UNITED
STATES


SECURITIES
AND EXCHANGECOMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





|X|   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For
the quarterly period ended June 30, 2008





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:  0-21696





ARIAD
Pharmaceuticals, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            22-3106987(State
      or other jurisdiction of
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





26
Landsdowne Street, Cambridge, Massachusetts 02139


(Address
of principal executive offices) (Zip Code)





Registrant’s
Telephone Number, Including Area Code: (617) 494-0400





Former
Name, Former Address and Former Fiscal Year,


If Changed
Since Last Report:  Not Applicable





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, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  Check one:




Large
      accelerated filer [   ]
              
              
              Accelerated
      filer [ X ]Non-accelerated
      filer [   ]
              (Do
      not check if a smaller reporting company)
              
              Smaller
      reporting company  [  
]




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




The number
of shares of the registrant’s common stock outstanding as of July 31, 2008 was
69,476,467.












ARIAD
PHARMACEUTICALS, INC.





TABLE
OF CONTENTS




PagePART
      I.
              FINANCIAL INFORMATION
              1ITEM
      1.
              UNAUDITED FINANCIAL
    STATEMENTS
              1Condensed Consolidated Balance Sheets – June 30,
      2008 and December 31, 2007
              1Condensed Consolidated Statements of Operations for the
      Three Months and Six Months Ended June 30, 2008 and 2007
              2Condensed Consolidated Statements of Cash Flows for the
      Six Months Ended June 30, 2008 and 2007
              3Notes to Unaudited Condensed Consolidated Financial
      Statements
              4ITEM
      2.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              11ITEM
      3.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              23ITEM 4.
              CONTROLS
      AND PROCEDURES
              23PART
      II.
              OTHER INFORMATION
              25ITEM
      1.
              LEGAL PROCEEDINGS
              25ITEM
      1A.
              RISK
      FACTORS
              25ITEM
      4.
              SUBMISSION OF MATTERS FOR VOTE OF SECURITY
      HOLDERS
              25ITEM
      5.
              OTHER INFORMATION
              25ITEM
      6.
              EXHIBITS
              26SIGNATURES
              27EXHIBIT INDEX
              28












PART I.       FINANCIAL
INFORMATION





ITEM 1.       UNAUDITED
FINANCIAL STATEMENTS




ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS




In
      thousands, except share and per share data
            
            June
      30,
              2008
            
            
            December
      31,
              2007(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            42,567
            
            
            $
            67,864Marketable
      securities
            
            
            17,474
            
            
            
            17,334Amounts
      due under collaboration agreement
            
            
            6,344
            
            
            
            4,588Inventory
      and other current assets
            
            
            4,077
            
            
            
            2,374Total
      current assets
            
            
            70,462
            
            
            
            92,160Property
      and equipment:Leasehold
      improvements
            
            
            19,191
            
            
            
            18,400Equipment
      and furniture
            
            
            13,339
            
            
            
            11,749Construction
      in progress
            
            
            1,092
            
            
            
            ---Total
            
            
            33,622
            
            
            
            30,149Less
      accumulated depreciation and amortization
            
            
            (26,056
            )
            
            
            (25,134
            )Property
      and equipment, net
            
            
            7,566
            
            
            
            5,015Intangible
      and other assets, net
            
            
            3,978
            
            
            
            3,930Total
      assets
            
            $
            82,006
            
            
            $
            101,105LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Current
      portion of long-term debt
            
            $
            1,400
            
            
            $
            3,815Accounts
      payable
            
            
            6,864
            
            
            
            5,049Accrued
      compensation and benefits
            
            
            712
            
            
            
            523Accrued
      product development expenses
            
            
            8,083
            
            
            
            7,287Other
      accrued expenses
            
            
            6,468
            
            
            
            4,331Current
      portion of deferred executive compensation
            
            
            787
            
            
            
            745Current
      portion of deferred revenue
            
            
            5,699
            
            
            
            5,819Current
      portion of capital lease payable
            
            
            61
            
            
            
            ---Total
      current liabilities
            
            
            30,074
            
            
            
            27,569Long-term
      debt
            
            
            12,250
            
            
            
            ---Capital
      lease payable
            
            
            111
            
            
            
            ---Deferred
      revenue
            
            
            77,202
            
            
            
            80,026Deferred
      executive compensation
            
            
            1,533
            
            
            
            1,410Stockholders’
      equity (deficit):Common
      stock, $.001 par value; authorized, 145,000,000 shares;
issued
              and
      outstanding, 69,447,220 shares in 2008 and 69,241,490 shares in
      2007
            
            
            69
            
            
            
            69Additional
      paid-in capital
            
            
            362,595
            
            
            
            359,576Accumulated
      other comprehensive income
            
            
            (2
            )
            
            
            3Accumulated
      deficit
            
            
            (401,826
            )
            
            
            (367,548
            )Total
      stockholders’ deficit
            
            
            (39,164
            )
            
            
            (7,900
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            82,006
            
            
            $
            101,105





See notes
to unaudited condensed consolidated financial statements.




1




ARIAD PHARMACEUTICALS, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,In
      thousands, except share and per share data
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007License
      and collaboration revenue
            
            $
            1,450
            
            
            $
            189
            
            
            $
            2,945
            
            
            $
            379Operating
      expenses:Research
      and development
            
            
            11,827
            
            
            
            10,540
            
            
            
            22,702
            
            
            
            21,563General
      and administrative
            
            
            7,029
            
            
            
            6,898
            
            
            
            15,178
            
            
            
            11,301Total
      operating expenses
            
            
            18,856
            
            
            
            17,438
            
            
            
            37,880
            
            
            
            32,864Loss
      from operations
            
            
            (17,406
            )
            
            
            (17,249
            )
            
            
            (34,935
            )
            
            
            (32,485
            )Other
      income (expense):Interest
      income
            
            
            331
            
            
            
            341
            
            
            
            928
            
            
            
            731Interest
      expense
            
            
            (192
            )
            
            
            (97
            )
            
            
            (271
            )
            
            
            (202
            )Total
      other income, net
            
            
            139
            
            
            
            244
            
            
            
            657
            
            
            
            529Net
      loss
            
            $
            (17,267
            )
            
            $
            (17,005
            )
            
            $
            (34,278
            )
            
            $
            (31,956
            )Net
      loss per share
            
            $
            (.25
            )
            
            $
            (.25
            )
            
            $
            (.49
            )
            
            $
            (.48
            )Weighted-average
      number of shares of common stock outstanding
            
            
            69,363,731
            
            
            
            68,786,835
            
            
            
            69,339,484
            
            
            
            67,215,100





See notes
to unaudited condensed consolidated financial statements.




2





ARIAD PHARMACEUTICALS, INC. AND
      SUBSIDIARIES
              CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
              (Unaudited)Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (34,278
            )
            
            $
            (31,956
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            1,229
            
            
            
            1,150Accretion
      of discount on marketable securities
            
            
            (243
            )
            
            
            (395
            )Deferred
      executive compensation expense
            
            
            390
            
            
            
            496Stock-based
      compensation
            
            
            2,880
            
            
            
            3,208Increase
      (decrease) from:Inventory
      and other current assets
            
            
            (1,703
            )
            
            
            (1,047
            )Amounts
      due under collaboration agreement
            
            
            (1,756
            )
            
            
            ---Other
      assets
            
            
            (3
            )
            
            
            (7
            )Accounts
      payable
            
            
            1,815
            
            
            
            1,397Accrued
      compensation and benefits
            
            
            189
            
            
            
            64Accrued
      product development expenses
            
            
            796
            
            
            
            (416
            )Other
      accrued expenses
            
            
            2,137
            
            
            
            1,194Deferred
      revenue
            
            
            (2,944
            )
            
            
            (55
            )Deferred
      executive compensation paid
            
            
            (225
            )
            
            
            ---Net
      cash used in operating activities
            
            
            (31,716
            )
            
            
            (26,367
            )Cash
      flows from investing activities:Proceeds
      from maturities of marketable securities
            
            
            30,550
            
            
            
            23,343Purchases
      of marketable securities
            
            
            (30,452
            )
            
            
            (34,804
            )Investment
      in property and equipment
            
            
            (3,278
            )
            
            
            (294
            )Investment
      in intangible assets
            
            
            (352
            )
            
            
            (299
            )Net
      cash used in investing activities
            
            
            (3,532
            )
            
            
            (12,054
            )Cash
      flows from financing activities:Proceeds
      from long-term borrowings
            
            
            10,505
            
            
            
            ---Repayment
      of borrowings
            
            
            (670
            )
            
            
            (960
            )Principal
      payments under capital lease obligations
            
            
            (23
            )
            
            
            ---Proceeds
      from the issuance of stock, net of issuance costs
            
            
            ---
            
            
            
            12,300Proceeds
      from issuance of stock pursuant to stock option and purchase
      plans
            
            
            139
            
            
            
            1,120Net
      cash provided by financing activities
            
            
            9,951
            
            
            
            12,460Net
      decrease in cash and cash equivalents
            
            
            (25,297
            )
            
            
            (25,961
            )Cash
      and cash equivalents, beginning of period
            
            
            67,864
            
            
            
            31,728Cash
      and cash equivalents, end of period
            
            $
            42,567
            
            
            $
            5,767





See notes
to unaudited condensed consolidated financial statements.




3





ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED


FINANCIAL
STATEMENTS





1.      Management
Statement





In the
opinion of the Company’s management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of items
of a normal and recurring nature) necessary to present fairly the financial
position as of June 30, 2008, the results of operations for the three-month and
six-month periods ended June 30, 2008 and 2007 and cash flows for the six-month
periods ended June 30, 2008 and 2007.  The results of operations for
the three-month and six-month periods ended June 30, 2008 are not necessarily
indicative of the results to be expected for the full year.  These
financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007, which includes
consolidated financial statements and notes thereto for the years ended December
31, 2007, 2006 and 2005.





At June
30, 2008, the Company has cash, cash equivalents and marketable securities
totaling $60.0 million.  The Company believes that the combination of
its cash, cash equivalents and marketable securities, together with funding
available pursuant to its collaboration with Merck & Co., Inc. (Note 2)
provide sufficient resources for the Company to satisfy its operating and
capital requirements for more than twelve months.





2.      Collaboration
Agreement with Merck & Co., Inc.





In July
2007, the Company entered into a collaboration agreement with Merck & Co.,
Inc. (“Merck”) for the joint global development and commercialization of
deforolimus, the Company’s lead product candidate, for use in cancer (the
“Collaboration Agreement”).





Under the
terms of the Collaboration Agreement, Merck and the Company will conduct a
broad-based development program in multiple types of cancer, pursuant to a
global development plan agreed upon by the parties.  Each party will
fund 50% of the global development costs, except that Merck will fund 100% of
any cost of development that is specific to development or commercialization of
deforolimus outside the United States.  The Collaboration Agreement
provides that, in certain circumstances, either party may opt out of conducting
and funding certain late-stage clinical trials, which would result in changes in
development and commercialization responsibilities and compensation
arrangements.  The Company will be responsible for supplying the
active pharmaceutical ingredient used in the product and Merck will be
responsible for the formulation of the finished product, all under a separate
supply agreement between the parties.





The
Collaboration Agreement provides that, in the United States, the Company and
Merck will co-promote the product, the Company will distribute and sell the
Product for all cancer indications and record all sales, and each party will
receive 50% of the profit from such sales.  Outside the United States,
Merck will distribute, sell and promote the product and book all sales, and
Merck will pay the Company tiered double-digit royalties on such
sales.  Royalties are payable by Merck, on a country by country basis,
until the later of (i) the expiration of the last valid claim of any patent
rights owned by either the Company or Merck that cover the product, (ii) a
specified number of years from first commercial sale, or (iii) the last date
upon which the Company supplies active pharmaceutical ingredient to Merck under
the supply agreement, subject to partial reduction in certain
circumstances.





Under the
terms of the Collaboration Agreement, Merck paid the Company an initial up-front
payment of $75 million in July 2007, and has agreed to pay up to $452 million in
milestone payments, including a $13.5 million milestone payment made in the
fourth quarter of 2007, based on the successful development of deforolimus in
multiple cancer indications, and up to $200 million based on achievement of
specified product sales thresholds.  Merck has also agreed to provide
the Company with up to $200 million in interest-bearing, repayable, development
cost advances to cover a portion of the Company’s share of global development
costs, after the Company has paid $150 million in global development
costs.  All amounts to be paid to the Company by Merck, with the
exception of any development cost advances, are non-refundable.




4





The
up-front and milestone payments of $88.5 million received by the Company to date
have been deferred and are being recognized as revenue on a straight-line basis
through 2023, the estimated expiration of the patents related to the underlying
technology.





Development
costs under the Collaboration Agreement are aggregated and split between the
Company and Merck in accordance with the terms of the agreement.  The
Company’s share of such development costs are reflected in operating expenses in
the Company’s statement of operations.  Any amounts due to or from
Merck in respect of such development costs are recorded as such on the Company’s
balance sheet.  At June 30, 2008, the Company has recorded an amount
due from Merck under the collaboration agreement of $6.3 million.





3.      Long-Term
Debt





Long-term
debt was comprised of the following at June 30, 2008 and December 31,
2007:





In
      thousands
            
            June
      30,
              2008
            
            
            December
      31,
              2007Bank
      term note
            
            $
            13,650
            
            
            $
            3,815Less
      current portion
            
            
            (1,400
            )
            
            
            (3,815
            )$
            12,250
            
            
            $
            ---





In March
2008, the Company amended its term loan with the bank, increasing the balance
due to $14.0 million, extending the maturity date from March 2008 to March 2013
and providing for repayment of the loan in quarterly payments of principal,
increasing from 2.5% of the total loan amount in the second quarter of 2008 to
8.75% of the total loan amount in the first quarter of 2013, together with
interest.  The loan as amended bears interest at LIBOR plus 1.25% to
2.25%, depending on the percentage of the Company’s liquid assets on deposit
with or invested through the bank, or at the prime rate, as provided in the
amendment.  The loan is secured by a lien on all assets of the Company
excluding intellectual property, which the Company has agreed not to pledge to
any other party.  The loan, as amended, also requires the Company to
maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and
investments.  The agreement also contains certain covenants that
restrict additional indebtedness, additional liens and sales of assets, and
dividends, distributions or repurchases of common stock.





The annual
aggregate future principal payments of the above loan, as amended, are $700,000
for the remainder of 2008, $1.4 million in 2009, $1.9 million in 2010, $3.7
million in 2011, $4.7 million in 2012 and $1.2 million in 2013.





4.      Stock-Based
Compensation





The
Company awards stock options and other equity-based instruments to its
employees, directors and consultants and provides employees the right to
purchase common stock (collectively “share-based payments”) pursuant to
stockholder approved plans.  The Company’s statement of operations
included total compensation cost from share-based payments for the three-month
and six-month periods ended June 30, 2008 and 2007 as follows:




5





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Compensation
      cost from:Stock
      options
            
            $
            1,223
            
            
            $
            1,806
            
            
            $
            2,485
            
            
            $
            2,691Stock
      and stock units
            
            
            291
            
            
            
            91
            
            
            
            359
            
            
            
            480Purchases
      of common stock at a discount
            
            
            18
            
            
            
            24
            
            
            
            36
            
            
            
            37$
            1,532
            
            
            $
            1,921
            
            
            $
            2,880
            
            
            $
            3,208






Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Compensation
      cost included in:Research
      and development expenses
            
            $
            835
            
            
            $
            960
            
            
            $
            1,640
            
            
            $
            1,540General
      and administrative expenses
            
            
            697
            
            
            
            961
            
            
            
            1,240
            
            
            
            1,668$
            1,532
            
            
            $
            1,921
            
            
            $
            2,880
            
            
            $
            3,208





During the
six-month periods ended June 30, 2008 and 2007, the Company made awards of stock
options, common stock and stock units to employees and directors, and sold
common stock to employees at a discount pursuant to the Company’s employee stock
purchase plan, as follows:





Six
      Months Ended June 30,2008
            
            
            2007Weighted-
              Average
              Grant-
              Date
              Fair
      Value
            
            
            
            
            
            
            
            
            Weighted-
              Average
              Grant-
              Date
              Fair
      ValueTotal
              Fair
              Value
            
            
            
            
            
            Total
              Fair
              ValueShares
            
            
            Shares(Per
      Share)
            
            
            (in
      000’s)
            
            
            
            
            
            (Per
      Share)
            
            
            (in
      000’s)Stock
      options
            
            
            747,215
            
            
            $
            2.05
            
            
            $
            1,532
            
            
            
            2,035,220
            
            
            $
            3.28
            
            
            $
            6,501Stock
      and stock units
            
            
            612,500
            
            
            
            3.57
            
            
            
            2,187
            
            
            
            134,000
            
            
            
            4.94
            
            
            
            662Purchases
      of commonstock at a discount
            
            
            50,214
            
            
            
            .71
            
            
            
            36
            
            
            
            23,412
            
            
            
            1.57
            
            
            
            371,409,929
            
            
            
            
            
            
            
            
            
            
            
            2,192,632





Stock
options are granted with an exercise price equal to the closing price of the
Company’s common stock on the date of grant and have a term of ten
years.  Stock options generally vest 25% per year over four
years.  Stock options are valued using the Black-Scholes option
valuation model and compensation expense is recognized based on such fair value,
net of the impact of forfeitures, over the vesting period on a straight-line
basis.  The weighted average assumptions used in the Black-Scholes
model to value stock options granted during the six-month periods ended June 30,
2008 and 2007 were as follows:




6




Six
      Months Ended
              June
      30,2008
            
            2007Expected
      life of options granted (in years)
            6.81
            
            7.60Expected
      volatility
            68.8%
            
            68.02%Risk
      free interest rate
            3.37%
            
            4.46%Expected
      annual dividends
            0%
            
            0%





Stock and
stock unit grants are valued based on the closing price of the Company’s common
stock on the date of grant and compensation expense is recognized over the
requisite service period or period during which restrictions remain on the
common stock or stock units granted.  Compensation expense related to
purchases of common stock by employees under the Company’s employee stock
purchase plan is recognized in the period of grant.





5.    Executive
Compensation Plans





Under the
Company’s deferred executive compensation plan established in 1997, participants
were granted options to purchase shares of certain designated mutual funds at a
discount equal to the amount of the award.  The options vested equally
over four years.  The awards were recognized as expense ratably over
the vesting period.





Effective
in October 2005, the Company adopted a new deferred executive compensation plan
that defers the payment of annual bonus awards to future periods as specified in
each award.  The Company accrues a liability based on the awards
ratably over the vesting period.  The recorded balances of such awards
are increased or decreased based on the actual total return and quoted market
prices of specified mutual funds.  In April 2008 and 2007, the Company
made awards in the aggregate amount of $908,000 and $1,403,000 to thirteen and
to eleven officers, respectively.  Total expense related to these
plans amounted to $437,000 and $496,000 for the six-month periods ended June 30,
2008 and 2007, respectively.





6.      Net
Loss Per Share





Net loss
per share amounts have been computed based on the weighted-average number of
common shares outstanding during each period.  Because of the net loss
reported in each period, diluted and basic net loss per share amounts are the
same.  For the periods ended June 30, 2008 and 2007, options to
purchase 7,996,942 and 7,737,833 shares of common stock, respectively, were not
included in the computation of net loss per share, because the effect would be
anti-dilutive.





7.      Litigation





NF-κB
Patent Infringement Litigation and Reexamination





Lilly
Litigation





As
disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of
March 31, 2008, in 2002, the Company, together with Massachusetts Institute of
Technology (“MIT”), The Whitehead Institute for Biomedical Research
(“Whitehead”) and Harvard University (“Harvard”) (collectively, the Plaintiffs)
filed a lawsuit in the United States District Court for the District of
Massachusetts (the “U.S. District Court“) against Eli Lilly and Company
(“Lilly”) alleging infringement of fourclaims (the “NF-κB ‘516
Claims”) of the Plaintiffs’ U.S. Patent No. 6,410,516 (the “‘516 Patent”),
covering methods of treating human disease by regulating NF-κB cell-signaling
activity through sales of Lilly’s drugs, Evista® and
Xigris®.  In 2006, a jury rendered a verdict in favor of the
Plaintiffs and awarded damages of $65.2 million to the Plaintiffs, plus further
damages equal to 2.3% of U.S. sales of Evista and Xigris from February 28, 2006
through the year 2019, when the patent expires.  Lilly filed a notice of
appeal on March 10, 2008 of the jury’s verdict and other rulings by the U.S.
District Court with the U.S. Court of Appeals for the Federal Circuit (the
“CAFC”).




7





Lilly
filed its opening brief with the CAFC on June 18, 2008.  On June 27,
2008, Wyeth Corp. (“Wyeth”) filed in the CAFC an amicus curiae or “friends of
the court” brief in support of Lilly’s arguments, along with a motion seeking
the CAFC’s permission to file its brief.  On July 14, 2008, the
Plaintiffs filed their opposition to Wyeth’s motion.  Plaintiff’s
opposition to Lilly’s brief is due on August 27, 2008, and Lilly’s reply brief
is due in September 2008, after which the CAFC will schedule oral argument on
the issues presented for appeal.





Amgen
Litigation





Also as
disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of
March 31, 2008, in April 2006, Amgen Inc. and certain affiliated entities
(“Amgen“) filed a lawsuit against the Company in the U.S. District Court for the
District of Delaware (the “Delaware Court“) seeking a declaratory judgment that
each of the claims contained in the ‘516 Patent are invalid and that Amgen has
not infringed any of the claims of the ‘516 Patent based on activities related
to Amgen’s products, Enbrel® and
Kineret®.  In
April 2007, the Company, together with MIT, Whitehead, and Harvard, filed a
counterclaim against Amgen, and joining Wyeth Corp. alleged infringement of the
‘516 Patent based on activities related to Enbrel and Kineret, as well as the
Company’s answer to Amgen’s complaint, counter-claim and demand for jury trial.
In December 2007, the Company agreed to dismiss its claims against Wyeth pending
final resolution of the litigation against Amgen.





On May 29,
2008, the Delaware Court denied in part a motion filed by the Company and its
co-defendants seeking to, among other things, clarify that the counterclaim
filed by them encompasses claims for infringement relating to Amgen’s ex-US
activities.





On April
25, 2008, the Company and its co-defendants provided Amgen a partial covenant
not to sue covering Kineret and Enbrel (the “Covenant”).  With respect
to Kineret, the Covenant covers all claims of the ’516 Patent, as well as any
claim of the ‘516 Patent that may reissue from the
reexamination.  With respect to Enbrel, the Covenant covers all claims
of the ‘516 Patent, other than the seven (7) claims currently being asserted
against Enbrel and claims of the ‘516 Patent that may issue from the
reexamination in a form that is either substantially identical to the seven (7)
claims currently being asserted or not substantially identical to a claim of the
‘516 Patent that issued on June 25, 2002.  The Covenant does not
abridge the Company’s rights to institute an action against Wyeth upon final
resolution of the Amgen litigation.





On April
25, 2008, the Company and its co-defendants, filed a motion seeking to dismiss
for lack of jurisdiction under the Declaratory Judgment Act Amgen’s challenges
to the validity and enforceability of claims of the ‘516 Patent that are not
being asserted against Enbrel.  Also on April 25, 2008, the Company
and its co-defendants filed (i) their opening brief on claim construction, (ii)
a motion for partial summary judgment with respect to Amgen’s inequitable
conduct defense, arguing, among other things, that certain of Amgen’s factual
allegations in support of that defense are moot in light of the Company’s
disclosures to the U.S. Patent and Trademark Office (the “PTO”), and (iii)
motions seeking to preclude trial testimony from certain of Amgen’s expert
witnesses.  The amendments to their counterclaim, the Covenant and the
motions for partial dismissal and summary judgment serve to focus the claims
asserted by the Company and its co-defendants against Amgen to be tried before
the jury in the nine-day trial in this case on their claim that Amgen infringes
the ‘516 Patent based on activities relating to Enbrel.  Amgen’s
opposition to these motions was filed on May 22, 2008.




8





On April
25, 2008, Amgen filed its opening brief on claim construction, as well as three
motions for summary judgment, arguing that (i) Enbrel does not infringe the ‘516
Patent, (ii) the ‘516 Patent is invalid, and (iii) Amgen’s infringement of the
‘516 Patent, if it exists, is not willful.  Also on April 25, 2008,
Amgen filed several motions seeking to preclude trial testimony from certain of
the Company’s expert witnesses.  The  opposition of the
Company and its co-defendants to Amgen’s motions was filed on May 22,
2008.


An amended
scheduling order for this action has been issued by the Delaware
Court.  The claim construction hearing was held and arguments on the
pending dispositive motions were heard on June 19, 2008.  A pretrial
conference is scheduled for October 15, 2008.  Trial is scheduled to
commence on November 3, 2008.





Timing
and Outcome of Litigation and Reexamination Proceedings





The timing
and ultimate outcome of the Lilly and Amgen litigations and the reexamination
proceedings in the PTO regarding the ‘516 Patent cannot be determined at this
time.  Consequently, no determination can be made with respect to
allowance of the claims of the ‘516 Patent pending before the PTO and/or
asserted against Lilly and Amgen, nor can any final determination be made with
respect to the validity or infringement of the claims asserted in the Lilly and
the Amgen litigations, nor can the Company predict whether the damages awarded
by the jury in the U.S. District Court in the Lilly litigation in 2006 will be
upheld, eliminated or limited.  Although the Company has prevailed in
both the jury and bench trials in the Lilly litigation, along with receiving a
favorable ruling on Lilly’s post-trial renewed motion for judgment as a matter
of law, the CAFC may reverse one or more of these rulings and/or remand one or
more issues in the Lilly litigation for retrial in the U.S. District
Court.  Consequently, the damages the Company was awarded by the jury
in the Lilly litigation may be eliminated or limited by adverse findings upon
appeal, or in the event that the claims of the ‘516 Patent are invalidated by
the PTO.  There can be no assurance that the Company will ultimately
prevail in its litigations against Lilly and Amgen or that the claims of the
‘516 Patent relevant to these actions will not be finally rejected as a result
of the reexamination proceedings in the PTO.





8.      Recently
Adopted or Issued Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”), Fair Value
Measurements.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair
value measurements. The Company has adopted the provisions of SFAS No. 157 as of
January 1, 2008, for financial instruments. Although the adoption of SFAS No.
157 did not materially impact its financial condition, results of operations, or
cash flow, the Company is now required to provide additional disclosures as part
of its financial statements.





SFAS No.
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on our own assumptions
used to measure assets and liabilities at fair value. A financial asset’s or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement. The
Company's marketable securities are classified as available for sale and are
stated at fair value based on quoted market prices which are considered Level 1
inputs within the fair value hierarchy.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which provides companies with the
option to measure specified financial instruments and certain other items at
fair value.  SFAS No. 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The Company did not elect to apply the fair value
method to any of its financial instruments at January 1, 2008.




9





In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities.  EITF No. 07-3 states that
nonrefundable advance payments for goods or services that will be used for
future research and development activities should be deferred and capitalized
and that such amounts should be recognized as an expense as the goods are
delivered or the services are performed.  EITF No. 07-3 is effective
for fiscal years beginning after December 15, 2007.  The adoption of
EITF No. 07-3 did not have a material impact on the Company’s financial
statements.





In
December 2007, the EITF issued EITF No. 07-1, Accounting for Collaborative
Arrangements.  EITF No. 07-1 provides guidance on the
determination of a collaborative arrangement, reporting of costs incurred and
revenue generated on sales to third parties in the statement of operations, and
classification of payments made between participants in a collaborative
arrangement in the statement of operations.  EITF No. 07-1 is
effective for fiscal years beginning after December 15, 2008.  The
adoption of this EITF is not expected to have a material impact on the Company’s
financial statements.





In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, which requires companies, in estimating the useful
life of a recognized intangible asset, to consider the company’s historical
experience in renewing or extending similar arrangements.  In the
absence of historical experience, the company shall consider assumptions that
market participants would use that are consistent with the highest and best use
of the asset. FSP No. FAS 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years.  The Company does not expect the impact of
FSP No. FAS 142-3 to have a material impact on its consolidated financial
statements.






10





ITEM 2.       MANAGEMENTS’
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS





Unless
stated otherwise, references in this Quarterly Report on Form 10-Q to “we,”
“us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and
our subsidiaries including our 80% owned subsidiary, ARIAD Gene Therapeutics,
Inc., or AGTI, unless the context requires otherwise.





Overview





We are
engaged in the discovery and development of breakthrough medicines to treat
cancers by regulating cell signaling with small molecules.  We are
developing a comprehensive approach to patients with cancer that addresses the
greatest medical need – aggressive and advanced-stage cancers for which current
treatments are inadequate.  Our goal is to build a fully integrated
oncology company focused on novel, molecularly targeted therapies to treat solid
tumors and hematologic cancers, as well as the spread of primary tumors to
distant sites.





Our lead
cancer product candidate, deforolimus, previously known as AP23573, has been or
is being studied in multiple clinical trials in patients with various types of
cancers.  We initiated patient enrollment in our initial Phase 3
clinical trial of deforolimus in patients with metastatic sarcoma in the third
quarter of 2007.  We discovered deforolimus in a research and
development program conducted by us on behalf of ARIAD Gene Therapeutics, Inc.,
or AGTI, our 80%-owned subsidiary.  In July 2007, we entered into a
global collaboration with Merck & Co., Inc., or Merck, to jointly develop
and commercialize deforolimus for use in cancer.





Our
collaboration with Merck for the global development and commercialization of
deforolimus anticipates that we together with Merck will conduct a broad-based
development program in multiple indications.  The collaboration
agreement provides that each party will fund 50% of global development costs,
except for certain specific costs to be funded 100% by Merck.  The
collaboration agreement establishes responsibilities for supply of the product
for development and commercial purposes, promotion, distribution and sales of
the product, governance of the collaboration, termination provisions and other
matters.





In
addition to cost-sharing provisions, the collaboration agreement provides for an
up-front payment by Merck of $75 million, which was paid to us in July 2007, up
to $452 million in milestone payments based on the successful development of
deforolimus in multiple cancer indications, of which $13.5 million was paid to
us in the fourth quarter of 2007 upon commencement of our Phase 3 clinical trial
of deforolimus in patients with metastatic sarcomas, and up to $200 million in
milestone payments based on achievement of specified product sales
thresholds.  The upfront payment and milestone payments, when earned
and paid by Merck, are non-refundable.  Merck has also agreed to
provide us with up to $200 million in interest-bearing, repayable, development
cost advances to cover a portion of our share of global development costs, after
we have paid $150 million in global development costs.  The
collaboration agreement provides that each party will receive 50% of the profit
from the sales of deforolimus in the United States, and Merck will pay us tiered
double-digit royalties on sales of deforolimus outside the United
States.





Our second
product candidate, AP24534, has entered clinical development.  We
filed an Investigational New Drug application, or IND, for this product
candidate with the U.S. Food and Drug Administration, or FDA, in the fourth
quarter of 2007 and initiated a Phase 1 clinical trial in patients with
hematologic cancers in the second quarter of 2008.





In
addition to our lead development programs, we have a focused drug discovery
program centered on small-molecule, molecularly targeted therapies and
cell-signaling pathways implicated in cancer.  We also have an
exclusive license to a family of patents, three in the United States and one in
Europe, including a pioneering U.S. patent covering methods of treating human
disease by regulating NF-κB cell-signaling activity.  Additionally, we
have developed a proprietary portfolio of cell-signaling regulation
technologies, our ARGENT technology, to control intracellular processes with
small molecules, which may be useful in the development of therapeutic vaccines
and gene and cell therapy products and which provide versatile tools for
applications in cell biology, functional genomics and drug discovery
research.




11





Since our
inception in 1991, we have devoted substantially all of our resources to our
research and development programs, including those we conduct on behalf of
AGTI.  We receive no revenue from the sale of pharmaceutical products,
and most of our revenue to date was received in connection with a joint venture
we had with a major pharmaceutical company from 1997 to 1999.  Except
for the gain on the sale of our fifty percent interest in that joint venture in
December 1999, which resulted in net income for fiscal 1999, we have not been
profitable since inception.  As a result of our collaboration with
Merck for the development and commercialization of deforolimus, we expect that
our license and collaboration revenue will increase in future
periods.  However, we expect to incur substantial and increasing
operating losses for the foreseeable future, primarily due to costs associated
with our pharmaceutical product development programs, including costs for
clinical trials and product manufacturing, pre-commercial activities, personnel
and our intellectual property.  We expect such costs and operating
losses will be offset in part by development cost-sharing provisions and license
revenue from our collaboration with Merck for development and commercialization
of deforolimus.  We expect that losses will fluctuate from quarter to
quarter and that these fluctuations may be substantial.





As of June
30, 2008, we had an accumulated deficit of $401.8 million and cash, cash
equivalents and marketable securities of $60.0 million and working capital of
$40.4 million.  Since July 2007, pursuant to the terms of our
collaboration agreement with Merck, we have been sharing with Merck ongoing
global development costs for deforolimus on a 50/50 basis except that Merck is
funding 100% of the cost of development that is specific to development or
commercialization of deforolimus outside the United States.  Under the
collaboration agreement, Merck is also required to pay us up to $452 million in
milestone payments based on successful development of deforolimus in multiple
cancer indications, of which $13.5 million was paid in 2007.





General





Our
operating losses are primarily due to the costs associated with our
pharmaceutical product development programs, personnel and intellectual property
protection and enforcement.  As our product development programs
progress, we incur significant costs for toxicology and pharmacology studies,
product development, manufacturing, clinical trials and regulatory
support.  We also incur costs related to planning for potential
regulatory approval and commercial launch of products, including market research
and assessment.  These costs can vary significantly from quarter to
quarter depending on the number of product candidates in development, the stage
of development of each product candidate, the number of patients enrolled in and
complexity of clinical trials and other factors.  Costs associated
with our intellectual property include legal fees and other costs to prosecute,
maintain, protect and enforce our intellectual property, which can fluctuate
from quarter to quarter depending on the status of patent issues being pursued,
including the NF-kB
patent litigation.





Historically,
we have relied primarily on the capital markets as our source of
funding.  We may also obtain funding from collaborations with
pharmaceutical, biotechnology and/or medical device companies for development
and commercialization of our product candidates, such as our collaboration with
Merck for the global development and commercialization of
deforolimus.  These collaborations can take the form of licensing
arrangements, co-development or joint venture arrangements or other
structures.  In addition, we utilize long-term debt to supplement our
funding, particularly as a means of funding investment in property and equipment
and infrastructure needs.  If funding from these various sources is
unavailable on reasonable terms, we may be required to reduce our operating
expenses in order to conserve cash and capital by delaying, scaling back or
eliminating one or more of our product development programs.




12





Critical
Accounting Policies and Estimates





Our
financial position and results of operations are affected by subjective and
complex judgments, particularly in the areas of revenue recognition, the
carrying value of intangible assets, deferred compensation benefits for
executives, and stock-based compensation.





For the
six-month period ended June 30, 2008, we reported license and collaboration
revenue of $2.9 million.  License and collaboration revenue is
recorded based on up-front payments, periodic license payments and milestone
payments received or deemed probable of receipt, spread over the estimated
performance period of the license or collaboration
agreement.  Regarding our collaboration with Merck for the development
and commercialization of deforolimus, as of June 30, 2008, we have received an
up-front payment of $75 million and a milestone payment of $13.5 million related
to the start of our Phase 3 clinical trial of deforolimus in patients with
metastatic sarcomas.  We are recognizing revenues related to such
payments on a straight-line basis through 2023, the estimated patent life of the
underlying technology.  Changes in development plans could impact the
probability of receipt of future milestone payments on which revenue recognition
is based.  In addition, changes in estimated performance periods,
including changes in patent lives of underlying technology, could impact the
rate of revenue recognition in any period.  Such changes in revenue
could have a material impact on our statement of operations.





At June
30, 2008, we reported $4.0 million of intangible assets, consisting of
capitalized costs related primarily to purchased and issued patents, patent
applications and licenses, net of accumulated amortization.  These
costs are being amortized over the estimated useful lives of the underlying
patents or licenses.  Changes in these lives or a decision to
discontinue using the technologies could result in material changes to our
balance sheet and statements of operations.  We have concluded that
the carrying value of our intangible assets is not currently impaired because
such carrying value does not exceed the future net cash flows expected to be
generated by such intangible assets.  If we were to abandon the
underlying technologies or terminate our efforts to pursue collaborations or
license agreements, we may be required to write off a portion of the carrying
value of our intangible assets.  The net book value as of June 30,
2008 of intangible assets related to our NF-κB technology is
$414,000.  If the patentability of our NF-κB patents, one
of which is currently the subject of litigation and reexamination proceedings,
is successfully challenged and such patents are subsequently narrowed,
invalidated or circumvented, we may be required to write off some or all of the
net book value related to such technology.





Under our
deferred executive compensation plans, we are required to adjust our recorded
obligations to our employees on a periodic basis based on the quoted market
value of certain underlying mutual funds.  Fluctuations in the quoted
market value of such mutual funds can result in uneven expense charges or
credits to our statements of operations.  If, for example, the quoted
market prices of the underlying mutual funds were 10% higher at June 30, 2008,
we would have recognized an additional $119,000 in compensation expense in the
six-month period ended June 30, 2008.





In
determining expense related to stock-based compensation, we utilize the
Black-Scholes valuation model to estimate the fair value of stock options
granted to employees, consultants and directors.  Application of the
Black-Scholes option valuation model requires the use of factors such as the
market value and volatility of our common stock, a risk-free discount rate and
an estimate of the life of the option contract.  Fluctuations in these
factors can result in adjustments to our statements of
operations.  If, for example, the market value of our common stock,
its volatility, or the expected life of stock options granted during the
six-month period ended June 30, 2008 were 10% higher or lower than used in the
valuation of such stock options, our valuation of, and total stock-based
compensation expense to be recognized for, such awards would have increased or
decreased by up to $388,000, $242,000, or $145,000 respectively.




13




Results
of Operations





For
the three months ended June 30, 2008 and 2007





Revenue





We
recognized license and collaboration revenue of $1.5 million in the three-month
period ended June 30, 2008, compared to $189,000 in the corresponding period in
2007.  The increase in license and collaboration revenue was due
primarily to the revenue recognized from the Merck collaboration of $1.4
million, based on the non-refundable up-front and milestone payments totaling
$88.5 million received from Merck to date, in accordance with our revenue
recognition policy.





Operating
Expenses





Research
and Development Expenses





Research
and development expenses increased by $1.3 million, or 12%, to $11.8 million in
the three-month period ended June 30, 2008, compared to $10.5 million in the
corresponding period in 2007, as described in further detail below.





The
research and development process necessary to develop a pharmaceutical product
for commercialization is subject to extensive regulation by numerous
governmental authorities in the United States and other
countries.  This process typically takes years to complete and
requires the expenditure of substantial resources.  Current
requirements include:





·
            preclinical
      toxicology, pharmacology and metabolism studies, as well as in vivo efficacy
      studies in relevant animal models of
disease;





·
            manufacturing
      of drug product for preclinical studies and clinical trials and ultimately
      for commercial supply;





·
            submission
      of the results of preclinical studies and information regarding
      manufacturing and control and proposed clinical protocol to the FDA in an
      IND (or similar filings with regulatory agencies outside the United
      States);





·
            conduct
      of clinical trials designed to provide data and information regarding the
      safety and efficacy of the product candidate in humans;
  and





·
            submission
      of all the results of testing to the FDA in a New Drug Application, or NDA
      (or similar filings with regulatory agencies outside the United
      States).





Upon
approval by the appropriate regulatory authorities, including in some countries
approval of product pricing, we may commence commercial marketing and
distribution of the product.





We group
our research and development, or R&D, expenses into two major categories:
direct external expenses and all other R&D expenses.  Direct
external expenses consist of costs of outside parties to conduct laboratory
studies, to develop manufacturing processes and manufacture product candidates,
to conduct and manage clinical trials and similar costs related to our clinical
and preclinical studies.  These costs are accumulated and tracked by
product candidate.  All other R&D expenses consist of costs to
compensate personnel, to purchase lab supplies and services, to maintain our
facility, equipment and overhead and similar costs of our R&D
efforts.  These costs apply to work on our clinical and preclinical
candidates as well as our discovery research efforts.  These costs
have not been tracked by product candidate because the number of product
candidates and projects in R&D may vary from time to time and because we
utilize internal resources across multiple projects at the same
time.




14





Direct
external expenses are further categorized as costs for clinical programs and
costs for preclinical programs.  Preclinical programs include product
candidates undergoing toxicology, pharmacology, metabolism and efficacy studies
and manufacturing process development required before testing in humans can
begin.  Product candidates are designated as clinical programs once we
have filed an IND with the FDA, or a similar filing with regulatory agencies
outside the United States, for the purpose of commencing clinical trials in
humans.





Our
R&D expenses for the three-month period ended June 30, 2008, as compared to
the corresponding period in 2007, were as follows:





Three
      months ended June 30,
            
            
            Increase/In
      thousands
            
            2008
            
            
            2007
            
            
            (decrease)Direct
      external expenses:Clinical
      programs
            
            $
            4,092
            
            
            $
            2,625
            
            
            $
            1,467Preclinical
      programs
            
            
            ---
            
            
            
            1,286
            
            
            
            (1,286
            )All
      other R&D expenses
            
            
            7,735
            
            
            
            6,629
            
            
            
            1,106$
            11,827
            
            
            $
            10,540
            
            
            $
            1,287





Our
clinical programs consist of deforolimus, our lead product candidate, and
AP24534, our kinase inhibitor program for which we filed an IND in late
2007.  Commencing in the third quarter of 2007, the direct external
expenses for deforolimus reflect our share of such expenses pursuant to the
cost-sharing arrangements of our collaboration with Merck.  Direct
external expenses for deforolimus were $3.1 million in the three-month period
ended June 30, 2008, an increase of $500,000, as compared to the corresponding
period in 2007.  This increase is due primarily to increases in
clinical costs of $2.1 million and toxicology costs of $1.0 million in the
three-month period ended June 30, 2008 as compared to the corresponding period
in 2007, offset in part by the impact of Merck’s share of expenses in the second
quarter of 2008 of $3.1 million.  Clinical and toxicology costs
increased due to increasing enrollment in our Phase 3 clinical trial of
deforolimus in patients with metastatic sarcomas and expansion of development of
deforolimus in accordance with our global development plan.  Through
June 30, 2008, we have incurred a total of approximately $76.1 million in direct
external expenses for deforolimus from the date it became a clinical program,
net of Merck’s share of such expenses.  We expect that our direct
external costs for deforolimus, net of Merck’s share of such costs, will
increase during the remainder of 2008 as we accelerate enrollment in our initial
Phase 3 clinical trial for this product candidate, initiate additional clinical
trials and expand other clinical and non-clinical development activities with
Merck.





Direct
external expenses for our second clinical program, AP24534, were $967,000 for
the three-month period ended June 30, 2008 which consisted primarily of clinical
costs of $216,000 and contract manufacturing costs of $692,000 as we initiated
enrollment in our first Phase 1 clinical trial of this product
candidate.  We expect that our direct external costs for AP24534 will
increase during the remainder of 2008 as we enroll patients in this clinical
trial and continue development of this product candidate.





We
incurred no direct external expenses for preclinical programs in the three-month
period ended June 30, 2008 as, at the current time, no R&D programs are
designated as preclinical programs.  All programs other than clinical
programs are designated as discovery research and are included in “all other
R&D expenses” in the above table.  Direct external expenses for
preclinical programs for the period ended June 30, 2007 relate primarily to
costs for toxicology and contract manufacturing studies for AP24534 in support
of the filing of the IND in late 2007.





All other
R&D expenses increased by $1.1 million in the three-month period ended June
30, 2008 as compared to the corresponding period in 2007.  This
increase is due to an increase in personnel expenses of $753,000 due to an
increase in the number of personnel and related expenses, an increase in
overhead expenses of $545,000 due primarily to the expiration of a sub-lease
agreement for a portion of our office and laboratory facility in July 2007 and
increased professional fees of $351,000 related to our development
activities.  These unfavorable impacts were offset in part by Merck’s
allocated share of such expenses under the terms of the collaboration agreement
of $753,000 in the three-month period ended June 30, 2008.  We expect
that all other R&D expenses will increase during the remainder of 2008 to
support our R&D programs.




15





The
successful development of our product candidates is uncertain and subject to a
number of risks.  We cannot be certain that any of our product
candidates will prove to be safe and effective or will meet all of the
applicable regulatory requirements needed to receive and maintain marketing
approval.  Data from preclinical studies and clinical trials are
susceptible to varying interpretations that could delay, limit or prevent
regulatory clearance.  We, the FDA or other regulatory authorities may
suspend clinical trials at any time if we or they believe that the subjects
participating in such trials are being exposed to unacceptable risks or if such
regulatory agencies find deficiencies in the conduct of the trials or other
problems with our products under development.  Delays or rejections
may be encountered based on additional governmental regulation, legislation,
administrative action or changes in FDA or other regulatory policy during
development or the review process.  Other risks associated with our
product development programs are described under the heading “Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as
updated from time to time in our subsequent periodic reports and current reports
filed with the SEC.  Due to these uncertainties, accurate and
meaningful estimates of the ultimate cost to bring a product to market, the
timing of completion of any of our drug development programs and the period in
which material net cash inflows from any of our drug development programs will
commence are unavailable.





General
and Administrative Expenses





General
and administrative expenses increased by $131,000, or 2%, to $7.0 million in the
three-month period ended June 30, 2008, compared to $6.9 million in the
corresponding period in 2007.  The increase in expenses was due
primarily to an increase in personnel expenses of $164,000 to $1.9 million in
the three-month period ended June 30, 2008, compared to $1.8 million in the
corresponding period in 2007 resulting from an increase in the number of
personnel and related expenses, and an increase in overhead and general expenses
of $253,000, offset by a decrease in professional services of
$265,000.  The decrease in professional services is related to a
decrease in legal fees associated with our patent litigation offset in part by
an increase in our expenses related to commercial operations
initiatives.  We expect that our general and administrative expenses
will increase slightly over the remainder of the year reflecting an increase in
commercial planning activities, required support of our research and development
programs and patent litigation.





We expect
that our operating expenses in total, net of Merck’s share of development costs
of deforolimus will increase during the remainder of 2008 for the reasons
described above.  Operating expenses may fluctuate from quarter to
quarter.  The actual amount of any change in operating expenses will
depend on, among other things, the progress of our product development programs,
including the planned increase in clinical trials and other studies related to
deforolimus pursuant to our collaboration with Merck, the enrollment of patients
in, and initiation of additional clinical trials and the required manufacturing
for AP24534, and the status of our patent infringement litigation with Lilly and
Amgen.





Interest
Income/Expense





Interest
income decreased to $331,000 in the three-month period ended June 30, 2008 from
$341,000 in the corresponding period in 2007, as a result of lower interest
yields from our investments offset in part by a higher average balance of funds
invested in 2008.




16





Interest
expense increased to $192,000 in the three-month period ended June 30, 2008 from
$97,000 in the corresponding period in 2007, as a result of higher average loan
balances in 2008 offset in part by lower interest rates on our long-term
debt.





Operating
Results





We
reported a loss from operations of $17.4 million in the three-month period ended
June 30, 2008 compared to a loss from operations of $17.2 million in the
corresponding period in 2007, an increase of $157,000, or 1%.  We
expect that our loss from operations will increase during the remainder of 2008
due to the various factors discussed under “Revenue” and “Operating Expenses”
above.  Losses may fluctuate depending on the progress of our product
development programs and the status of our patent infringement
litigation.  The extent of operating losses will also depend on the
sufficiency of funds on hand or available from time to time, which will
influence the amount we will spend on R&D and the development timelines for
our product candidates.





We
reported a net loss of $17.3 million in the three-month period ended June 30,
2008, compared to a net loss of $17.0 million in the corresponding period in
2007, an increase in net loss of $262,000 or 2%, and a net loss per share of
$0.25 and $0.25, respectively.





Results
of Operations





For
the six months ended June 30, 2008 and 2007





Revenue





We
recognized license and collaboration revenue of $2.9 million in the six-month
period ended June 30, 2008, compared to $379,000 in the corresponding period in
2007.  The increase in license and collaboration revenue was due
primarily to the revenue recognized from the Merck collaboration of $2.8
million, based on the non-refundable up-front and milestone payments totaling
$88.5 million received from Merck to date, in accordance with our revenue
recognition policy.





Operating
Expenses





Research
and Development Expenses





Research
and development expenses increased by $1.1 million, or 5%, to $22.7 million in
the six-month period ended June 30, 2008, compared to $21.6 million in the
corresponding period in 2007.





Our
R&D expenses for the six-month period ended June 30, 2008, as compared to
the corresponding period in 2007, were as follows:





Six
      months ended June 30,
            
            
            Increase/In
      thousands
            
            2008
            
            
            2007
            
            
            (decrease)Direct
      external expenses:Clinical
      programs
            
            $
            7,706
            
            
            $
            5,795
            
            
            $
            1,911Preclinical
      programs
            
            
            ---
            
            
            
            2,836
            
            
            
            (2,836
            )All
      other R&D expenses
            
            
            14,996
            
            
            
            12,932
            
            
            
            2,064$
            22,702
            
            
            $
            21,563
            
            
            $
            1,139





Direct
external expenses for deforolimus were $6.1 million in the six-month period
ended June 30, 2008, an increase of $272,000, as compared to the corresponding
period in 2007.  This increase is due to an increase in clinical costs
of $3.6 million, toxicology costs of $1.2 million and contract manufacturing
costs of $1.1 million in the six-month period ended June 30, 2008, as compared
to the corresponding period in 2007 offset in part by the impact of Merck’s
share of expenses of $6.1 million for the six-month period ended June 30,
2008.  Clinical, toxicology and contract manufacturing costs increased
due to increasing enrollment in our Phase 3 clinical trial of deforolimus in
patients with metastatic sarcomas and expansion of development of deforolimus in
accordance with our global development plan.




17





Direct
external expenses for our second clinical program, AP24534, were $1.6 million
for the six-month period ended June 30, 2008 which consisted primarily of
clinical costs of $354,000 and contract manufacturing costs of $1.1 million as
we initiated enrollment in our first Phase 1 clinical trial of this product
candidate.





We
incurred no direct external expenses for preclinical programs in the six-month
period ended June 30, 2008 as, at the current time, no R&D programs are
designated as preclinical programs.  All programs other than clinical
programs are designated as discovery research and are included in “all other
R&D expenses” in the above table.  Direct external expenses for
preclinical programs for the period ended June 30, 2007 relate primarily to
costs for toxicology and contract manufacturing studies for AP24534 in support
of the filing of the IND in late 2007.





All other
R&D expenses increased by $2.1 million in the six-month period ended June
30, 2008 as compared to the corresponding period in 2007.  This
increase is due primarily to an increase in personnel expenses of $1.7 million
related to an increase in the number of personnel and related expenses, and an
increase in overhead expenses of $1.2 million due to the expiration of a
sub-lease agreement for a portion of our office and laboratory facility in July
2007 and miscellaneous increases in lab supplies and services and professional
services.  These unfavorable impacts were offset in part by Merck’s
allocated share of such expenses under the terms of the collaboration agreement
of $1.5 million in the six-month period ended June 30, 2008.





General
and Administrative Expenses





General
and administrative expenses increased by $3.9 million, or 34% to $15.2 million
in the six-month period ended June 30, 2008, compared to $11.3 million in the
corresponding period in 2007.  Professional fees increased by $3.7
million to $10.8 million in the six-month period ended June 30, 2008, compared
to $7.1 million in the corresponding period in 2007 due primarily to costs
related to corporate and commercial development initiatives that support our
expanding product development activities, and to our patent litigation as well
as miscellaneous increases in various general and overhead expenses of
$539,000.





Interest
Income/Expense





Interest
income increased to $928,000 in the six-month period ended June 30, 2008 from
$731,000 in the corresponding period in 2007, as a result of a higher average
balance of funds invested in 2008, offset in part by lower interest yields from
our investments.





Interest
expense increased to $271,000 in the six-month period ended June 30, 2008 from
$202,000 in the corresponding period in 2007, as a result of higher average loan
balances in 2008 offset in part by lower interest rates on our long-term
debt.





Operating
Results





We
reported a loss from operations of $34.9 million in the six-month period ended
June 30, 2008 compared to a loss from operations of $32.5 million in the
corresponding period in 2007, an increase of $2.4 million, or 8%.




18





We
reported a net loss of $34.3 million in the six-month period ended June 30,
2008, compared to a net loss of $32.0 million in the corresponding period in
2007, an increase in net loss of $2.3 million or 7%, and a net loss per share of
$0.49 and $0.48, respectively.





Liquidity
and Capital Resources





We have
financed our operations and investments to date primarily through sales of our
common stock to institutional investors and, to a lesser extent, through
issuances of our common stock pursuant to our stock option and employee stock
purchase plans, supplemented by the issuance of long-term debt.  We
sell securities and incur debt when the terms of such transactions are deemed
favorable to us and as necessary to fund our current and projected cash
needs.  In addition, our collaboration with Merck for the development
and commercialization of deforolimus provides for additional funding in the form
of up-front and potential milestone payments, as well as the sharing of
development costs for deforolimus.  Under the collaboration, we also
have access to up to $200 million in interest-bearing, repayable development
cost advances after the Company has paid $150 million in global development
costs.  We seek to balance the level of cash, cash equivalents and
marketable securities on hand with our projected needs and to allow us to
withstand periods of uncertainty relative to the availability of funding on
favorable terms.





Sources
of Funds





For the
three months and six months ended June 30, 2008 and 2007, our sources of funds
were as follows:





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Proceeds
      from issuance of common stock pursuant to stock option and purchase
      plans
            
            $
            62
            
            
            $
            873
            
            
            $
            139
            
            
            $
            1,120Proceeds
      from long-term borrowings
            
            
            
            
            
            
            
            
            
            
            10,505Proceeds
      from issuance of common stock, net of issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,300$
            62
            
            
            $
            873
            
            
            $
            10,644
            
            
            $
            13,420





In March,
2008, we amended our existing term loan with a bank.  The amendment
provided for an increase of $10.5 million in our loan balance to $14.0 million,
the extension of the maturity date from March 31, 2008 to March 31, 2013 and
changes to the repayment provisions.  The amended terms of the loan
require us to maintain at least $15.0 million in unrestricted cash, cash
equivalents and investments.  The agreement also contains certain
covenants that restrict additional indebtedness, additional liens, and sales of
assets, and dividends, distributions or repurchases of common
stock.





We have
filed shelf registration statements with the SEC, from time to time, to register
shares of our common stock or other securities for sale, giving us the
opportunity to raise funding when needed or otherwise considered
appropriate.  On January 30, 2007, we filed a shelf registration
statement with the SEC for the issuance of common stock, preferred stock,
various series of debt securities and/or warrants to purchase any of such
securities, either individually or in units, with a total value of up to $100
million, from time to time at prices and on terms to be determined at the time
of any such offerings.  This filing was declared effective on February
6, 2007.





On
February 14, 2007, we entered into an agreement with Azimuth Opportunity Ltd.,
or Azimuth, under which we may offer and sell, at our sole discretion, and
Azimuth is committed to purchase, subject to the terms and conditions set forth
in the agreement, the lesser of up to $50 million of our common stock, or the
number of shares which is one less than twenty percent of the issued and
outstanding shares of our common stock as of the effective date of the
agreement.  These shares will be registered under the shelf
registration statement we filed in January 30, 2007.  The per share
purchase price for these shares will equal the daily volume weighted average
price of our common stock on such date, less a discount ranging from 3.5% to
5.5%, with a minimum purchase price of $3.00 per share below which Azimuth is
not required to purchase shares of our common stock.  The agreement
expires on September 1, 2008.




19





In March
2007, we sold to Azimuth 3,072,393 shares of our common stock pursuant to this
agreement.  We received aggregate gross proceeds from this sale of
$12.5 million, or $12.3 million net of issuance expenses.  These
shares were registered under our shelf registration statement filed on January
30, 2007.  As of June 30, 2008, we have $37.5 million available under
our equity financing facility with Azimuth and $87.5 million of securities
remaining for issuance under our shelf registration statement.





The amount
of funding we raise through sales of our common stock depends on many factors,
including, but not limited to, the status and progress of our product
development programs, projected cash needs, availability of funding from other
sources, our stock price and the status of the capital markets.





Uses
of Funds





The
primary uses of our cash are to fund our operations and working capital
requirements and, to a lesser degree, to repay our long-term debt, to invest in
intellectual property and to invest in our property and equipment as needed for
our business.  For the three months and six months ended June 30, 2008
and 2007, our uses of funds were as follows:





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      cash used in operating activities
            
            $
            18,442
            
            
            $
            13,730
            
            
            $
            31,716
            
            
            $
            26,367Purchases
      of marketable securities, net of maturities
            
            
            1,237
            
            
            
            4,530
            
            
            
            (98
            )
            
            
            11,461Repayment
      of borrowings
            
            
            350
            
            
            
            480
            
            
            
            670
            
            
            
            960Investment
      in intangible assets
            
            
            123
            
            
            
            99
            
            
            
            352
            
            
            
            299Investment
      in property and equipment
            
            
            1,399
            
            
            
            214
            
            
            
            3,278
            
            
            
            294$
            21,551
            
            
            $
            19,053
            
            
            $
            35,918
            
            
            $
            39,381





The net
cash used in operating activities is comprised of our net losses, adjusted for
non-cash expenses and working capital requirements.  As noted above,
our net loss for the six months ended June 30, 2008 increased by $2.3 million,
as compared to the corresponding period in 2007, due primarily to increased
operating expenses.  As a result of changes in our working capital
requirements, our net cash used in operations increased by $5.3 million in the
six-month period ended June 30, 2008 as compared to the corresponding period in
2007.





We manage
our marketable securities portfolio to provide cash for payment of our
obligations.  We purchase marketable securities to enhance our yield
on invested funds and when such amounts are not needed for near-term payment of
obligations.  We generally hold our marketable securities to
maturity.  Upon maturity of such marketable securities, a portion may
be retained as cash to provide for payment of current obligations while the
remainder will be reinvested in accordance with our investment
policy.  For the three-month and six-month periods ended June 30, 2008
and 2007, purchase of marketable securities, proceeds from maturities of
marketable securities, and the resulting net amount reinvested or retained as
cash for payment of obligations was as follows:




20





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,In
      thousands
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Purchases
      of marketable securities
            
            $
            17,432
            
            
            $
            19,766
            
            
            $
            30,452
            
            
            $
            34,804Proceeds
      from sales and maturities of marketable securities
            
            
            (16,195
            )
            
            
            (15,236
            )
            
            
            (30,550
            )
            
            
            (23,343
            )$
            1,237
            
            
            $
            4,530
            
            
            $
            (98
            )
            
            $
            11,461





As noted
above, we expect that our net loss will increase in the remainder of 2008 due to
continued progress in development of our product candidates.  However,
we expect that we will receive additional milestone payments from Merck in the
remainder of 2008 consistent with our global development plan for deforolimus;
such milestone payments, if received, will have a favorable impact on our cash
used in operations.  We also expect that our investments in intangible
assets, consisting of our intellectual property, and property and equipment will
increase in support of our product development activities.





Off-Balance
Sheet Arrangements





As part of
our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities for financial partnerships, such as
entities often referred to as structured finance or special purpose entities
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.  As of June 30, 2008, we maintained an outstanding letter of
credit of $699,000 in accordance with the terms of our long-term lease for our
office and laboratory facility.





Contractual
Obligations





We have
substantial fixed contractual obligations under various research and licensing
agreements, consulting and employment agreements, lease agreements and long-term
debt instruments.  These contractual obligations were comprised of the
following as of June 30, 2008:





Payments
      Due By PeriodIn
      thousands
            
            Total
            
            
            In
              2008
            
            
            2009
              through
              2011
            
            
            2012
              through
              2013
            
            
            After
              2013Long-term
      debt
            
            $
            13,650
            
            
            $
            700
            
            
            $
            7,000
            
            
            $
            5,950
            
            
            $
            ---Operating
      leases
            
            
            8,566
            
            
            
            1,049
            
            
            
            6,294
            
            
            
            1,223
            
            
            
            ---Employment
      agreements
            
            
            12,036
            
            
            
            2,482
            
            
            
            9,554
            
            
            
            ---
            
            
            
            ---Other
      long-term obligations
            
            
            5,638
            
            
            
            556
            
            
            
            2,934
            
            
            
            1,352
            
            
            
            796Total
      fixed contractual obligations
            
            $
            39,890
            
            
            $
            4,787
            
            
            $
            25,782
            
            
            $
            8,525
            
            
            $
            796





Long-term
debt obligations above include only scheduled principal payments on such
debt.  Interest on our long-term debt is based on variable interest
rates.  Assuming a constant interest rate of 5.0%, our average
interest rate on our debt at June 30, 2008, over the remaining term of the debt,
our interest expense would total approximately $505,000 for the remainder of
2008, $1.6 million in the period 2009 through 2011, and $221,000 in the period
2012 through 2013.





Other
long-term obligations are comprised primarily of obligations under our deferred
executive compensation plans and license agreements.  The license
agreements generally provide for payment by us of annual license fees, milestone
payments and royalties upon successful commercialization of
products.  All license agreements are cancelable by us.  The
above table reflects remaining license fees for the lives of the agreements but
excludes milestone and royalty payments, as such amounts are not probable or
estimable at this time.




21





Liquidity





At June
30, 2008, we had cash, cash equivalents and marketable securities totaling $60.0
million and working capital of $40.4 million, compared to cash, cash equivalents
and marketable securities totaling $85.2 million and working capital of $64.6
million at December 31, 2007.





Taking
into account the impact of the Merck collaboration, we believe that our cash,
cash equivalents and marketable securities on hand at June 30, 2008 should be
sufficient to satisfy our capital and operating requirements for more than
twelve months.  There are numerous factors that are likely to affect
our spending levels, including the planned expansion of clinical trials and
other development activities for deforolimus in collaboration with Merck, the
planned initiation of clinical trials for AP24534, the progress of our discovery
research programs, the impact of potential business development activities, the
potential acquisition of or other strategic transaction regarding the minority
stockholders’ interests in AGTI, and developments in our NF-kB patent litigation, among
other factors.  These variables could result in higher or lower
spending levels which could impact the sufficiency of our current funds if we
are to continue operations in accordance with our current plans and achieve our
intended timelines for development.  In any event, we may require
substantial additional funding for our R&D programs, including preclinical
development and clinical trials, for operating expenses including intellectual
property protection and enforcement, for the pursuit of regulatory approvals,
and for establishing manufacturing, marketing and sales
capabilities.  In order to fund our needs, we may, among other things,
(1) sell our securities through public or private offerings as market conditions
permit, (2) enter into new long-term debt or other credit agreements, (3) enter
into partnerships
for our product candidates, and/or (4) license our cell-signaling technologies,
including our ARGENT and NF-κB intellectual property
portfolios.  There can be no assurance, however, that adequate
resources will be available when needed or on terms acceptable to us, if
at all.





Securities
Litigation Reform Act





Safe harbor statement under the
Private Securities Litigation Reform Act of 1995:  This
Quarterly Report on Form 10-Q, contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.  Such
statements in connection with any discussion of future operations or financial
performance are identified by the use of words such as “may,” “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words
and terms of similar meaning.  Such statements are based on
management’s expectations and are subject to certain factors, risks and
uncertainties that may cause actual results, outcome of events, timing and
performance to differ materially from those expressed or implied by such
statements.  These risks and uncertainties include, but are not
limited to, the costs associated with our research, development, manufacturing
and other activities, the conduct and results of pre-clinical and clinical
studies of our product candidates, difficulties or delays in obtaining
regulatory approvals to market products resulting from our development efforts,
our reliance on strategic partners and licensees and other key parties for the
successful development, manufacturing and commercialization of products, the
adequacy of our capital resources and the availability of additional funding,
patent protection and third-party intellectual property claims relating to our
and any partner's product candidates, the timing, scope, cost and outcome of
legal and patent office proceedings concerning our NF-kB patent portfolio, the
potential acquisition of or other strategic transaction regarding the minority
stockholders' interests in our 80%-owned subsidiary, ARIAD Gene Therapeutics,
Inc., future capital needs, risks related to key employees, markets, economic
conditions, prices, reimbursement rates, competition and other factors detailed
under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2007 and in our other public filings with
the U.S. Securities and Exchange Commission.  The information
contained in this document is believed to be current as of the date of original
issue.  We do not intend to update any of the forward-looking
statements after the date of this document to conform these statements to actual
results or to changes in our expectations, except as required by
law.




22





ITEM 3.       QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We invest
our available funds in accordance with our investment policy to preserve
principal, maintain proper liquidity to meet operating needs and maximize
yields.  Our investment policy specifies credit quality standards for
our investments and limits the amount of credit exposure to any single issue,
issuer or type of investment.





We invest
cash balances in excess of operating requirements first in short-term, highly
liquid securities, with maturities of 90 days or less, and money market
accounts.  Depending on our level of available funds and our expected
cash requirements, we may invest a portion of our funds in marketable
securities, consisting generally of corporate debt and U.S. government and
agency securities.  Maturities of our marketable securities are
generally limited to periods necessary to fund our liquidity needs and may not
in any case exceed three years.  These securities are classified as
available-for-sale.  Available-for-sale securities are recorded on the
balance sheet at fair market value with unrealized gains or losses reported as a
separate component of stockholders’ equity (accumulated other comprehensive
income or loss).  Realized gains and losses on marketable security
transactions are reported on the specific-identification
method.  Interest income is recognized when earned.  A
decline in the market value of any available-for-sale security below cost that
is deemed other than temporary results in a charge to earnings and establishes a
new cost basis for the security.





Our
investments are sensitive to interest rate risk.  We believe, however,
that the effect, if any, of reasonable possible near-term changes in interest
rates on our financial position, results of operations and cash flows generally
would not be material due to the current short-term nature of these
investments.  In particular, at June 30, 2008, because our available
funds are invested solely in short-term securities with remaining maturities of
six months or less, our risk of loss due to changes in interest rates is not
material.





We have a
deferred executive compensation program which provides participants with
deferred compensation based on the value of certain designated mutual
funds.  The fair value of our obligations under this program is
reflected as a liability on our balance sheet.  In the event of a
hypothetical 10% increase in the fair market value of the underlying mutual
funds as of June 30, 2008, we would have incurred approximately $119,000 of
additional compensation expense in the six-month period ended June 30,
2008.





At June
30, 2008, we had $13.65 million outstanding under a bank term note which bears
interest at prime or, alternatively, LIBOR + 1.25% to 2.25%.  This
note is sensitive to interest rate risk.  In the event of a
hypothetical 10% increase in the interest rate on which the loan is based (50.0
basis points at June 30, 2008), we would incur approximately $65,000 of
additional interest expense per year based on expected balances over the next
twelve months.





ITEM 4.       CONTROLS AND
PROCEDURES





(a) Evaluation of Disclosure Controls
and Procedures.  Our principal executive officer and principal
financial officer, after evaluating the effectiveness of our disclosure controls
and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such evaluation,
our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms and is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.




23





In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.





(b) Changes in Internal
Controls.  There were no changes in our internal control over
financial reporting, identified in connection with the evaluation of such
internal control that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.






24




PART II.       OTHER
INFORMATION





ITEM 1.       LEGAL
PROCEEDINGS





The
information contained in Note 7 to the Notes to our Unaudited Condensed
Consolidated Financial Statements found elsewhere in this Quarterly Report on
Form 10-Q is incorporated herein by reference.





ITEM 1A.       RISK
FACTORS





There have
been no material changes to the risk factors included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007, as supplemented in our
Form 10-Q for the period ended March 31, 2008.





ITEM 4.       SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS





Our Annual
Meeting of Stockholders was held on June 12, 2008.  Of 69,446,170
shares of common stock issued and outstanding and eligible to vote as of the
record date of April 21, 2008, a quorum of 52,415,383 shares, or 80% of the
eligible shares, was present in person or represented by proxy.  The
following actions were taken at such meeting.





(a)
            Reelection
      of the following Class 2 Directors of the
  Company.




Voted
      For
              
              Withheld
      AuthorityJay
      R. LaMarche
              50,482,780
              
              1,932,603Sandford
      D. Smith
              43,700,627
              
              8,714,756Elizabeth
      H. S. Wyatt
              50,541,950
              
              1,878,433




After the
meeting, Harvey J. Berger, M.D., Michael D. Kishbauch and Burton E. Sobel, M.D.,
continued to serve as our Class 3 Directors for terms which expire in 2009 and
until their successors are duly elected and qualified, and Athanase Lavidas,
Ph.D. and Peter J. Nelson continued to serve as our Class 1 Directors for terms
which expire in 2010 and until their successors are duly elected and
qualified.  On June 25, 2008, Peter J. Nelson notified us that he will
resign from the Board of Directors, effective August 29, 2008, due to other work
commitments.





(b)
            Approval
      of an amendment to the ARIAD Pharmaceuticals, Inc. 1997 Employee Stock
      Purchase Plan and reservation of an additional 500,000 shares of common
      stock for issuance pursuant to this Plan.  The voting results
      were 22,365,770 votes for, 1,292,597 votes against, and 129,736 votes
      abstaining, with 28,627,280 broker
non-votes.





(c)
            Ratification
      of the selection of the Audit Committee of the Board of Directors of
      Deloitte & Touche LLP as our independent registered public accounting
      firm for the year ending December 31, 2008.  The voting results
      were 50,941,055 votes for, 1,126,421 votes against, and 347,906 votes
      abstaining.





ITEM 5.       OTHER
INFORMATION





On May 7,
2008, the Company and its 80%-owned subsidiary, ARIAD Gene Therapeutics, Inc.,
entered into an agreement with Merck & Co., Inc. (“Merck”) for the supply of
active pharmaceutical ingredient (“API”) and drug product for the Company’s lead
product candidate, deforolimus (the “Supply Agreement”).  The Supply
Agreement was entered into pursuant to the provisions of the Collaboration
Agreement between Merck and the Company dated July 11, 2007 (the “Collaboration
Agreement”).  Under the terms of the Supply Agreement, the Company will be
responsible for supplying the API and Merck will be responsible for supplying of
the finished drug product for clinical trials and any commercialization of
deforolimus by the parties under the Collaboration Agreement.  The Supply
Agreement also provides that sales of API and finished drug product between the
parties will be made at their respective manufacturing costs.  The term of
the Supply Agreement coincides with the term of the Collaboration Agreement.
 The Supply Agreement provides for early termination upon termination or
expiration of the Collaboration Agreement, upon mutual consent of the parties,
for uncured breach of the terms of the agreement or for insolvency of either
party.




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ITEM
6.       EXHIBITS





10.1
            Amended
      and Restated ARIAD Pharmaceuticals, Inc., 1997 Employee Stock Purchase
      Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement
      on Schedule 14A (File No. 000-21696) filed with the Securities and
      Exchange Commission on April 29, 2008 and incorporated herein by
      reference).




10.2
              Deforolimus
      API and Tablet Supply Agreement dated May 7, 2008 among ARIAD
      Pharmaceuticals, Inc., ARIAD Gene Therapeutics, Inc. and Merck & Co.,
      Inc.*




31.1
            Certification
      of the Chief Executive Officer.





31.2
            Certification
      of the Chief Financial Officer.





32.1
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




*
      Confidential treatment has been requested for portions of this
      exhibit.


ARIAD and
the ARIAD logo are our registered trademarks and ARGENT is our
trademark.  The domain name and website address www.ariad.com, and all
rights thereto, are registered in the name of, and owned by,
ARIAD.  The information in our website is not intended to be part of
this Quarterly Report on Form 10-Q.  We include our website address
herein only as an inactive textual reference and do not intend it to be an
active link to our website.






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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 its behalf by the undersigned, thereunto
duly authorized.




ARIAD
      Pharmaceuticals, Inc.By:
            /s/ Harvey J. Berger, M.D.Harvey
      J. Berger, M.D.Chairman
      and Chief Executive OfficerBy:
            /s/ Edward M. FitzgeraldEdward
      M. FitzgeraldSenior
      Vice President,Chief
      Financial Officer(Principal
      financial officerDate:  August
      11, 2008
            
            and
      chief accounting officer)




27




EXHIBIT INDEX







Exhibit
              TitleNo.10.1
              Amended
      and Restated ARIAD Pharmaceuticals, Inc., 1997 Employee Stock Purchase
      Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement
      on Schedule 14A (File No. 000-21696) filed with the Securities and
      Exchange Commission on April 29, 2008 and incorporated herein by
      reference).10.2
              Deforolimus
      API and Tablet Supply Agreement dated May 7, 2008 among ARIAD
      Pharmaceuticals, Inc., ARIAD Gene Therapeutics, Inc. and Merck & Co.,
      Inc.*31.1
              Certification
      of the Chief Executive Officer.31.2
              Certification
      of the Chief Financial Officer.32.1
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*
      Confidential treatment has been requested for portions of this
      exhibit.






28