunits of accounting if specified criteria are met, including whether the delivered elementhas

19

stand-alone value to the customer and whether there is objective and reliable evidenceof the fair value of the undelivered items. We allocate the consideration we receive amongthe separate units based on their respective fair values, and we apply the applicablerevenue recognition criteria to each of the separate units. We classify advance paymentsreceived in excess of amounts earned as deferred revenue until earned.

        Werecognize revenue from the sale of VELCADE in the United States whendelivery has occurred and title has transferred. During the fourth quarter of 2004, webegan distributing VELCADE through a sole-source open access distribution model in which we selldirectly to an independent third party who in turn distributes to the wholesaler base. In April2006, our sole-source distributor added a second distribution site to its network in orderto improve access to the product for physicians in the western United States. Under our agreement withour sole-source distributor, inventory levels are contractuallylimited to no more than three weeks. VELCADE product inventory levels held by thesole-source distributor and wholesalers may fluctuate from time to time within our desired range of one totwo weeks of inventory in the distribution channel. During the second quarter of 2006,inventory levels rose by less than a week to the higher end of our one to two week desiredrange. 

        Werecord allowances as a reduction to product sales for product returns, chargebacks anddiscounts at the time of sale. As VELCADE is a fairly new product, we estimate productreturns based on historical return patterns as they become available. VELCADE returns areexpected to be generally low because the shelf life for the product is 18 months inthe United States and we expect wholesalers not to stock significantinventory due to the expense of the product. Additionally, we consider several factors inour estimation process including our internal sales forecasts, inventory levels asprovided by wholesalers and third party market research data. As we continually monitoractual product returns and inventory levels in the domestic distribution channel, we havereduced and may, from time to time in the future, reduce our product returns estimate.Doing so would result in increased product sales at the time the return estimate ischanged. If circumstances change or conditions become more competitive in the market fortherapeutic products that address multiple myeloma, we may take actions to increase ourproduct return estimates. Doing so would result in an incremental reduction of productsales at the time the return estimate is changed. Our accruals for rebates, chargebacks,and other discounts were immaterial at June 30, 2006. 

        ThroughAugust 31, 2005, we recognized co-promotion revenue based on SGP’s reportedshipments of INTEGRILIN to wholesalers. Co-promotion revenue included our share of theprofits from the sales of INTEGRILIN and reimbursements of our manufacturing-relatedcosts, development costs and advertising and promotional expenses. We communicated withSGP to calculate our share of the profits from the sales of INTEGRILIN on a monthly basis.The calculation included estimates of the amount of advertising and promotional expensesand other costs incurred on a monthly basis. Adjustments to our estimates were based uponactual information that we received subsequent to our reporting deadlines. Our estimateswere adjusted on a monthly basis and historically the adjustments were not significant dueto frequent communication with SGP. 

        Werecognize nonrefundable upfront licensing fees and guaranteed, time-based payments thatrequire continuing involvement in the form of research and development, manufacturing orother commercialization efforts by us as strategic alliance revenue: 
 • ratably over the development period if development risk is significant;     • ratably over the manufacturing period or estimated product useful life if development riskhas been substantially eliminated; or      • based upon the level of research services performed during the period of the researchcontract.    
        Whenthe period of deferral cannot be specifically identified from the contract, managementestimates the period based upon other critical factors contained within the contract. Wecontinually review these estimates which could result in a change in the deferral periodand might impact the timing and the amount of revenue recognized. 

        Milestonepayments are recognized as strategic alliance revenue when the performance obligations, asdefined in the contract, are achieved. Performance obligations typically consist ofsignificant milestones in the development life cycle of the related technology, such asinitiation of clinical trials, filing for approval with regulatory agencies and approvalsby regulatory agencies. Reimbursements of research and development costs are recognized asstrategic alliance revenue as the related costs are incurred. 

        Weare entitled to receive royalty payments under license agreements with a number of thirdparties that sell products based on technology we have developed or to which we haverights. These license agreements provide for the payment of royalties to us based on salesof the licensed product and we record royalty revenues based on estimates of sales frominterim data provided by licensees. Beginning September 1, 2005, upon closing theamended collaboration agreement with SGP, we

20

began recording royalty revenues as aseparate line item in our statement of operations. For all of our royalty arrangements, we perform ananalysis of historical royalties we have been paid, adjusted for any changes in facts andcircumstances, as appropriate. Differences between actual royalty revenues and estimatedroyalty revenues are adjusted for in the period which they become known, typically thefollowing quarter. We do not expect these adjustments to be significant. To the extent wedo not have sufficient ability to accurately estimate royalty revenue, we recordroyalties on a cash basis. 

***Inventory***

        Inventoryconsists of currently marketed products and from time to time product candidates awaitingregulatory approval, which are capitalized based upon management’s judgment ofprobable near-term commercialization. We assess the probability of commercialization basedupon several factors including estimated launch date, time to manufacture and shelf life.At June 30, 2006 and December 31, 2005, inventory does not include amounts forproducts that had not been approved for sale. 

        Inventoriesprimarily represent raw materials used in production, work in process and finished goodsinventory on hand, valued at cost, for VELCADE, raw material used in production and workin process, valued at cost, for INTEGRILIN to supply GSK and limited amounts of work inprocess, valued at cost, for INTEGRILIN to supply SGP. Inventories are reviewedperiodically for slow-moving or obsolete status based on sales activity, both projectedand historical. Our current sales projections provide for full utilization of theinventory balance. If product sales levels differ from projections or a launch of a newproduct is delayed, inventory may not be fully utilized and could be subject toimpairment, at which point we would adjust inventory to its net realizable value. 

***Intangible Assets***

        Wehave acquired significant intangible assets that we value and record. Those assets that donot yet have regulatory approval and for which there are no alternative uses are expensedas acquired in-process research and development, and those that are specificallyidentified and have alternative future uses are capitalized. We use a discounted cash flowmodel to value intangible assets at acquisition. The discounted cash flow model requiresassumptions about the timing and amount of future cash inflows and outflows, risk, thecost of capital, and terminal values. Each of these factors can significantly affect thevalue of the intangible asset. We engage independent valuation experts who review ourcritical assumptions for significant acquisitions of intangibles. We review intangibleassets for impairment on a periodic basis using an undiscounted net cash flows approachwhen impairment indicators arise. If the undiscounted cash flows of an intangible assetare less than the carrying value of an intangible asset, the intangible asset is writtendown to the discounted cash flow value. Where cash flows cannot be identified for anindividual asset, the review is applied at the lowest group level for which cash flows areidentifiable. 

***Goodwill***

        OnOctober 1, 2005, we performed our annual goodwill impairment test and determined thatno impairment existed on that date. However, since the date of acquisition of COR, whichgenerated a significant amount of goodwill, we have experienced a significant decline inmarket capitalization due to a decline in stock price. We continually monitor business andmarket conditions, including the restructured relationship with SGP, to assess whether animpairment indicator exists. If we were to determine that an impairment indicator exists,we would be required to perform an impairment test which could result in a materialimpairment charge to our statement of operations. 

***Stock-Based CompensationExpense***

        Weadopted Statement of Financial Accounting Standards, or SFAS No. 123 (revised 2004),“Share Based Payment,” or SFAS No. 123R, effective January 1, 2006.SFAS 123R requires the recognition of the fair value of stock-based compensation expensein our operations, and accordingly the adoption of SFAS No. 123R fair value methodwill have a significant impact on our results of operations, although it will have noimpact on our overall financial position. Option valuation models require the input ofhighly subjective assumptions, including stock price volatility and expected term of anoption. In the fourth quarter of 2005, we considered implied volatilities of currentlytraded options to provide an estimate of volatility based upon current trading activity.After considering other such factors as our stage of development, the length of time wehave been public and the impact of having a marketed product, we believe a blendedvolatility rate based upon the most recent three-year and four-year periods of historicalperformance, as well as the implied volatilities of currently traded options betterreflects the expected volatility of our stock going forward. Changes in market pricedirectly affect volatility and could cause future stock-based compensation expense tovary significantly in future reporting periods. 

        Weuse historical data to estimate option exercise and employee termination behavior,adjusted for known trends, to arrive at the estimated expected life of an option. Uponadoption of SFAS 123R, we validated our estimates and assumptions 

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with an independentthird party having the relevant expertise in valuation methodologies. We updated theseassumptions during the second quarter of 2006 to reflect recent historical data. Additionally, weare required to estimate forfeiture rates to estimate the number of shares that will vestin a period to which the fair value is applied. We will continually monitoremployee exercise behavior and may further adjust the estimated term and forfeiture ratesin future periods. Increasing the estimated life would result in an increase in the fairvalue to be recognized over the requisite service period, generally the vesting period.Estimated forfeitures will be adjusted to actual forfeitures upon the vest date of thecancelled options as a cumulative catch up adjustment on a quarterly basis. Doing so couldcause future expenses to vary at each reporting period. 

        Weestimate stock-based compensation expense to be in the range of $40.0 million to $50.0million in 2006, dependent upon market price, assumptions used in estimating the fairvalue as discussed above and the levels of share-based payments granted in 2006. InMarch 2006, we revised our annual merit compensation program to include both stockoptions and restricted stock to certain employees. For the three and six months ended June30, 2006, we recognized total stock-based compensation expense under SFAS 123R of $11.5million and $22.0 million, respectively. As of June 30, 2006, the total remainingunrecognized compensation cost related to nonvested stock option awards and nonvestedrestricted stock awards amounted to approximately $29.3 million and$11.8 million, including estimated forfeitures, respectively, which will be amortizedover the weighted-average remaining requisite service periods of approximately one and onehalf years and two years, respectively. 
Accounting Pronouncements 
        InMay 2005, the Financial Accounting Standards Board issued SFAS No. 154,“Accounting Changes and Error Corrections,” or SFAS No. 154 which replacesAccounting Principles Board Opinions No. 20, “Accounting Changes” and SFASNo. 3, “Reporting Accounting Changes in Interim Financial Statements — anAmendment of APB Opinion No. 28.”  SFAS No. 154 provides guidance onthe accounting for and reporting of accounting changes and error corrections. Itestablishes retrospective application, or the earliest practicable dates, as the requiredmethod for reporting a change in accounting principle and restatement with respect to thereporting of a correction of an error. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. Although we continue to evaluate the application of SFAS No. 154, we do notcurrently believe that adoption will have a material impact on our results of operations,financial position or cash flows. 

        In June2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109”, or the“Interpretation”. The Interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes arecognition threshold and measurement attribute for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. The Interpretation iseffective for fiscal years beginning after December 15, 2006. Although we have notcompleted our evaluation of the Interpretation, we do not currently believe that adoptionwill have a material impact on our results of operations, financial position or cashflows. 

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Results of Operations Three Months Ended June 30, Increase/(Decrease)Percentage change Six Months Ended June 30, Increase/(Decrease)Percentage change  2006 2005 2006/2005 2006 2005 2006/2005 (in thousands, except per share amounts) Revenues:                        Net product sales $58,786 $43,892  34% $112,159 $88,687  26%    Co-promotion revenue  —  47,661  (100)  —  90,487  (100)    Revenue under strategic alliances  27,165  19,092  42   65,794  55,182  19     Royalties  34,172  —  —   64,645  —  —                      Total revenues  120,123  110,645  9   242,598  234,356  4              Costs and expenses:                        Cost of sales (excludes amortization of       acquired intangible assets)  14,102  16,680  (15)  29,930  31,261  (4)    Research and development (Note 1)  79,309  86,939  (9)  161,907  173,093  (6)    Selling, general and administrative      (Note 1)  37,391  52,060  (28)  72,856  103,697  (30)    Restructuring  1,554  2,999  (48)  4,385  4,106  7     Amortization of intangibles  8,487  8,500  —   16,974  17,000  —                      Total costs and expenses  140,843  167,178  (16)  286,052  329,157  (13)             Loss from operations  (20,720) (56,533) (63)  (43,454) (94,801) (54)                     Other income (expense):                        Investment income, net  5,777  14,737  (61)  10,402  19,179  (46)    Interest expense  (2,724) (2,315) 18   (5,456) (4,903) 11              Net loss $(17,667)$(44,111) (60)% $(38,508)$(80,525) (52)%             *Amounts per common share:*                    Net loss per share, basic and diluted $(0.06)$(0.14)    $(0.12)$(0.26)                Weighted average shares, basic and diluted  313,321  307,570      312,575  307,082                 
Note 1: Upon adoption of SFAS No. 123R on January 1,2006, the Company began recording stock-based compensation expense in its consolidatedstatements of operations. No stock-based compensation expense was recognized under SFASNo. 123R in any prior periods. See Note 6 of our condensed consolidated financialstatements for further discussion. Stock-based compensation expense is allocated in thecondensed consolidated statements of operations expense lines as follows: 
 Three Months Ended June 30, Six Months Ended June 30,  2006 2005  2006 2005 **(in thousands)**              Research and development $5,998 $—  $12,332 $— Selling, general and administrative  5,483  —   9,649  —       Total $11,481 $—  $21,981 $—       
***Revenues***

        Totalrevenues increased 9% to $120.1 million during the three months ended June 30, 2006,or the 2006 Three Month Period, and 4% to $242.6 million during the six months ended June30, 2006, or the 2006 Six Month Period, from the comparable periods in 2005. The increaseprimarily related to higher net product sales of VELCADE offset by lower revenue from ourcollaborators, including total lower revenue from SGP as a result of the restructuredrelationship and lower license fee revenue recognized from GSK partially offset byincreased royalty revenue recognized from Ortho Biotech on sales of 

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VELCADE outside of theUnited States. Revenue from our collaborators includes revenue understrategic alliance, royalties, and in 2005, co-promotion revenue.

        Netproduct sales of VELCADE increased 34% to $58.8 million in the 2006 Three Month Period and26% to $112.2 million in the 2006 Six Month Period from the comparable periods in 2005.The increase in net product sales was attributable to higher unit volume coupled withprice increases in both periods. Volume increase is attributable to growth in product demand as a result of increasedpenetration in the second line treatment setting of multiple myeloma patients, anincrease in the number of cycles used on average for responding patients, and fluctuations in inventory levels within our desired range of one to two weeksin the domestic distribution channel. Reserves forproduct returns, chargebacks and discounts represented approximately 5% to 6% of grossproduct sales for all periods presented. Product sales from VELCADE representedapproximately 49% and 40% of our total revenues in the 2006 Three Month Period and the three months ended June 30, 2005, or the 2005 Three Month Period,respectively, and 46% and 38% of our total revenues in the 2006 Six MonthPeriod and the six months ended June 30, 2005, or the 2005 Six MonthPeriod, respectively. 

        Asof September 1, 2005, we no longer report co-promotion revenue due to ourrestructured relationship with SGP. Co-promotion revenue represented approximately 43% ofour total revenues in the 2005 Three Month Period and 39% of our total revenues in the2005 Six Month Period. 

        Revenueunder strategic alliances increased 42% to $27.2 million in the 2006 Three Month Periodand 19% to $65.8 million in the 2006 Six Month Period from the comparable periods in 2005. The increase inboth the 2006 Three and Six Month Periods was primarily due to the restructured SGPrelationship, which generates revenue from the management of the INTEGRILIN supply chainon behalf of SGP in the form of license fees and reimbursement of manufacturing-relatedexpenses. Beginning July 1, 2006, SGP will purchase the majority of the activepharmaceutical ingredient necessary to manufacture INTEGRILIN. We expect reimbursement ofmanufacturing-related expenses to decrease in future periods as a result of this change.Additionally, we expect cost of sales to decrease by a corresponding amount with no netimpact on our statements of operations.

        Weexpect revenue under strategic alliances to fluctuate in future periods depending on thelevel of revenues earned for ongoing development efforts, the level of milestones achievedand the number of alliances we may enter into in the future with major pharmaceuticalcompanies. 

        Asmentioned above, we began recording royalty revenue starting September 1, 2005. Royaltyrevenue may include royalties earned upon sales of INTEGRILIN in the United States andother territories around the world as provided by SGP, royalties earned upon sales ofINTEGRILIN in Europe as provided by GSK, distribution fees earned upon sales outside ofthe United States of VELCADE as provided by Ortho Biotech and any royalties earned undercertain of our early discovery alliances. We recorded $34.2 million and $64.6 million ofroyalty revenue during the 2006 Three and Six Month Periods, respectively, which primarilyincluded royalties from SGP and Ortho Biotech. 

***Cost of Sales***

        Costof sales decreased 15% to $14.1 million in the 2006 Three Month Period and 4% to $29.9million in the 2006 Six Month Period from the comparable periods in 2005. Cost of salesincludes manufacturing-related expenses associated with the sales of VELCADE as well ascosts associated with managing the INTEGRILIN supply chain on behalf of SGP. The decrease was primarily a result of timingdifferences due to the manner in which we now recognize cost of sales at the time ofshipment to SGP under our restructured relationship.  Through August 31, 2005 under our co-promotion arrangement with SGP, we deferredcertain manufacturing-related expenses until the time SGP shipped INTEGRILIN to its customers inside and outside of the co-promotion territories.  Thisdecrease was partially offset by increased cost of sales associated with higher VELCADE sales.

***Research and Development***

        Researchand development expenses decreased 9% to $79.3 million in the 2006 Three Month Period and6% to $161.9 million in the 2006 Six Month Period from the comparable periods in 2005. Thedecrease in both periods was primarily a result of cost reductionsassociated with our 2005 strategy refinement and restructuring efforts combined withdecreased spending in our discovery organization partially offset by the addition ofstock-based compensation expense of approximately $6.0 million and $12.3 million in the 2006 Three and Six Month Periods,respectively, related to the adoption of SFAS 123R on January 1, 2006. 

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        Inaddition to our ongoing clinical trials of VELCADE, we have a number of drug candidates inclinical and late preclinical development. In January 2006, as part of our portfolioreview process, based on the evaluation of clinical data in the context ofadditional opportunities in the pipeline, we decided to discontinue development of MLN2704in its current form as well as MLN1202 in rheumatoid arthritis. The following chartsummarizes the applicable disease indication and the clinical or preclinical trial statusof our drug candidates. 
Product Description Disease Indication Current Trial Status       ***Cancer***     MLN518 is a small molecule inhibitor of the Receptor Tyrosine Kinase, or RTK, including FLT-3, PDGF-R and c-KIT Acute myeloid leukemiaGlioma(1)Renal(1)Prostate(1) phase I/phase IIphase I planned for 2006phase I planned for 2006phase I planned for 2006       MLN8054 is a small molecule inhibitor of AuroraA kinases Advanced malignancies phase I       ***Inflammatory Diseases***     MLN0002 is a humanized monoclonal antibody directed against the alpha4beta7 receptor Crohn's diseaseUlcerative colitis preclinical with prior phase II datapreclinical with prior phase II data       MLN1202 is a humanized monoclonal antibody directed against CCR2 Multiple sclerosisAtherosclerosisScleroderma phase IIaphase IIphase IIa planned for 2007       MLN3897 is a small molecule CCR1 inhibitor Chronic inflammatory diseases such as rheumatoid arthritis phase I with phase IIa planned for 2006       MLN3701 is a small molecule CCR1 inhibitor, backup to MLN3897 Chronic inflammatory diseases such as rheumatoid arthritis phase I       MLN0415 is a small molecule inhibitor of IKKbeta Chronic inflammatory diseases such as rheumatoid arthritis phase I planned for 2006       MLN6095 is a small molecule anti-inflammatory inhibitor Inflammatory diseases preclinical 
__________________    (1)                 Trials planned to be conducted through Cancer Therapy Evaluation Program, a division of          the National Cancer Institute. 

        Completionof clinical trials may take several years or more and the length of time can varysubstantially according to the type, complexity, novelty and intended use of a productcandidate. The types of costs incurred during a clinical trial vary depending upon thetype of product candidate and the nature of the study. 

        Weestimate that clinical trials in our areas of focus are typically completed over thefollowing timelines: 
 **Clinical Phase** **Objective** **Estimated Completion Period**                                 phase I Establish safety in humans, study how the drug works, metabolizes and interacts with other drugs 1-2 years                                 phase II Evaluate efficacy, optimal dosages and expanded evidence of safety 2-3 years                                 phase III Confirm efficacy and safety of the product 2-4 years        
        Uponsuccessful completion of phase III clinical trials, and in some cases phase II, of aproduct candidate, we intend to submit the results to the FDA to support regulatoryapproval. However, we cannot be certain that any of our product candidates will prove tobe safe or effective, will receive regulatory approvals, or will be successfullycommercialized. Our clinical trials might prove that our product candidates may not beeffective in treating the disease or have undesirable or unintended side effects,toxicities or other characteristics that require us to cease further development of theproduct candidate. The cost to take a product candidate through clinical trials isdependent upon, among other things, the disease indications, the timing, the size anddosing schedule of each clinical trial, the number of patients enrolled in each trial andthe speed at which patients are enrolled and treated. We could incur increased productdevelopment costs if we experience delays in clinical trial enrollment, delays in theevaluation of clinical trial results or delays in regulatory approvals. 

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         Someproducts that are likely to result from our research and development projects are based onnew technologies and new therapeutic approaches that have not been extensively tested inhumans. The regulatory requirements governing these types of products may be more rigorousthan for conventional products. As a result, it is difficult to estimate the nature andlength of the efforts to complete such projects as we may experience a longer regulatoryprocess in connection with any products that we develop based upon these new technologiesor therapeutic approaches. In addition, ultimate approval for commercial manufacturing andmarketing of our products is dependent on the FDA or applicable approval body in thecountry for which approval is being sought, adding further uncertainty to estimated costsand completion dates. Significant delays could allow our competitors to bring products tomarket before we do and impair our ability to commercialize our product candidates. 

        Dueto the variability in the length of time necessary to develop a product, the uncertaintiesrelated to the estimated cost of the projects and ultimate ability to obtain governmentalapproval for commercialization, accurate and meaningful estimates of the ultimate cost tobring our product candidates to market are not available. 

        Webudget and monitor our research and development costs by type or category, rather than byproject on a comprehensive or fully allocated basis. Significant categories of costsinclude personnel, clinical, third party research and development services and laboratorysupplies. In addition, a significant portion of our research and development expenses isnot tracked by project as it benefits multiple projects or our technology platform.Consequently, fully loaded research and development cost summaries by project are notavailable. 

        Giventhe uncertainties related to development, we are currently unable to reliably estimatewhen, if ever, our product candidates will generate revenue and cash flows. We do notexpect to receive net cash inflows from any of our major research and development projectsuntil a product candidate becomes a profitable commercial product. 

***Selling, General andAdministrative***

        Selling,general and administrative expenses decreased 28% to $37.4 million in the 2006 Three MonthPeriod and 30% to $72.9 million in the 2006 Six Month Period from the comparable periodsin 2005. The decrease in both periods was primarily the result ofreduced sales and marketing expenses associated with the transfer of the U.S.commercialization rights to INTEGRILIN to SGP as of September 1, 2005 combined withcost reductions associated with our 2005 strategy refinement and restructuring effortspartially offset by the addition of stock-based compensation expense of approximately $5.5million and $9.6 million in the Three and Six Month Periods, respectively, related to the adoption of SFAS 123R onJanuary 1, 2006. 

***Restructuring***

        Duringthe fourth quarter of 2005, we announced our 2005 strategy refinement focused on advancingkey growth assets, including VELCADE, our clinical and preclinical pipeline in oncologyand inflammation molecules and our oncology-focused discovery organization. As part of ourrefined strategy, we have taken a series of steps, building on our restructuredrelationship with SGP, which together have reduced research and development and selling,general and administrative expenses in 2006. We expect these cost reductions to continuethroughout the remainder of 2006. We reduced the size of our company from approximately 1,500 employeesat the end of 2004 to approximately 1,100 at the end of 2005, by managing attrition,eliminating INTEGRILIN sales and marketing positions, and reducing the number of positionsin inflammation discovery and in business support groups. 

        InDecember 2002 and June 2003, we took steps as part of our 2003 restructuringplan to focus our resources on drug development and commercialization. Our restructuringplan included consolidation of research and development facilities, overall headcountreduction and streamlining of discovery and development projects. 

        Inaccordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” our facilities related expenses and liabilities underboth the 2003 and 2005 restructuring plans included estimates of the remaining rentalobligations, net of estimated sublease income, for facilities we no longer occupy. Wevalidated our estimates and assumptions with independent third parties having relevantexpertise in the real estate market. We review our estimates and assumptions on a regularbasis until the outcome is finalized, and make whatever modifications we believenecessary, based on our best judgment, to reflect any changed circumstances. It ispossible that such estimates could change in the future resulting in additionaladjustments, and the effect of any such adjustments could be material. 

        Duringthe 2006 Three and Six Month Periods, we recorded a total of $1.6 million and $4.4million, respectively, in restructuring charges under the 2005 strategy refinement and our2003 restructuring plan. We recorded net restructuring credits of $1.6 million during the2006 Three Month Period and net restructuring charges of $0.3 million during the2006 Six

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Month Period under the 2005 restructuring plan. The restructuringcharges primarily related to additional facility related costs associated with vacatedbuildings and employee termination benefits as a result of the headcount reductions withininflammation discovery and business support groups. Offsetting these charges was a creditresulting from the earlier than anticipated sublease of one of the vacated buildings at ahigher rate per square foot than was originally estimated. We recorded restructuringcharges of $3.2 million and $4.1 million during the 2006 Three and Six Month Periods, respectively, under the 2003 restructuring plan. The restructuring charges primarily related toadjustments to our original estimates of the remaining rental obligationsfor a certain vacated facility based upon our inability to secure subtenants in the timeand manner included in our earlier estimates. 

***Amortization ofIntangibles***

        Amortizationof intangible assets of $8.5 million in the 2006 Three Month Period and $17.0 million inthe 2006 Six Month Period was relatively unchanged from the comparable periods in 2005.Amortization in 2006 and 2005 primarily related to specifically identified intangibleassets from the COR acquisition. We will continue to amortize the specifically identifiedintangible assets from our COR acquisition through 2015. We expect to incur amortizationexpense of approximately $34.0 million for each of the next five years. 

***Investment Income***

        Investmentincome decreased 61% to $5.8 million in the 2006 Three Month Period and 46% to $10.4million in the 2006 Six Month Period from the comparable periods in 2005. The decrease inboth periods was primarily attributable to the realized gain of approximately $10.5million recognized upon the sale of our cost method investment in TransFormPharmaceuticals, Inc. in April 2005, partially offset by more favorable market conditionsresulting in higher yields. 

***Interest Expense***

        Interestexpense increased 18% to $2.7 million in the 2006 Three Month Period and 11% to $5.5million in the 2006 Six Month Period from the comparable periods in 2005. The increase wasprimarily attributable to increased capital lease buyouts resulting in higher relatedinterest expense. 
Liquidity and CapitalResources 
        Werequire cash to fund our operating expenses, to make capital expenditures, acquisitionsand investments and to pay debt service, including principal and interest and capitallease payments. We have also made strategic purchases of debt and equity securities ofsome of our alliance collaborators in accordance with our Board of Directors’approved policies and our business needs. These investments were generally in smallercompanies. We have and may in the future lose money in these investments and our abilityto liquidate these investments is in some cases very limited. We may also owe our partnersmilestone payments and royalties. We also have committed to fund development costsincurred by some of our collaborators. 

        Wehave funded our cash requirements primarily through the following: 
 • our co-promotion relationship with SGP for the sale of INTEGRILIN through August 31,2005;     • product sales of VELCADE;     • payments from our strategic collaborators, including equity investments, license fees,milestone payments and research funding;      • royalty payments related to the sales of our products; and     • equity and debt financings in the public markets.    
        Inthe future, we expect to continue to fund our cash requirements from some or all of thesesources as well as from sales of other products, subject to receiving regulatory approval.We are entitled to additional committed research and development funding under some of ourstrategic alliances. We believe the key factors that could affect our internal andexternal sources of cash are: 
 • revenues and margins from sales of VELCADE, INTEGRILIN and other products and services forwhich we may obtain marketing approval in the future or which are sold by companies thatmay owe us royalty, milestone, distribution or other payments on account of such products;    
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 • the success of our clinical and preclinical development programs;     • our ability to enter into additional strategic collaborations and to maintain existing andnew collaborations as well as the success of such collaborations; and     • the receptivity of the capital markets to financings by biopharmaceutical companiesgenerally and to financings by our company specifically. 
        Asof June 30, 2006 we had $626.0 million in cash, cash equivalents and marketablesecurities. This excludes $7.4 million of interest-bearing marketable securitiesclassified as restricted cash on our balance sheet as of June 30, 2006, which primarilyserve as collateral for letters of credit securing leased facilities. As of June 30, 2006we had $99.6 million of outstanding convertible debt, all of which is included incurrent liabilities. 

        Oursignificant capital resources are as follows: 
 June 30, 2006 December 31, 2005 (in thousands)  Cash, cash equivalents and marketable securities  $626,003 $645,588 Working capital   493,742  576,501 Long-term debt, net of current portion   —  99,571                    Six Months Ended June 30,  2006 2005 Cash provided by (used in):            Operating activities  $(20,564)$(110,603)    Investing activities   19,857  114,211     Financing activities   6,801  1,724 Capital expenditures (included in investing activities above)   (5,552) (6,430)
***Cash Flows***

        Theprincipal use of cash in operating activities in both 2006 and 2005 was to fund our netloss. In January 2005, we paid SGP approximately $49.3 million for advances SGP hadmade to COR for inventory purchases in prior years. Cash flows from operations can varysignificantly due to various factors including changes in accounts receivable, as well aschanges in accounts payable and accrued expenses. The average collection period of ouraccounts receivable can vary and is dependent on various factors, including the type ofrevenue and the payment terms related to those revenues. 

        Investingactivities provided cash of $19.9 million in the 2006 Six Month Period and $114.2million in the comparable period in 2005. The principal source of funds in both 2006 and2005 was the proceeds from sales and maturities of marketable securities. In April 2005,we recorded proceeds of approximately $10.6 million upon the sale of our cost methodinvestment in TransForm. 

        Financingactivities provided cash of $6.8 million in the 2006 Six Month Period and $1.7million in the comparable period in 2005. The principal source of funds was from the purchasesof common stock by our employees. We used $5.9 million in 2006 to pay off our 4.5%convertible senior notes in accordance with the payment terms. We also used $3.3 millionand $6.9 million in 2006 and 2005, respectively, to makeprincipal payments on our capital leases. 

        Webelieve that our existing cash and cash equivalents and the anticipated cash receipts fromour product sales, current strategic alliances and royalties will be sufficient to supportour expected operations, fund our debt service and capital lease obligations and fund ourcapital commitments for at least the next several years. 

***Contractual Obligations***

        Asnoted above and in accordance with the payment terms, we paid off the $5.9 millionprincipal balance on our 4.5% convertible senior notes during the 2006 Three Month Period. 

        Therehave been no additional significant changes to our contractual obligations and commercialcommitments included in our Form 10-K as of December 31, 2005. 

        Asof June 30, 2006, we did not have any financing arrangements that were not reflected inour balance sheet. 

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RISK FACTORS THAT MAYAFFECT RESULTS
        ThisQuarterly Report on Form 10-Q and certain other communications made by us containforward-looking statements, including statements about our growth and future operatingresults, discovery and development of products, strategic alliances and intellectualproperty. For this purpose, any statement that is not a statement of historical factshould be considered a forward-looking statement. We often use the words“believe,” “anticipate,” “plan,” “expect,”“intend,” “may,” “will” and similar expressions to helpidentify forward-looking statements. 

        Wecannot assure investors that our assumptions and expectations will prove to have beencorrect. Important factors could cause our actual results to differ materially from thoseindicated or implied by forward-looking statements. Such factors that could cause orcontribute to such differences include those factors discussed below. We undertake nointention or obligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise. 
Regulatory Risks 
**Our business may be harmed if wedo not obtain approval to market VELCADE for additional therapeutic uses.**

        Animportant part of our strategy to grow our business is to market VELCADE for additionalindications. To do so, we will need to successfully conduct clinical trials and then applyfor and obtain the appropriate regulatory approvals. If we are unsuccessful in ourclinical trials, or we experience a delay in obtaining or are unable to obtainauthorizations for expanded uses of VELCADE, our revenues may not grow as expected and ourbusiness and operating results will be harmed. 

**We may not be able to obtainapproval in additional countries to market VELCADE.**

        VELCADEis currently approved for marketing in the United States and more than75 other countries including the countries of the European Union. If we are not able toobtain approval to market VELCADE in additional countries, we will lose the opportunity tosell in those countries and will not be able to earn potential milestone payments underour agreement with Ortho Biotech or collect potential distribution fees on sales ofVELCADE by Ortho Biotech in those countries. 

**We may not be able to obtainmarketing approval for products resulting from our development efforts.**

        Theproducts that we are developing require research and development, extensive preclinicalstudies and clinical trials and regulatory approval prior to any commercial sales. Thisprocess is expensive and lengthy, and can often take a number of years. In some cases, thelength of time that it takes for us to achieve various regulatory approval milestonesaffects the payments that we are eligible to receive under our strategic allianceagreements. 

        Wemay need to successfully address a number of technological challenges in order to completedevelopment of our products. Moreover, these products may not be effective in treating anydisease or may prove to have undesirable or unintended side effects, toxicities or othercharacteristics that may preclude our obtaining regulatory approval or prevent or limitcommercial use. For example, in January 2006, as part of our portfolio reviewprocess, based on the evaluation of clinical data in the context of additionalopportunities in the pipeline, we decided to discontinue development at this time ofMLN2704 in its current form as well as MLN1202 in rheumatoid arthritis. 

        Failureto gain approval for the products we are developing could have an adverse material impacton our business. 

**If we fail to comply withregulatory requirements, or if we experience unanticipated problems with our approvedproducts, our products could be subject to restrictions or withdrawal from the market.**

        Anyproduct for which we obtain marketing approval, along with the manufacturing processes,post-approval clinical data and promotional activities for such product, is subject tocontinual review and periodic inspections by the FDA, and other regulatory bodies. Laterdiscovery of previously unknown problems or safety issues with our products ormanufacturing processes, or failure to comply with regulatory requirements, may result inrestrictions on such products or manufacturing processes, withdrawal of the products fromthe market, the imposition of civil or criminal penalties or a refusal by the FDA andother regulatory bodies to approve pending applications for marketing approval of newdrugs or supplements to approved applications. As with any recently approved therapeuticproduct, we expect that our knowledge of the safety profile for VELCADE will expand afterwider usage, and the possibility exists of patients receiving VELCADE treatmentexperiencing unexpected or more frequently than expected serious adverse events, whichcould have a material adverse effect on our business. 

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        Weare a party to collaborations that transfer responsibility for specified regulatoryrequirements, such as filing and maintenance of marketing authorizations and safetyreporting, to our collaborators. If our collaborators do not fulfill these regulatoryobligations, products, including VELCADE or INTEGRILIN, could be withdrawn from themarket, which would have a material adverse effect on our business. 

**Some of our products may be basedon new technologies which may affect our ability or the time we require to obtainnecessary regulatory approvals.**

        Productsthat result from our research and development programs may be based on new technologies,such as proteasome inhibition, and new therapeutic approaches that have not beenextensively tested in humans. The regulatory requirements governing these types ofproducts may be more rigorous than for conventional products. As a result, we mayexperience a longer regulatory process in connection with any products that we developbased on these new technologies or new therapeutic approaches. 
Risks Relating to OurBusiness, Strategy and Industry 
**Our revenues over the next severalyears will be materially dependent on the commercial success of VELCADE and INTEGRILIN.**

        VELCADEwas approved by the FDA in May 2003 and commercially launched in theUnited States shortly after that date. Marketing of VELCADE outside theUnited States commenced in April 2004. INTEGRILIN has been on themarket in the United States since June 1998. Marketing ofINTEGRILIN outside the United States commenced in mid-1999. 

        Ourbusiness plan contemplates obtaining marketing authorization to sell VELCADE in manycountries for the treatment of all patients with multiple myeloma and both in theUnited States and abroad for other indications. We will be adverselyaffected if VELCADE does not receive such approvals. 

        Wewill not achieve our business plan, and we may be forced to scale back our operations andresearch and development programs, if we do not obtain regulatory approval to sell VELCADEin additional countries or for additional therapeutic uses or the sales of VELCADE orINTEGRILIN do not meet our expectations. 

**We face substantial competition,and others may discover, develop or commercialize products before or more successfullythan we do.**

        Thefields of biotechnology and pharmaceuticals are highly competitive. Many of ourcompetitors are substantially larger than we are, and these competitors have substantiallygreater capital resources, research and development staffs and facilities than we have.Furthermore, many of our competitors are more experienced than we are in drug research,discovery, development and commercialization, obtaining regulatory approvals and productmanufacturing and marketing. As a result, our competitors may discover, develop andcommercialize pharmaceutical products before or in a shorter timeframe than we do. Inaddition, our competitors may discover, develop and commercialize products that make theproducts that we or our collaborators have developed or are seeking to develop andcommercialize non-competitive or obsolete. 

        Withrespect to VELCADE, we face competition from Celgene’s Thalomid and Revlimid. In May 2006, theFDA approved the use of Thalomid for the treatment of newly diagnosed multiple myeloma. Wealso face competition for VELCADE from Celgene’s Revlimid which was approved by theFDA in December 2005 for the treatment of a subset of patients withtransfusion-dependent anemia and in June 2006 for relapsed or refractory multiple myeloma.We also face competition for VELCADE from traditional chemotherapy treatments, and thereare other potentially competitive therapies for VELCADE, including other proteasomeinhibitors, that are in late-stage clinical development for the treatment of multiplemyeloma. In addition, multiple myeloma therapies in development may reduce the number ofpatients available for VELCADE treatment through enrollment of these patients in clinicaltrials of these potentially competing products. 

        Dueto the incidence and severity of cardiovascular diseases, the market for therapeuticproducts that address these diseases is large, and we expect the already intensecompetition in this field to increase. The most significant competitors for SGP and GSK inmarketing INTEGRILIN are major pharmaceutical companies and biotechnology companies. Thetwo products that compete directly with INTEGRILIN in the GP IIb-IIIa inhibitormarket segment are ReoPro® (abciximab), which is produced by Johnson &Johnson and sold by Johnson & Johnson and Eli Lilly and Company, andAggrastat® (tirofiban HCl), which is produced and sold by Merck &Co., Inc. outside of the United States and by Guilford Pharmaceuticals, Inc. inthe United States.

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        Othercompetitive factors that could negatively affect INTEGRILIN include: 
 • expanded use of heparin replacement therapies, such as Angiomax® (bivalirudin), which is produced and sold by The Medicines              Company;     • changing treatment practices for PCI and ACS based on new technologies, including the use of drug-coated stents;     • increased use of another class of anti-platelet drugs known as ADP inhibitors in patientswhose symptoms make them potential candidates for treatment with INTEGRILIN; and      • SGP’s inability to complete clinical trials and develop data to promote increased useof INTEGRILIN in its current indications as well as in new indications.
**Sales of INTEGRILIN and possiblyVELCADE in particular reporting periods may be affected by fluctuations in inventory,allowances and buying patterns.**

        Asignificant portion of INTEGRILIN domestic pharmaceutical sales is made by SGP to majordrug wholesalers. These sales are affected by fluctuations in the buying patterns of thesewholesalers and the corresponding changes in inventory levels maintained by them.Inventory levels held by these wholesalers may fluctuate significantly from quarter toquarter. If these wholesalers build inventory levels excessively in any quarter, sales tothe wholesalers in future quarters may unexpectedly decrease notwithstanding steadyprescriber demand. Because SGP commercializes INTEGRILIN and manages product distribution,we have limited insight into or control over forces affecting changes in distributorinventory levels. If SGP does not appropriately manage this distribution, SGP may notrealize sales goals for the product and could reduce the royalty revenue we recognize andthus adversely affect our business. 

        Wedistribute VELCADE in the U.S. through a sole-source distributionmodel, where we sell directly to a third party who in turn distributes to the wholesalerbase. Our VELCADE product inventory levels may fluctuate from time to time depending onthe consistency of the distribution logistics of this arrangement and the buying patternsof these wholesalers. 

        Additionally,we make provisions at the time of sale of VELCADE for discounts, rebates, product returnsand other allowances based on historical experience updated for changes in facts andcircumstances, as appropriate. To the extent these allowances are incorrect, we may needto adjust our estimates, which could have a material impact on the timing and actualamount of revenue we are able to recognize from these sales. 

**Because our research anddevelopment projects are based on new technologies and new therapeutic approaches thathave not been extensively tested in humans, it is possible that our discovery process willnot result in commercial products.**

        Theprocess of discovering drugs based upon genomics and other new technologies is new andevolving rapidly. We focus a portion of our research on diseases that may be linked to anumber of genes working in combination or to novel targets. Both we and the generalscientific and medical communities have only a limited understanding of the role thatgenes play in these diseases. To date, we have not commercialized any products discoveredthrough our genomics research, and we may not be successful in doing so in the future. Inaddition, relatively few products based on gene discoveries have been developed andcommercialized by others. Rapid technological development by us or others may result incompounds, products or processes becoming obsolete before we recover our developmentexpenses. Further, manufacturing costs or products based on these new technologies maymake products uneconomical to commercialize. 

**If our clinical trials areunsuccessful, or if they experience significant delays, our ability to commercializeproducts will be impaired.**

        Wemust provide the FDA and foreign regulatory authorities with preclinical and clinical datademonstrating that our products are safe and effective before they can be approved forcommercial sale. Clinical development, including preclinical testing, is a long, expensiveand uncertain process. It may take us several years to complete our testing, and failurecan occur at any stage of testing. Interim results of preclinical or clinical studies donot necessarily predict their final results, and acceptable results in early studies mightnot be seen in later studies. Any preclinical or clinical test may fail to produce resultssatisfactory to the FDA. Preclinical and clinical data can be interpreted in differentways, which could delay, limit or prevent regulatory approval. Negative or inconclusiveresults from a preclinical study or clinical trial, adverse medical events during aclinical trial or safety issues resulting from products of the same class of drug couldcause a preclinical study or clinical trial to be

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repeated or a program to be terminated,even if other studies or trials relating to the program are successful. For example, in December 2003 we decided to stop further accrual to a phase II trial examiningVELCADE in colorectal cancer because interim findings produced results that did not meetthe pre-specified efficacy criteria for continuation of study accrual. 

        Wemay not complete our planned preclinical or clinical trials on schedule or at all. We maynot be able to confirm the safety and efficacy of our potential drugs in long-termclinical trials, which may result in a delay or failure to commercialize our products. Wemay have difficulty obtaining a sufficient number of appropriate patients or clinicalsupport to conduct our clinical trials as planned. A number of additional events coulddelay the completion of our clinical trials, including conditions imposed on us by the FDAor foreign regulatory authorities regarding the scope or design of our clinical trials,lower than anticipated retention rates for patients in our clinical trials, insufficientsupply or deficient quality of our product candidates or other materials necessary toconduct our clinical trials or the failure of our third party contractors to comply withregulatory requirements or otherwise meet their contractual obligations to us in a timelymanner. As a result, we may have to expend substantial additional funds to obtain accessto resources or delay or modify our plans significantly. Our product development costswill increase if we experience delays in testing or approvals. Significant clinical trialdelays could allow our competitors to bring products to market before we do and impair ourability to commercialize our products or potential products. 

**If third parties on which we relyfor clinical trials do not perform as contractually required or as we expect, we may notbe able to obtain regulatory approval for or commercialize our product candidates.**

        Wedepend on independent clinical investigators and, in some cases, contract researchorganizations and other third party service providers to conduct the clinical trials ofour product candidates and expect to continue to do so. We rely heavily on these partiesfor successful execution of our clinical trials, but we do not control many aspects oftheir activities. Nonetheless, we are responsible for confirming that each of our clinicaltrials is conducted in accordance with the general investigational plan and protocol. Ourreliance on these third parties that we do not control does not relieve us of ourresponsibility to comply with the regulations and standards of the FDA relating to goodclinical practices. Third parties may not complete activities on schedule or may notconduct our clinical trials in accordance with regulatory requirements or the applicabletrials plans and protocols. The failure of these third parties to carry out theirobligations could delay or prevent the development, approval and commercialization of ourproduct candidates or result in enforcement action against us. 

**Because many of the products thatwe are developing are based on new technologies and therapeutic approaches, the market maynot be receptive to these products upon their introduction.**

        Thecommercial success of any of our products for which we may obtain marketing approval fromthe FDA or other regulatory authorities will depend upon their acceptance by the medicalcommunity and third party payors as clinically useful, cost-effective and safe. Many ofthe products that we are developing are based upon new technologies or therapeuticapproaches. As a result, it may be more difficult for us to achieve market acceptance ofour products, particularly the first products that we introduce to the market based on newtechnologies and therapeutic approaches. Our efforts to educate the medical community onthese potentially unique approaches may require greater resources than would be typicallyrequired for products based on conventional technologies or therapeutic approaches. Thesafety, efficacy, convenience and cost-effectiveness of our products as compared tocompetitive products will also affect market acceptance. 

**Because of the high demand fortalented personnel within our industry, we could experience difficulties in recruitingemployees necessary for our success and growth.**

        Becausecompetition for talented employees within our industry is fierce, we may not be successfulin hiring, retaining or promptly replacing key management, sales, marketing and technicalpersonnel. Any failure to expeditiously fill our needs for key personnel could have amaterial adverse effect on our business. 
Risks Relating to OurFinancial Results and Need for Financing 
**We have incurred substantiallosses and expect to continue to incur losses. We will not be successful unless we reversethis trend.**

        Wehave incurred net losses of $17.7 million for the three months ended June 30, 2006 and$44.1 million for the three months ended June 30, 2005. We have incurred net losses of$38.5 million for the six months ended June 30, 2006 and $80.5 million for the sixmonths ended June 30, 2005, net losses of $198.2 million for the year endedDecember 31, 2005, $252.3 million for the year ended December 31, 2004 and$483.7 million for the year ended December 31, 2003. We expect to continue to incursubstantial operating losses in future periods. Prior to our acquisition of COR,substantially all of our revenues resulted from payments from collaborators, and not fromthe sale of products.

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        Weexpect to continue to incur significant expenses in connection with our research anddevelopment programs and commercialization activities. As a result, we will need togenerate significant revenues to help fund these costs and achieve positive net income.Our ability to achieve positive net income would be adversely impacted if our acquiredintangible assets and goodwill, primarily resulting from our acquisition of COR, becameimpaired as a result of reduced market capitalization or product failures or withdrawals.We cannot be certain whether or when we will become profitable because of the significantuncertainties with respect to our ability to successfully develop products and generaterevenues from the sale of approved products and from existing and potential futurestrategic alliances. 

**We may need additional financing,which may be difficult to obtain. Our failure to obtain necessary financing or doing so onunattractive terms could adversely affect our business and operations.**

        Wewill require substantial funds to conduct research and development, including preclinicaltesting and clinical trials of our potential products. We will also require substantialfunds to meet our obligations to our collaborators, manufacture and market products thatare approved for commercial sale, including VELCADE, and meet our debt serviceobligations. We may also require additional financing to execute on product in-licensingor acquisition opportunities. Additional financing may not be available when we need it ormay not be available on favorable terms. 

        Ifwe are unable to obtain adequate funding on a timely basis, we may have to delay orcurtail our research and development programs, our product commercialization activities orour in-licensing or acquisition activities. We could be required to seek funds througharrangements with collaborators or others that may require us to relinquish rights tospecified technologies, product candidates or products which we would otherwise pursue onour own. 

**Our indebtedness and debt serviceobligations may adversely affect our cash flow and otherwise negatively affect ouroperations.**

        AtJune 30, 2006, we had approximately $99.6 million of outstanding convertible debt whichmatures in 2007 and $77.1 million of capital lease obligations. During each of the lastfive years, our earnings were insufficient to cover our fixed charges. We will be requiredto make interest payments on our outstanding convertible notes totaling approximately $5.4million over the next year. 

        Wemay in the future incur additional indebtedness, including long-term debt, credit linesand property and equipment financings to finance capital expenditures. We intend tosatisfy our current and future debt service obligations from cash generated by ouroperations, our existing cash and investments and, in the case of principal payments atmaturity, funds from external sources. We may not have sufficient funds and we may beunable to arrange for additional financing to satisfy our principal or interest paymentobligations when those obligations become due. Funds from external sources may not beavailable on acceptable terms, or at all. 

        Ourindebtedness could have significant additional negative consequences, including: 
 • increasing our vulnerability to general adverse economic and industry conditions;     • limiting our ability to obtain additional financing;     • requiring the dedication of a substantial portion of our cash flow from operations toservice our indebtedness, thereby reducing the amount of our expected cash flow availablefor other purposes, including capital expenditures and research and development;     • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and     • placing us at a possible competitive disadvantage to less leveraged competitors andcompetitors that have better access to capital resources.
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**If we do not achieve theanticipated benefits of our restructuring efforts, or if the costs of our restructuringefforts exceed anticipated levels, our business could be harmed.**

        Werecorded restructuring charges of $1.6 million for the three months ended June 30, 2006and $3.0 million for the three months ended June 30, 2005. We recorded restructuringcharges of $4.4 million for the six months ended June 30, 2006 and $4.1 million for thesix months ended June 30, 2005, restructuring charges of $77.1 million for the year endedDecember 31, 2005, $38.0 million for the year ended December 31, 2004 and$191.0 million for the year ended December 31, 2003. In December 2002 andJune 2003, we took steps as part of our 2003 restructuring plan to focus ourresources on development and commercialization of product opportunities and achieving ourgoal of becoming profitable in the future. On September 1, 2005, we transferredexclusive U.S. commercialization and development rights of INTEGRILINto SGP and on October 26, 2005, we announced additional efforts to refine ourstrategy including a substantial reduction of our inflammation discovery programs. As aresult of these efforts, we expect to reduce total research and development and selling,general and administration expenses. We may not achieve our estimated expense reductionsanticipated from the restructurings because such savings are difficult to predict andspeculative in nature. 

**If we or the SEC determine that wehave improperly accounted for historical stock option grants, and if the associatedexpense not previously recorded is material, we could be required to restate certainhistorical financial statements and become subject to litigation.**

        During the second quarter of 2006, wereceived a telephone inquiry from the SEC regarding whether stock options we awarded witha stated grant date of September 26, 2001 were, in fact, properly granted on that date. Wewere one of over 30 public companies discussed in a May 2006 third party report concerningthe timing of stock option grants from 1997 through 2002. With respect to us, the reportreferenced one option grant we made in September 2001. As both our review and theSEC’s inquiry are on-going, we or the SEC may identify additional issues relating toother stock option grants. If it is determined that any of our option grants wereimproperly granted or accounted for, we may be required to record new compensationexpense relating to those grants, and if the expense is material we may be required torestate certain of our historical financial statements. Additionally, we could becomesubject to an enforcement proceeding or other litigation. The adverse effects of such arestatement or litigation could be material. 
Risks Relating toCollaborators 
**We depend significantly on ourcollaborators to work with us to commercialize and develop products including VELCADE andINTEGRILIN.**

        Outsideof the United States, we commercialize VELCADE through an alliance withOrtho Biotech. On September 1, 2005, we transferred exclusive U.S.commercialization and development rights of INTEGRILIN to SGP and SGP is solelyresponsible for the commercialization and development of INTEGRILIN outside ofEurope. GSK is responsible for marketing and selling INTEGRILIN in Europe. Weconduct substantial discovery and development activities through strategic alliances,including with Ortho Biotech for the ongoing development of VELCADE. We expect to enterinto additional alliances in the future, especially in connection with productcommercialization. The success of our alliances depends heavily on the efforts andactivities of our collaborators. 

        Eachof our collaborators has significant discretion in determining the efforts and resourcesthat it will apply to the alliance and the degree to which it shares financial and productsales and inventory information. Our existing and any future alliances may not bescientifically or commercially successful. 

        Therisks that we face in connection with these existing and any future alliances include thefollowing: 
 • All of our strategic alliance agreements are for fixed terms and are subject totermination under various circumstances, including, in many cases, such as in ourcollaboration with Ortho Biotech, without cause.     • Our collaborators may change the focus of their development and commercialization efforts.Pharmaceutical and biotechnology companies historically have re-evaluated theirdevelopment and commercialization priorities following mergers and consolidations, whichhave been common in recent years in these industries. The ability of some of our products,including VELCADE and INTEGRILIN, to reach their potential could be limited if ourcollaborators decrease or fail to increase marketing or spending efforts related to suchproducts.      • We expect to rely on ourcollaborators to manufacture many products covered by our alliances.    
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 • In our strategic alliance agreements, we generally agree not to conduct specified types ofresearch and development in the field that is the subject of the alliance. Theseagreements may have the effect of limiting the areas of research and development that wemay pursue, either alone or in collaboration with third parties.     • Our collaborators may develop and commercialize, either alone or with others, productsthat are similar to or competitive with the products that are the subject of the alliancewith us.     • Our collaborators may not properly maintain or defend our intellectual property rights ormay use our proprietary information in such a way as to expose us to potential litigation.
**We are substantially dependent onSGP for future revenues related to INTEGRILIN.**

        Underthe terms of our revised agreement with SGP effective as of September 1, 2005, SGPwill pay us royalties based on net product sales of INTEGRILIN. In 2006 and 2007, minimumroyalty payments for each year are set at $85.4 million, with some conditions that couldreduce these minimums. If SGP’s INTEGRILIN sales after 2007 are less than expected,we will receive less royalty revenue than we expect, which would have a material adverseeffect on our ability to fund other parts of our business.

**We may not be successful inestablishing additional strategic alliances, which could adversely affect our ability todevelop and commercialize products.**

        Animportant element of our business strategy is entering into strategic alliances for thedevelopment and commercialization of selected products. In some instances, if we areunsuccessful in reaching an agreement with a suitable collaborator, we may fail to meetall of our business objectives for the applicable product or program. We face significantcompetition in seeking appropriate collaborators. Moreover, these alliance arrangementsare complex to negotiate and time-consuming to document. We may not be successful in ourefforts to establish additional strategic alliances or other alternative arrangements. Theterms of any additional strategic alliances or other arrangements that we establish maynot be favorable to us. Moreover, such strategic alliances or other arrangements may notbe successful. 
 Risks Relatingto Intellectual Property 
**If we are unable to obtain patentprotection for our discoveries, the value of our technology and products will be adverselyaffected. If we infringe patent or other intellectual property rights of third parties, wemay not be able to develop and commercialize our products or the cost of doing so mayincrease.**

        Ourpatent positions, and those of other pharmaceutical and biotechnology companies, aregenerally uncertain and involve complex legal, scientific and factual questions. Ourability to develop and commercialize products depends in significant part on our abilityto: 
 • obtain and maintain patents;     • obtain licenses to the proprietary rights of others on commercially reasonable terms;     • operate without infringing upon the proprietary rights of others;     • prevent others from infringing on our proprietary rights; and     • protect trade secrets.
**There is significant uncertaintyabout the validity and permissible scope of patents in our industry, which may make itdifficult for us to obtain patent protection for our discoveries.**

        Thevalidity and permissible scope of patent claims in the pharmaceutical and biotechnologyfields, including the genomics field, involve important unresolved legal principles andare the subject of public policy debate in the United States andabroad. For example, there is significant uncertainty both in theUnited States and abroad regarding the patentability of gene sequencesin the absence of functional data and the scope of patent protection available forfull-length genes and partial gene sequences. Moreover, some groups have made particulargene sequences available in publicly accessible databases. These and other disclosures mayadversely affect our ability to obtain patent protection for gene sequences claimed by usin patent applications that we file subsequent to such disclosures. There is also someuncertainty as to whether human clinical data will

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be required for issuance of patents forhuman therapeutics. If such data are required, our ability to obtain patent protectioncould be delayed or otherwise adversely affected. 

**Third parties may own or controlpatents or patent applications and require us to seek licenses, which could increase ourdevelopment and commercialization costs, or prevent us from developing or marketing ourproducts.**

        Wemay not have rights under some patents or patent applications related to some of ourexisting and proposed products or processes. Third parties may own or control thesepatents and patent applications in the United States and abroad.Therefore, in some cases, such as those described below, in order to develop, manufacture,sell or import some of our existing and proposed products or processes, we or ourcollaborators may choose to seek, or be required to seek, licenses under third partypatents issued in the United States and abroad, or those that might issue from UnitedStates and foreign patent applications. In such event, we would be required to pay licensefees or royalties or both to the licensor. If licenses are not available to us onacceptable terms, we or our collaborators may not be able to develop, manufacture, sell orimport these products or processes. 

        OurMLN0002 and MLN1202 product candidates are humanized monoclonal antibodies. We are aware ofthird party patents and patent applications that relate to humanized or modifiedantibodies, products useful for making humanized or modified antibodies and processes formaking and using recombinant antibodies. 

        Withrespect to VELCADE, on June 26, 2002, Ariad Pharmaceuticals, Inc. sent to us andapproximately 50 other parties a letter offering a sublicense for the use of United StatesPatent No. 6,410,516, which is exclusively licensed to Ariad. If this patent is validand Ariad successfully sues us for infringement, we would require a license from Ariad inorder to manufacture and market VELCADE. On May 4, 2006, a federal court jury gave averdict in favor of Ariad in its patent-infringement lawsuit against Eli Lilly relating toUnited States Patent No. 6,410,516. We expect that Eli Lilly will challenge thisverdict and the validity of the patent with the federal district judge and the U.S. Courtof Appeals. In addition, we are also aware that Amgen Inc. has filed a declaratory relief actionseeking an invalidity ruling with respect to this patent. However, Ariad’s initial success in its claim against Eli Lilly mayincrease the possibility that Ariad could sue additional parties, including us, and allege infringement of the patent.

**We may become involved inexpensive patent litigation or other proceedings, which could result in our incurringsubstantial costs and expenses or substantial liability for damages or require us to stopour development and commercialization efforts.**

        Therehas been substantial litigation and other proceedings regarding the patent and otherintellectual property rights in the pharmaceutical and biotechnology industries. We maybecome a party to patent litigation or other proceedings regarding intellectual propertyrights. For example, we believe that we hold patent applications that cover genes that arealso claimed in patent applications filed by others. Interference proceedings before theUnited States Patent and Trademark Office may be necessary to establish which party wasthe first to invent these genes. 

        Thecost to us of any patent litigation or other proceeding, even if resolved in our favor,could be substantial. Some of our competitors may be able to sustain the cost of suchlitigation or proceedings more effectively than we can because of their substantiallygreater financial resources. If a patent litigation or other proceeding is resolvedagainst us, we or our collaborators may be enjoined from developing, manufacturing,selling or importing our products or processes without a license from the other party andwe may be held liable for significant damages. We may not be able to obtain any requiredlicense on commercially acceptable terms or at all. 

        Uncertaintiesresulting from the initiation and continuation of patent litigation or other proceedingscould have a material adverse effect on our ability to compete in the marketplace. Patentlitigation and other proceedings may also absorb significant management time. 

**Our patent protection for anycompounds that we seek to develop may be limited to a particular method of use orindication such that, if a third party were to obtain approval of the compound for use inanother indication, we could be subject to competition arising from off-label use.**

        Althoughwe generally seek the broadest patent protection available for our proprietary compounds,we may not be able to obtain patent protection for the actual composition of anyparticular compound and may be limited to protecting a new method of use for the compoundor otherwise restricted in our ability to prevent others from exploiting the compound. Ifwe are unable to obtain patent protection for the actual composition of any compound thatwe seek to develop and commercialize and must rely on method of use patent coverage, wewould likely be unable to prevent others from manufacturing or marketing that compound forany use that is not protected by our patent rights. If a third party were to receivemarketing approval for the 

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compound for another use, physicians could neverthelessprescribe it for indications that are not described in the product’s labeling orapproved by the FDA or other regulatory authorities. Even if we have patent protection ofthe prescribed indication, as a practical matter, we would have little recourse as aresult of this off-label use. In that event, our revenues from the commercialization ofthe compound would likely be adversely affected. 

**If we fail to comply with ourobligations in our intellectual property licenses with third parties, we could loselicense rights that are important to our business.**

        Weare a party to various license agreements. In particular, we license rights to patents forthe formulation of VELCADE and issued patents relating to MLN518 and MLN1202. We may enterinto additional licenses in the future. Our existing licenses impose, and we expect futurelicenses will impose, various diligence, milestone payment, royalty, insurance and otherobligations on us. If we fail to comply with these obligations, the licensor may have theright to terminate the license, in which event we might not be able to market any productthat is covered by the licensed patents. 

**Competition from genericpharmaceutical manufacturers could negatively impact our products sales.**

        Competitionfrom manufacturers of generic drugs is a major challenge for us in theU.S. and is growing internationally. Upon the expiration or loss ofpatent protection for one of our products, or upon the “at-risk” launch (despitepending patent infringement litigation against the generic product) by a genericmanufacturer of a generic version of one of our products, we could lose the major portionof sales of that product in a very short period, which could adversely affect ourbusiness. 

        Genericcompetitors operate without our large research and development expenses and our costs ofconveying medical information about our products to the medical community. In addition,the FDA approval process exempts generics from costly and time-consuming clinical trialsto demonstrate their safety and efficacy, allowing generic manufacturers to rely on thesafety and efficacy data of the innovator product. Generic products, however, need onlydemonstrate a level of availability in the bloodstream equivalent to that of the innovatorproduct. This means that generic competitors can market a competing version of our productafter the expiration or loss of our patent and charge much less. The issuedU.S. patents related to VELCADE expire in 2014 with the potential forextension and the issued foreign patents expire in 2015 with extensions issued or pendingin a number of countries. The issued United States patents that coverINTEGRILIN expire in 2014 and 2015 and the issued foreign patents expire between 2010 and2012. In addition, our patent-protected products can face competition in the form ofgeneric versions of branded products of competitors that lose their market exclusivity. 
Risks Relating toProduct Manufacturing, Marketing and Sales 
**Because we have limited sales,marketing and distribution experience and capabilities, in some instances we are dependenton third parties to successfully perform these functions on our behalf, or we may berequired to incur significant costs and devote significant efforts to augment our existingcapabilities.**

        Weare marketing and selling VELCADE in the United States solely throughour cancer-specific sales force and without a collaborator. Our success in selling VELCADEwill depend heavily on the performance of this sales force. In areas outside theUnited States where VELCADE has received approval, Ortho Biotech or itsaffiliates market VELCADE. As a result, our ability to earn revenue related to VELCADEoutside of the United States will depend heavily on Ortho Biotech. 

        SGPexclusively markets INTEGRILIN in areas outside of Europe, including theUnited States, and GSK exclusively markets INTEGRILIN in Europe. As aresult, except for our minimum royalty payments from SGP in 2006 and 2007, our success inreceiving royalties and milestone payments from sales of INTEGRILIN depends entirely onthe marketing efforts of these third parties. 

        Dependingon the nature of the products for which we obtain marketing approval, we may need to relysignificantly on sales, marketing and distribution arrangements with our collaborators andother third parties. For example, some types of pharmaceutical products require a largesales force and extensive marketing capabilities for effective commercialization. If inthe future we elect to perform sales, marketing and distribution functions for these typesof products ourselves, we would face a number of additional risks, including the need torecruit a large number of additional experienced marketing and sales personnel. 

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**Because we have no commercialmanufacturing capabilities, we will continue to be dependent on third party manufacturersto manufacture products for us, or we will be required to incur significant costs anddevote significant efforts to establish our own manufacturing facilities and capabilities.**

        Wehave no commercial-scale manufacturing capabilities. In order to continue to developproducts, apply for regulatory approvals and commercialize products, we will need todevelop, contract for or otherwise arrange for the necessary manufacturing capabilities. 

        Wecurrently rely substantially upon third parties to produce material for preclinicaltesting purposes and expect to continue to do so in the future. We also currently rely andexpect to continue to rely, upon other third parties, potentially including ourcollaborators, to produce materials required for clinical trials and for the commercialproduction of our products. 

        Thereare a limited number of contract manufacturers that operate under the FDA’s goodmanufacturing practices regulations capable of manufacturing our products. If we areunable to arrange for third party manufacturing of our products, or to do so oncommercially reasonable terms, we may not be able to complete development of our productsor commercialize them, or we may experience delays in doing so. 

        Relianceon third party manufacturers entails risks to which we would not be subject if wemanufactured products ourselves, including reliance on the third party for regulatorycompliance, the possibility of breach of the manufacturing agreement by the third partybecause of factors beyond our control and the possibility of termination or non-renewal ofthe agreement by the third party, based on its own business priorities, at a time that iscostly or inconvenient for us. 

        Wemay in the future elect to manufacture some of our products in our own manufacturingfacilities. We would need to invest substantial additional funds and recruit qualifiedpersonnel in order to build or lease and operate any manufacturing facilities. 

**Because we have no commercialmanufacturing capability for VELCADE and INTEGRILIN, we are dependent on third parties toproduce product sufficient to meet market demand.**

        Weare responsible for managing the supply of material for all clinical and commercialproduction of VELCADE, including VELCADE that Ortho Biotech sells or uses in clinicaltrials, and INTEGRILIN, including INTEGRILIN that SGP and GSK sell or use in clinicaltrials. 

        Werely on third party contract manufacturers to manufacture, fill/finish and package VELCADEfor both commercial purposes and for all clinical trials. We have established long-termsupply relationships for the production of commercial supplies of VELCADE. We work withone manufacturer, with whom we have a long-term supply agreement, to complete fill/finishfor VELCADE. If any of our current third party manufacturers performing production andfill/finish for VELCADE are unable or unwilling to continue performing these services forus and we are unable to find a replacement manufacturer or in the future we are otherwiseunable to contract with manufacturers to produce commercial supplies of VELCADE in acost-effective manner, we could run out of VELCADE for commercial sale and clinical trialsand our business could be substantially harmed. 

        Wehave no manufacturing facilities for INTEGRILIN and, accordingly, rely on third partycontract manufacturers for the clinical and commercial production of INTEGRILIN. We havethree approved manufacturers that currently provide us with eptifibatide, the activeingredient necessary to make INTEGRILIN. Solvay, one of the current manufacturers, ownsthe process technology used by it and one other manufacturer for the production of bulkproduct. We own the technology utilized by the third supplier. We have two manufacturersthat currently perform fill/finish services for INTEGRILIN and a new packaging supplierfor the United States. If our current manufacturers are unable tocontinue or decide to discontinue their fill/finish services and we are unable to securealternative manufacturers, the supply of INTEGRILIN could be adversely affected whichcould harm our business.

        Inorder to mitigate the risk of INTEGRILIN supply interruption, we have entered into a newthird party fill/finish arrangement on commerciallyreasonable terms and we are in the process of establishing a second bulk product manufacturing site that willmanufacture eptifibatide using the Millennium owned process technology. Because these arenew manufacturing arrangements, these manufacturers may encounter difficulties that couldadversely affect the supply of INTEGRILIN and, thereby, harm our business. For example, the owner of the process technologyused by two of our manufacturers has raised concerns that the new Millennium process may have been developed using information asserted to be confidentialto that owner.  If that owner succeeds in a claim relating to these concerns, our ability to practice the new process could be negatively impacted whichcould affect the cost of manufacturing eptifibatide and negatively impact our business.

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**If we fail to obtain an adequatelevel of reimbursement for our products by third party payors, there may be nocommercially viable markets for our products.**

        Theavailability and levels of reimbursement by governmental and other third party payorsaffect the market for any pharmaceutical product or health care service. These third partypayors continually attempt to contain or reduce the costs of health care by challengingthe prices charged for medical products and services. In some foreign countries,particularly the countries of the European Union, the pricing of prescriptionpharmaceuticals is subject to governmental control. We may not be able to sell ourproducts as profitably as we expect if we are required to sell our products at lower thananticipated prices or reimbursement is unavailable or limited in scope or amount. 

        Inparticular, third party payors could lower the amount that they will reimburse hospitalsor doctors to treat the conditions for which the FDA has approved VELCADE or INTEGRILIN.If they do, pricing levels or sales volumes of VELCADE or INTEGRILIN may decrease. Inaddition, if we fail to comply with the rules applicable to the Medicaid and Medicareprograms, we could be subject to the imposition of civil or criminal penalties orexclusion from these programs. 

        Inforeign markets, a number of different governmental and private entities determine thelevel at which hospitals will be reimbursed for administering VELCADE and INTEGRILIN toinsured patients. If these levels are set, or reset, too low, it may not be possible tosell VELCADE or INTEGRILIN at a profit in these markets. 

        Inboth the United States, on federal and state levels, and foreignjurisdictions, there have been a number of legislative and regulatory proposals to changethe health care system. For example, the Medicare Prescription Drug and Modernization Actof 2003 and its implementing regulations impose new requirements for the distribution andpricing of prescription drugs which may affect the marketing of our products. These newrequirements have created uncertainty among oncologists and could impact sales levels ofVELCADE as oncologists adapt to the new reimbursement model. Further proposals are alsolikely. The current uncertainty and the potential for adoption of additional proposalscould affect the timing of product revenue, our ability to raise capital, obtainadditional collaborators and market our products. 

        Inaddition, we believe that the increasing emphasis on managed care in theUnited States has and will continue to put pressure on the price andusage of our present and future products, which may adversely affect product sales.Further, when a new therapeutic product is approved, the availability of governmental orprivate reimbursement for that product is uncertain, as is the amount for which thatproduct will be reimbursed. We cannot predict the availability or amount of reimbursementfor our product candidates, and current reimbursement policies for VELCADE or INTEGRILINcould change at any time. 

**We face a risk of productliability claims and may not be able to obtain insurance.**

        Ourbusiness exposes us to the risk of product liability claims that is inherent in themanufacturing, testing and marketing of human therapeutic products. In particular, VELCADEand INTEGRILIN are administered to patients with serious diseases who have a highincidence of mortality. Although we have product liability insurance that we believe isappropriate, this insurance is subject to deductibles, co-insurance requirements andcoverage limitations and the market for such insurance is becoming more restrictive. Wemay not be able to obtain or maintain adequate protection against potential liabilities.If we are unable to obtain insurance at acceptable cost or otherwise protect againstpotential product liability claims, we will be exposed to significant liabilities, whichmay materially and adversely affect our business and financial position. These liabilitiescould prevent or interfere with our product commercialization efforts. 
Guidelines andrecommendations can affect the use of our products. 
        Governmentagencies promulgate regulations and guidelines directly applicable to us and to ourproducts. In addition, professional societies, practice management groups, private healthand science foundations and organizations involved in various diseases from time to timemay also publish guidelines or recommendations to the health care and patient communities.Recommendations of government agencies or these other groups or organizations may relateto such matters as usage, dosage, route of administration and use of concomitanttherapies. Recommendations or guidelines suggesting the reduced use of our products or theuse of competitive or alternative products that are followed by patients and health careproviders could result in decreased use of our products. 

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Risks Relating to anInvestment in Our Common Stock 
**The trading price of oursecurities could be subject to significant fluctuations.**

        Thetrading price of our common stock has been quite volatile, and may be volatile in thefuture. During the six months ended June 30, 2006, our common stock traded as high as$11.46 per share and as low as $7.83 per share. During 2005, our common stock traded ashigh as $12.34 per share and as low as $7.63 per share. Factors such as announcements ofour or our competitors’ operating results, data from our or our competitors’clinical trial results, changes in our prospects, market conditions for biopharmaceuticalstocks in general and analyst recommendations or commentary concerning our or ourcompetitors’ products or business could have a significant impact on the futuretrading prices of our common stock. 

        Inparticular, the trading price of the common stock of many biopharmaceutical companies,including ours, has experienced extreme price and volume fluctuations, which have at timesbeen unrelated to the operating performance of such companies whose stocks were affected.Some of the factors that may cause volatility in the price of our securities include: 
 • product revenues and the rate of revenue growth;     • introduction or success of competitive products;     • clinical trial results and regulatory developments;     • quarterly variations in financial results and guidance to the investment community with respect to future financial results;     • business and product market cycles;     • fluctuations in customer requirements;     • availability and utilization of manufacturing capacity;     • timing of new product introductions; and     • our ability to develop and implement new technologies.
        Theprice of our securities may also be affected by the estimates and projections of theinvestment community and our ability to meet or exceed the financial projections weprovide to the public. The price may also be affected by general economic and marketconditions, and the cost of operations in our product markets. While we cannot predict theindividual effect that these factors may have on the price of our securities, thesefactors, either individually or in the aggregate, could result in significant variationsin price during any given period of time. We can not assure you that these factors willnot have an adverse effect on the trading price of our common stock. 

**We have anti-takeover defensesthat could delay or prevent an acquisition and could adversely affect the price of ourcommon stock.**

        Provisionsof our certificate of incorporation and bylaws and of Delaware law could havethe effect of delaying, deferring or preventing an acquisition of our company. Forexample, we have divided our board of directors into three classes that serve staggeredthree-year terms, we may issue shares of our authorized “blank check” preferredstock and our stockholders are limited in their ability to call special stockholdermeetings. In addition, we have issued preferred stock purchase rights that would adverselyaffect the economic and voting interests of a person or group that seeks to acquire us ora 15% or greater interest in our common stock without negotiations with our board ofdirectors. 
Item 3.    Quantitative and Qualitative Disclosures About MarketRisk
        Wemanage our fixed income investment portfolio in accordance with our Policy for SecuritiesInvestments, or Investment Policy, that has been approved by our Board of Directors. Theprimary objectives of our Investment Policy are to preserve principal, maintain a highdegree of liquidity to meet operating needs, and obtain competitive returns subject toprevailing market conditions. Investments are made primarily in investment-grade corporatebonds with effective maturities of three years or less, asset-backed debt securities andU.S. government agency debt securities. These investments are subjectto risk of default, changes in credit rating and changes in market value. Theseinvestments are also subject to interest rate risk and

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will decrease in value if marketinterest rates increase. A hypothetical 100 basis point increase in interest rates wouldresult in an approximate $10.2 million decrease in the fair value of our investments as ofJune 30, 2006. However, due to the conservative nature of our investments and relativelyshort effective maturities of debt instruments, interest rate risk is mitigated. OurInvestment Policy specifies credit quality standards for our investments and limits theamount of exposure from any single issue, issuer or type of investment. We do not ownderivative financial instruments in our investment portfolio. 

        Wereceive distribution fees from Ortho Biotech based on worldwide product sales of VELCADEoutside of the U.S. As a result, our financial position, results ofoperations and cash flows can be affected by fluctuations in foreign currency exchangerates, primarily EURO. Movement in foreign currency exchange rates could cause royaltyrevenue to vary significantly in future reporting periods. 

        Asof June 30, 2006, the fair value of our 5.0% notes and 5.5% notes approximates theircarrying value. The interest rates on our convertible notes and capital lease obligationsare fixed and therefore not subject to interest rate risk. 

        Wehave no derivative instruments outstanding as of June 30, 2006. 

        As ofJune 30, 2006 we did not have any financing arrangements that were not reflected in ourbalance sheet. 
Item4.    Controls and Procedures
        Ourmanagement, with the participation of our chief executive officer and chief financialofficer, evaluated the effectiveness of our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,2006. In designing and evaluating our disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives and our managementnecessarily applied its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based on this evaluation, our chief executive officer and chieffinancial officer concluded that as of June 30, 2006, our disclosure controls andprocedures were (1) designed to ensure that material information relating to us ismade known to our chief executive officer and chief financial officer by others,particularly during the period in which this report was prepared and (2) effective,in that they provide reasonable assurance that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms. 

        Nochange in our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during thefiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting. 

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**PART II    OTHER INFORMATION**

**Item 4.    Submission of Matters to a Vote of Security Holders**

        At ourAnnual Meeting of Stockholders held on May 4, 2006, our stockholders voted on three matters,as follows: 
 1. The stockholders elected Deborah Dunsire, Robert F. Friel and Norman C. Selby to serve as Class I directors for a term of three years by the following               votes:      **Number of Shares****Name** **For** **Withheld**Deborah Dunsire 266,389,439 4,892,113Robert F. Friel 267,046,864 4,234,688Norman C. Selby 264,190,142 7,091,410       Theother directors whose terms of office as a director continue after the meeting are asfollows: A. Grant Heidrich, III, Charles J. Homcy, Raju S. Kucherlapati, Eric S. Lander, Mark J. Levin, Kenneth E. Weg and Anthony H. Wild.
 2. The stockholders approved an amendment to our 1996 Employee Stock Purchase Plan that reserves an additional2,000,000 shares of our common stock for issuance under the plan to employees by the               following votes:    **For:**196,810,004**Against:**10,595,129**Abstain:**336,895**Broker Non-Votes:**63,539,524
 3. The stockholders ratified the appointment of Ernst & Young LLP as our               independent registered public accounting firm for the fiscal year ending December 31, 2006 by the               following votes:    **For:**269,686,049**Against:**1,355,779**Abstain:**239,724
**Item 6.    Exhibits**
(a)    Exhibits      The exhibits listed in the Exhibit Index are included in this report.      
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**SIGNATURES**
        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.  MILLENNIUM PHARMACEUTICALS, INC.(Registrant)        Dated: August 4, 2006  By /s/  MARSHA H. FANUCCI      Marsha H. Fanucci   *Senior Vice President and Chief Financial Officer*   *(principal financial and chief accounting officer)*    
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**EXHIBIT INDEX**
Exhibit No. Description       10.1 Letter Agreement dated May 25, 2006 between the Company and Anna Protopapas       10.2 1996 Employee Stock Purchase Plan, as amended       31.1 Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe Securities Exchange Act of 1934, as amended       31.2 Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe                                 Securities Exchange Act of 1934, as amended       32.1 Statement Pursuant to 18 U.S.C. §1350       32.2 Statement Pursuant to 18 U.S.C. §1350 
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