**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**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, 2007**





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 ofincorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)





**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 or a non-accelerated filer.  See definition of
“large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange
      Act.


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





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b
      - 2 of the Exchange Act).


**Yes  |  |             No  |X|**




The
      number
      of shares of the Registrant’s common stock outstanding as of July 31, 2007 was
      69,151,129.













**ARIAD
        PHARMACEUTICALS, INC.**
 
 **TABLE
        OF CONTENTS**
 
 **PART
                    I.**
                **FINANCIAL
                    INFORMATION**
                1**ITEM
                    1.**
                **UNAUDITED
                    FINANCIAL
                    STATEMENTS**
                1Condensed
                    Consolidated Balance Sheets – June 30,
                    2007 andDecember
                    31, 2006
                1Condensed
                    Consolidated Statements of Operations for the
                    ThreeMonths
                    and Six Months Ended June 30, 2007 and
                    2006
                2Condensed
                    Consolidated Statements of Cash Flows for
                    theSix
                    Months Ended June 30, 2007 and 2006
                3Notes
                    to Unaudited Condensed Consolidated Financial
                    Statements
                4**ITEM
                    2.**
                **MANAGEMENT’S
                    DISCUSSION AND ANALYSIS OF
                    FINANCIAL****CONDITION
                    AND RESULTS OF
                    OPERATIONS**
                11**ITEM
                    3.**
                **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES
                    ABOUT****MARKET
                    RISK**
                23**ITEM
                    4.**
                **CONTROLS
                    AND PROCEDURES**
                23**PART
                    II.**
                **OTHER
                    INFORMATION**
                25**ITEM
                    1.**
                **LEGAL
                    PROCEEDINGS**
                25**ITEM
                    1A.**
                **RISK
                    FACTORS**
                25**ITEM
                    4.**
                **SUBMISSION
                    OF MATTERS FOR VOTE OF SECURITY
                    HOLDERS**
                28**ITEM
                    6.**
                **EXHIBITS**
                29**SIGNATURES**
                30**EXHIBIT
                    INDEX**
                31


**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,**
                  **2007**
                
                
                **December
                    31,**
                  **2006****(Unaudited)****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                5,767
                
                
                $
                31,728Marketable
                    securities
                
                
                19,929
                
                
                
                8,076Inventory
                    and other current assets
                
                
                2,886
                
                
                
                1,839Total
                    current assets
                
                
                28,582
                
                
                
                41,643Property
                    and equipment:Leasehold
                    improvements
                
                
                18,172
                
                
                
                18,126Equipment
                    and furniture
                
                
                10,925
                
                
                
                10,677Total
                
                
                29,097
                
                
                
                28,803Less
                    accumulated depreciation and amortization
                
                
                (24,453
                )
                
                
                (23,721
                )Property
                    and equipment, net
                
                
                4,644
                
                
                
                5,082Intangible
                    and other assets, net
                
                
                4,206
                
                
                
                4,318Total
                    assets
                
                $
                37,432
                
                
                $
                51,043**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Current
                    portion of long-term debt
                
                $
                4,775
                
                
                $
                1,920Accounts
                    payable
                
                
                5,400
                
                
                
                4,003Accrued
                    compensation and benefits
                
                
                492
                
                
                
                428Accrued
                    product development expenses
                
                
                6,196
                
                
                
                6,612Other
                    accrued expenses
                
                
                3,035
                
                
                
                1,841Current
                    portion of deferred executive compensation
                
                
                532
                
                
                
                528Current
                    portion of deferred revenue
                
                
                399
                
                
                
                452Total
                    current liabilities
                
                
                20,829
                
                
                
                15,784Long-term
                    debt
                
                
                
                
                
                
                3,815Deferred
                    revenue
                
                
                
                
                
                
                2Deferred
                    executive compensation
                
                
                1,672
                
                
                
                1,180Stockholders’
                    equity:Common
                    stock, $.001 par value; authorized, 145,000,000 shares; issuedand
                    outstanding,
                  69,012,888
                    shares in 2007 and 65,391,347 shares in 2006
                
                
                69
                
                
                
                65Additional
                    paid-in capital
                
                
                355,844
                
                
                
                339,220Accumulated
                    other comprehensive income
                
                
                
                
                
                
                3Accumulated
                    deficit
                
                
                (340,982
                )
                
                
                (309,026
                )Total
                    stockholders’ equity
                
                
                14,931
                
                
                
                30,262Total
                    liabilities and stockholders’ equity
                
                $
                37,432
                
                
                $
                51,043




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 Ended****June
                  30,**
              
              
              **June
                  30,*****In
                  thousands, except share and per share data***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**License
                  revenue
              
              $
              189
              
              
              $
              229
              
              
              $
              379
              
              
              $
              458Operating
                  expenses:Research
                  and development
              
              
              10,540
              
              
              
              10,144
              
              
              
              21,563
              
              
              
              21,818General
                  and administrative
              
              
              6,898
              
              
              
              7,531
              
              
              
              11,301
              
              
              
              11,987Total
                  operating expenses
              
              
              17,438
              
              
              
              17,675
              
              
              
              32,864
              
              
              
              33,805Loss
                  from operations
              
              
              (17,249
              )
              
              
              (17,446
              )
              
              
              (32,485
              )
              
              
              (33,347
              )Other
                  income (expense):Interest
                  income
              
              
              341
              
              
              
              574
              
              
              
              731
              
              
              
              1,239Interest
                  expense
              
              
              (97
              )
              
              
              (124
              )
              
              
              (202
              )
              
              
              (246
              )Total
                  other income, net
              
              
              244
              
              
              
              450
              
              
              
              529
              
              
              
              993Net
                  loss
              
              $
              (17,005
              )
              
              $
              (16,996
              )
              
              $
              (31,956
              )
              
              $
              (32,354
              )Net
                  loss per share
              
              $
              (.25
              )
              
              $
              (.27
              )
              
              $
              (.48
              )
              
              $
              (.52
              )Weighted-average
                  number of shares ofcommon stock outstanding
              
              
              68,786,835
              
              
              
              62,093,353
              
              
              
              67,215,100
              
              
              
              61,827,494




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***
              
              **2007**
              
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (31,956
              )
              
              $
              (32,354
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              1,150
              
              
              
              2,344Accretion
                  of discount on marketable securities
              
              
              (395
              )
              
              
              (973
              )Deferred
                  executive compensation expense
              
              
              496
              
              
              
              449Stock-based
                  compensation
              
              
              3,208
              
              
              
              2,272Increase
                  (decrease) from:Inventory
                  and other current assets
              
              
              (1,047
              )
              
              
              (710
              )Other
                  assets
              
              
              (7
              )
              
              
              3Accounts
                  payable
              
              
              1,397
              
              
              
              1,928Accrued
                  compensation and benefits
              
              
              64
              
              
              
              277Accrued
                  product development expenses
              
              
              (416
              )
              
              
              (1,094
              )Other
                  accrued expenses
              
              
              1,194
              
              
              
              921Deferred
                  revenue
              
              
              (55
              )
              
              
              (133
              )Deferred
                  executive compensation paid
              
              
              0
              
              
              
              (301
              )Net
                  cash used in operating activities
              
              
              (26,367
              )
              
              
              (27,371
              )Cash
                  flows from investing activities:Proceeds
                  from maturities of marketable securities
              
              
              23,343
              
              
              
              53,753Purchases
                  of marketable securities
              
              
              (34,804
              )
              
              
              (26,538
              )Investment
                  in property and equipment
              
              
              (294
              )
              
              
              (860
              )Investment
                  in intangible assets
              
              
              (299
              )
              
              
              (327
              )Net
                  cash (used in) provided by investing activities
              
              
              (12,054
              )
              
              
              26,028Cash
                  flows from financing activities:Repayment
                  of borrowings
              
              
              (960
              )
              
              
              (960
              )Proceeds
                  from the issuance of stock , net of issuance costs
              
              
              12,300Proceeds
                  from issuance of stock pursuant to stock option and purchase
                  plans
              
              
              1,120
              
              
              
              1,349Net
                  cash provided by financing activities
              
              
              12,460
              
              
              
              389Net
                  decrease in cash and cash equivalents
              
              
              (25,961
              )
              
              
              (954
              )Cash
                  and cash equivalents, beginning of period
              
              
              31,728
              
              
              
              25,453Cash
                  and cash equivalents, end of period
              
              $
              5,767
              
              
              $
              24,499




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, 2007, the results of operations for the three-month
        and
        six-month periods ended June 30, 2007 and 2006 and cash flows for the six-month
        periods ended June 30, 2007 and 2006.  The results of operations for
        the three-month and six-month periods ended June 30, 2007 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, 2006, which includes
        consolidated financial statements and notes thereto for the years ended December
        31, 2006, 2005 and 2004.
 
 At
        June
        30, 2007, the Company has cash, cash equivalents and marketable securities
        totaling $25.7 million.  The Company believes that the combination of
        its cash, cash equivalents and marketable securities, together with funding
        pursuant to its collaboration with Merck & Co., Inc. (Note 9) and the
        availability of $37.5 million under its equity financing facility with Azimuth
        Opportunity Ltd. (Note 5), provide sufficient resources for the Company to
        satisfy its operating and capital requirements for more than twelve
        months.
 
 **2.      Marketable
        Securities**
 
 The
        Company has classified its marketable securities as available-for-sale and,
        accordingly, carries such securities at aggregate fair value.  At June
        30, 2007, all of the Company’s marketable securities consisted of United States
        government or agency securities.
 
 At
        June
        30, 2007, the aggregate fair value and amortized cost of the Company’s
        marketable securities were both $19,929,000.  Gross unrealized gains
        and losses were both $3,000, at June 30, 2007.  The gross unrealized
        losses of $3,000 pertain to four marketable securities with an aggregate
        fair
        value of $11,483,000, all of which have been in a continuous loss position
        for
        less than twelve months.
 
 At
        December 31, 2006, the aggregate fair value and amortized cost of the Company’s
        marketable securities were $8,076,000 and $8,073,000,
        respectively.  Gross unrealized gains and losses were $3,000 and $0
        respectively, at December 31, 2006.
 
 The
        Company’s marketable securities with unrealized losses are guaranteed by the
        U.S. government or an agency thereof.  The unrealized losses were
        caused by increased interest rates.  Because the Company has the
        intent and ability to hold the securities to maturity, which should result
        in a
        recovery of the fair value, the Company does not consider the investments
        to be
        other-than-temporarily impaired.
 
 Realized
        gains and losses on investment security transactions are reported on the
        specific-identification method.  There were no realized gains or
        losses on sales of marketable securities during the six months ended June
        30,
        2007.  Changes in market values resulted in a decrease in net
        unrealized gains of $3,000 for the six-month period ended June 30,
        2007.
 
 **3.      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 fair value of the awards was recognized as
        expense over the vesting period.
  4




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 fair value
        of 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 2007, the
        Company made awards in the aggregate amount of $1,403,000 to eleven officers;
        there were no awards made in 2006.  Total expense related to these
        plans amounted to $496,000 and $449,000 for the six-month periods ended June
        30,
        2007 and 2006, respectively.
 
 **4.      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 six months ended June 30, 2007 and 2006, options to
        purchase 7,737,833 and 6,907,899 shares of common stock, respectively, were
        not
        included in the computation of net loss per share, because the effect would
        be
        anti-dilutive.
 
 **5.      Equity
        Financing Facility**
 
 On
        February 14, 2007, the Company entered into an agreement with Azimuth
        Opportunity Ltd. (“Azimuth”) under which the Company may offer and sell, at the
        Company’s sole discretion, and Azimuth is committed to purchase, subject to the
        terms and conditions set forth in the agreement, up to $50 million of the
        Company’s common stock, or the number of shares which is one less than twenty
        percent of the issued and outstanding shares of the Company’s common stock as of
        the date of the agreement, whichever is fewer.  The per share purchase
        price for these shares will equal the daily volume weighted average price
        of the
        Company’s common stock on such date, less a discount ranging from
        3.5%  to 5.5%.  The term of the agreement is eighteen
        months.  Upon each sale of common stock to Azimuth, the Company will
        pay to Reedland Capital Partners a placement fee equal to 1.0% of the aggregate
        dollar amount received by the Company from such sale.
 
 Pursuant
        to the terms of this agreement, on March 26, 2007, the Company sold to Azimuth
        3,072,393 shares of its common stock at an aggregate purchase price of $12.5
        million.  The net proceeds from this transaction, after deducting
        issuance expenses, were approximately $12.3 million.  Following this
        transaction, $37.5 million remains available to the Company under this equity
        financing facility.
 
 The
        shares
        of common stock sold to Azimuth were registered under a shelf registration
        statement filed by the Company with the U.S. Securities and Exchange Commission
        (“SEC”) on January 30, 2007 and declared effective by the SEC on February 6,
        2007 which registered for issuance a total of $100 million of
        securities.  Following the sale of common stock to Azimuth, $87.5
        million of securities remain available for issuance under this shelf
        registration statement.
 
 **6.      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, 2007 and 2006 as follows:
 5




**Three
                  Months Ended**
                **June
                  30,**
              
              
              **Six
                  Months Ended**
                **June
                  30,*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Compensation
                  cost from:Stock
                  options
              
              $
              1,806
              
              
              $
              896
              
              
              $
              2,691
              
              
              $
              1,880Stock
                  and stock units
              
              
              91
              
              
              
              185
              
              
              
              480
              
              
              
              369Purchases
                  of common stock at a discount
              
              
              24
              
              
              
              15
              
              
              
              37
              
              
              
              23$
              1,921
              
              
              $
              1,096
              
              
              $
              3,208
              
              
              $
              2,272




During
        the
        six-month periods ended June 30, 2007 and 2006, 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,****2007**
                
                
                **2006****Shares**
                
                
                **Weighted-**
                  **Average**
                  **Grant-Date**
                  **Fair
                    Value**
                
                
                **Total**
                  **Fair**
                  **Value**
                
                
                **Shares**
                
                
                **Weighted-**
                  **Average**
                  **Grant-Date**
                  **Fair
                    Value**
                
                
                **Total**
                  **Fair**
                  **Value*****(Per
                    Share)***
                
                
                ***(in
                    000’s)***
                
                
                
                
                
                ***(Per
                    Share)***
                
                
                ***(in
                    000’s)***Stock
                    options
                
                
                2,035,220
                
                
                $
                3.28
                
                
                $
                6,501
                
                
                
                518,045
                
                
                $
                4.47
                
                
                $
                2,472Stock
                    and stock units
                
                
                134,000
                
                
                
                4.94
                
                
                
                662
                
                
                
                80,000
                
                
                
                6.43
                
                
                
                514Purchases
                    of common stock at a discount
                
                
                23,412
                
                
                
                1.57
                
                
                
                37
                
                
                
                17,971
                
                
                
                1.28
                
                
                
                232,192,632
                
                
                
                
                
                
                
                
                
                
                
                616,016
  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,
          2007 and 2006 were as follows:
  **Six
                      Months Ended**
                    **June
                      30,****2007**
                  
                  **2006**Expected
                      life of options granted (in years)
                  7.60
                  
                  7.12Expected
                      volatility
                  68.02%
                  
                  70.72%Risk
                      free interest rate
                  4.46%
                  
                  4.59%Expected
                      annual dividends
                  $0.00
                  
                  $0.00
  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 purchase.
 6




**7.      Litigation**
 
 **NF-κB
        Patent Infringement Litigation and Reexamination**
 
 *Lilly
        Litigation*
 
 In
        2002,
        the Company, together with Massachusetts Institute of Technology, The Whitehead
        Institute for Biomedical Research and Harvard University (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 certain claims (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 osteoporosis drug, Evista®,
        and Lilly’s septic
        shock drug, Xigris®, and seeking
        monetary damages from Lilly.
 
 This
        case
        was tried before a jury in the U.S. District Court from April 10, 2006 through
        April 28, 2006.  After deliberations, on May 4, 2006, the jury
        rendered a verdict in favor of the Plaintiffs by finding that
        the NF-κB
‘516 Claims asserted in the lawsuit are valid and infringed by Lilly through
        sales of Evista and Xigris in theUnited
        States.  One
        defense regarding validity was not submitted to the jury and was instead
        the
        subject of a bench trial, as addressed below.  The jury awarded
        damages to the Plaintiffs in the amount of approximately $65.2 million, based
        on
        the jury’s determination of a reasonable royalty rate of 2.3% to be paid by
        Lilly to the Plaintiffs based on U.S. sales of Evista and Xigris from the
        date
        of the filing of the lawsuit on June 25, 2002 through February 28,
        2006.  The jury awarded further damages on an ongoing basis, in
        amounts to be determined, equal to 2.3% of U.S. sales of Evista and Xigris
        through the year 2019, when the patent expires.  If the verdict is
        upheld, damages paid by Lilly will be applied first to reimburse the Company
        for
        any unreimbursed legal fees and expenses relating to the
        litigation.  The Company will receive 91% of the remainder, and the
        co-plaintiffs will receive 9%.
 
 A
        separate
        trial, or bench trial, was held in the
        U.S.
        District Court from August 7, 2006 through August 9, 2006 on certain defenses
        asserted by Lilly relating to the enforceability of the NF-κB ‘516 Claims and
        one defense related to the validity of these claims.On July
        6, 2007, the U.S. District Court issued its findings of fact and conclusions
        of
        law concerning the defenses asserted by Lilly at the bench trial.  In
        that ruling, the U.S. District Court found that the ‘516 Patent is valid and
        enforceable and that judgment may be entered for the Plaintiffs in accordance
        with the verdict of the jury and its findings of fact and conclusions of
        law.  Specifically, the U.S. District Court found that the four claims
        of the ‘516 Patent found infringed by the jury do not encompass unpatentable
        subject matter and the ‘516 Patent is not invalid due to inequitable conduct or
        prosecution laches.
 
 On
        July
        17, 2007, Lilly filed a motion to stay entry of the final judgment by the
        U.S. District Court pending re-examination of the ‘516 Patent or for settlement
        of form of the final judgment.  On July 26, 2007, the Plaintiffs filed
        their opposition to Lilly’s motion and the parties await the ruling of the U.S.
        District Court on this pending motion. Oral argument on this motion has been
        requested, but no date therefore has been set by the U.S. District
        Court.  Lilly also has the right to file additional motions
        challenging the jury’s verdict in this lawsuit, and, upon the entry of a final
        judgment by the U.S. District Court, to file an appeal of the jury’s verdict and
        other rulings by the U.S. District Court with the Court of Appeals for the
        Federal Circuit.
 
 *Amgen
        Litigation*
 
 On
        April
        20, 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®.  The
        Company filed a motion to dismiss this case in the Delaware Court on June
        14,
        2006, which was, after a hearing held on September 11, 2006, denied in an
        order
        dated September 13, 2006.
  7


On
      September 25, 2006, the Company filed a motion requesting the judge to certify
      the Delaware Court’s September 13, 2006 order denying our motion to dismiss for
      immediate appeal to the Court of Appeals for the Federal Circuit
      (“CAFC”).  On October 5, 2006, the Company also filed a renewed motion
      to dismiss the Amgen litigation for failure to name the institutional patentees
      as necessary and indispensable parties or, in the alternative, to transfer
      this
      case to the U.S. District Court for the District of Massachusetts (the
“Massachusetts Court”).





At
      a
      hearing on these motions held on November 3, 2006, the Delaware Court granted
      the Company’s motion certifying the Delaware Court’s September 13, 2006 order
      for immediate appeal and denied, as moot and without prejudice, the Company’s
      renewed motion to dismiss or transfer the case.  The Delaware Court
      also stayed discovery in the case pending a ruling on the Company’s petition for
      permission to appeal the Delaware Court’s September 13, 2006 order (the
“Petition“) to be filed with the CAFC.  The Company filed its Petition
      with the CAFC on November 16, 2006, which was denied by the CAFC on December
      29,
      2006.  As a result of the CAFC’s denial of the Company’s Petition, the
      temporary stay issued by the Delaware Court expired.





On
      February 20, 2007, a hearing was held before the Delaware Court on the Company’s
      renewed motion to dismiss the Amgen litigation, or in the alternative, to
      transfer this case to the Massachusetts Court.  The Delaware Court
      issued an order on March 27, 2007 denying the Company’s renewed motion to
      dismiss or alternatively to transfer this case.  In its Order, the
      Delaware Court found that the institutional patentees are necessary, but not
      indispensable, parties to the action, and ordered Amgen to join The Whitehead
      Institute for Biomedical Research as a party.  In addition, the
      Delaware Court ordered ARIAD to inform the Delaware Court, by April 13, 2007,
      whether Harvard University and Massachusetts Institute of Technology would
      voluntarily join the action.





On
      April
      13, 2007, Amgen filed an amended complaint for declaratory judgment of patent
      invalidity and noninfringement against the Company and The Whitehead Institute
      and requested leave from the Delaware Court to file a second amended complaint
      to add a claim for inequitable conduct.  On the same day, the Company
      together with the institutional patentees filed a lawsuit against Amgen and
      Wyeth alleging infringement of the ‘516 Patent based on activities related to
      Enbrel and Kineret, as well as the Company’s answer to the amended complaint,
      counter-claim and demand for jury trial.





On
      May 30,
      2007, the Company and the institutional patentees filed a motion seeking to
      amend their counterclaims to assert claims against Amgen for infringement of
      U.S. Patent Nos. 5,804,374 (the “374 Patent”) and 6,150,090 (the “090
      Patent”).  On June 4, 2007, Wyeth filed a motion seeking to sever it
      from the proceedings in the Delaware court relating to Amgen and to stay such
      proceedings against Wyeth. Oral argument on these two motions has been
      requested, but no date therefore has been set by the Delaware
      Court.





The
      scheduling order issued by the Delaware Court pursuant to Rule 16 of the Federal
      Rules of Civil Procedure was amended pursuant to agreement by the parties at
      a
      hearing held before the Delaware Court on June 13, 2007.  The
      technology tutorial was held before the Delaware Court on May 1, 2007 pursuant
      to the initial scheduling order.  The claim construction hearing in
      this case is scheduled to be heard on or around June 24, 2008, with trial
      scheduled to commence on November 3, 2008.





*Re-examination
      Proceedings in PTO*





On
      April
      4, 2005, Lilly filed a request in the United States Patent and Trademark Office
      (“PTO“) to reexamine the patentability of certain claims of the ‘516
      Patent.  An unrelated third party filed a similar request in the PTO
      on December 2, 2005 to reexamine the patentability of certain claims of the
‘516
      Patent.


8


These
      two
      requests have been granted and were merged by the PTO into a single
      reexamination proceeding.  The Company petitioned the PTO to vacate or
      stay the grant of these requests, but these petitions were
      rejected.  The Company (with the Plaintiffs) also filed a complaint in
      the U.S. District Court in the Eastern District of Virginia requesting that
      the
      court enjoin the PTO from continuing with the reexamination proceedings, along
      with a motion for summary judgment, both of which were denied by the Court
      in an
      order dated October 3, 2006 granting the PTO’s motion to dismiss this action.
      The Company has determined that it will not appeal this order.


The
        PTO
        issued its first office action on August 2, 2006.  In this first
        office action, 160 of the 203 claims of the ‘516 Patent were rejected by the
        PTO, including the claims asserted by the Company in the Lilly litigation
        and
        claims which are or may be asserted by the Company in the Amgen
        litigation.  In the Company’s response to the first office action,
        filed on November 9, 2006, the Company cancelled 8 of the 160 claims rejected
        by
        the PTO and advocated allowance of the remaining 152 rejected
        claims.  On July 6, 2007, the PTO issued a final office action,
        rejecting 141 claims of the ‘516 Patent, including the claims asserted by the
        Company in the Lilly and Amgen litigations.  On July 25, 2007, the
        Company filed a petition to withdraw the finality of July 6 office
        action.  At the present time, the Company can provide no assurance
        that the PTO will not invalidate some of the claims of the ‘516 Patent in the
        reexamination process, including claims which have been asserted against
        Lilly
        and/or Amgen, or that the Company will ultimately prevail in either of these
        litigations.
 
 The
        timing
        and ultimate outcome of the Lilly and Amgen litigations and the reexamination
        proceedings cannot be determined at this time, and, as a result, no
        determination can be made with respect to allowance of the claims of the
‘516
        Patent, nor can any final determination be made with respect to the validity
        or
        infringement of the claims of the ‘516 Patent in the Lilly litigation and the
        Amgen litigation, nor can the Company predict whether the damages awarded
        by the
        jury in the U.S. District Court in the Lilly litigation will be upheld,
        eliminated or limited.  Although the Company has prevailed in both the
        jury  and bench trials in the Lilly litigation, the damages the
        Company was awarded by the jury may be eliminated or limited by an adverse
        finding on post-trial motions, upon appeal, or in the event that the claims
        of
        the ‘516 Patent are invalidated by the PTO.
 
 **8.      Recently
        Issued Accounting Pronouncement**
 
 The
        Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No.
        48 (“FIN 48”), *Accounting for Uncertainties in Income Taxes*, on January
        1, 2007.  FIN 48 defines the threshold for recognizing the benefits of
        tax-return positions in the financial statements as “more-likely-than-not” to be
        sustained by the taxing authorities.  FIN 48 also requires explicit
        disclosure about a company’s uncertainties related to their income tax position,
        including a detailed roll-forward of tax benefits taken that do not qualify
        for
        financial statement recognition.  The adoption of FIN 48 did not have
        a material impact on the Company’s financial statements as of and for the period
        ended June 30, 2007.
 
 **9.      Subsequent
        Events**
 
 On
        July
        11, 2007, the Company entered into a Collaboration Agreement with Merck &
Co., Inc. (“Merck”) for the joint global development and commercialization of
        deforolimus, previously known as AP23573, the Company’s lead product candidate
        (the “Product”), for use in cancer (the “Collaboration Agreement”).
 
 Under
        the
        terms of the Collaboration Agreement, Merck and the Company anticipate
        conducting a broad-based development program in which clinical trials and
        biomarker studies will be conducted concurrently in multiple cancer indications,
        pursuant to a global development plan to be agreed upon by the Company and
        Merck.  Each party will fund fifty percent (50%) of the global
        development costs, except that Merck will fund one-hundred percent (100%)
        of any
        cost of development that is specific to development or commercialization
        of the
        Product 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 to be negotiated by the parties.
 9


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 book all sales, and each party will
      receive fifty percent (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 has paid to the Company in July
      2007
      an initial payment of $75 million, and has agreed to pay up to $452 million
      in
      milestone payments based on the successful development of the Product 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.





The
      Collaboration Agreement may be terminated (i) by either party based on
      insolvency or uncured breach by the other party, (ii) by Merck on or after
      the
      third anniversary of the effective date by providing at least twelve (12) months
      prior written notice, (iii) by Merck upon the failure of the Product to meet
      certain developmental and safety requirements, or (iv) after discussions between
      the parties, in the event Merck concludes it is not advisable to continue the
      development of deforolimus for use in a cancer indication.  Upon
      termination of the Collaboration Agreement, depending upon the circumstances,
      the parties have varying rights and obligations with respect to the continued
      development and commercialization of the Product and continuing royalty
      obligations.





The
      Company and Merck will establish a series of joint committees which will be
      responsible for the development and commercialization of the
      Product.  Under the committee structure, if the committees are unable
      to reach a decision, the matter is referred to senior executives of the
      parties.  Each party has ultimate decision making authority with
      respect to a specified limited set of issues, and for all other issues, the
      matter must be resolved by consensus of the parties.




10


**ITEM
        2. **MANAGEMENTS’
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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, including sarcomas, hormone refractory prostate cancer, endometrial
        cancer, brain cancer and leukemias and lymphomas.  We expect to
        initiate 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.  In 2005, we entered into a partnership
        with Medinol Ltd., a leading cardiovascular medical device company, to develop
        and commercialize stents and other medical devices to deliver deforolimus
        in
        order to prevent reblockage of injured vessels following stent-assisted
        angioplasty, a common non-surgical procedure for dilating or opening narrowed
        arteries.
 
 Our
        global
        collaboration with Merck for the 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, paid in July 2007, up to $452 million
        in milestone payments based on the successful development of delorolimus
        in
        multiple cancer indications and up to $200 million in milestone payments
        based
        on achievement of specified product sales thresholds.  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 income from the sales of deforolimus in the United States,
        and Merck will pay us a tiered double-digit royalty on sales of deforolimus
        outside the United States.
 
 Our
        second
        product candidate, AP24534, is in preclinical testing for the treatment of
        chronic myeloid leukemia.  We expect to file an Investigational New
        Drug application, or IND, for this product candidate with the United States
        Food
        and Drug Administration, or FDA, in the second half of 2007.
 
 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 U.S. 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.  We expect to incur substantial 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, 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, 2007, we had an accumulated deficit of $341.0 million and cash, cash
      equivalents and marketable securities of $25.7 million and working capital
      of
      $7.8 million.  In July 2007, we received an up-front payment of $75
      million from Merck and expect to receive in 2007 a milestone payment of $13.5
      million upon initiation of our Phase 3 clinical trial of deforolimus in patients
      with metastatic sarcoma pursuant to our collaboration agreement.  We
      also will share with Merck ongoing global development costs on a 50/50 basis
      except that Merck will fund 100% of the cost of development that is specific
      to
      development or commercialization of deforolimus outside the United
      States.  In addition, in February 2007, we obtained a commitment for
      up to $50 million in equity financing from Azimuth Opportunity Ltd. which is
      available for us to access, subject to certain terms and conditions, over the
      18-month term of the agreement.  As of June 30, 2007, $37.5 million
      remained available to us under this equity financing facility.





**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.  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.





Historically,
      we have relied primarily
      on the capital markets as our source of funding.  In October 2006, we
      raised approximately $14.3 million through an underwritten offering of our
      common stock.  We have also entered into a $50 million equity
      financing facility pursuant to which we raised approximately $12.5 million
      in
      March 2007.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 the carrying value of intangible
      assets, deferred compensation benefits for executives, and stock-based
      compensation.





At
      June
      30, 2007, we reported $4.2 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,
      2007 of intangible assets related to our NF-κB
      technology is $457,000.  If the patentability of our NF-κB
      patents, one of which is currently the subject of litigation and reexamination
      proceedings (see Part II, Item 1, Legal 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 to reflect fair value 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, 2007, we would have
      recognized an additional $143,000 in compensation expense in the six-month
      period ended June 30, 2007.





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 in the six-month
      period ended June 30, 2007 were 10% higher or lower on the grant date than
      used
      in the valuation of such stock options, our valuation of such awards as of
      the
      grant date would have increased or decreased by up to $368,000, $152,000, or
      $453,000, respectively.  This increase or decrease in valuation would
      be recognized on our statement of operations over the vesting period of such
      awards.





**Results
      of Operations**





***For
      the three months ended June 30, 2007 and 2006***





***Revenue***





We
      recognized license revenue of $189,000 in the three-month period ended June
      30,
      2007, compared to $229,000 in the corresponding period in 2006.  The
      decrease in license revenue was due primarily to the impact of the expected
      timing of receipt of future milestone payments pursuant to our agreement with
      Medinol Ltd., in accordance with our revenue recognition policy.  We
      expect that our license revenue will increase significantly during the remainder
      of 2007, reflecting the up-front and any milestone payments to be received
      from
      Merck pursuant to our collaboration agreement, which will be recognized as
      revenue on a systematic basis over the development period in accordance with
      our
      revenue recognition policy.




13


***Operating
      Expenses***





*Research
      and Development Expenses*





Research
      and development expenses increased by $396,000, or 4%, to $10.5 million in
      the
      three-month period ended June 30, 2007, compared to $10.1 million in the
      corresponding period in 2006.  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 the product
      candidate, 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 research
      and development efforts.  These costs apply to work on our clinical
      and preclinical candidates as well as our discovery research
      efforts.  These costs are not 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.





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
      research and development expenses for the three-month period ended June 30,
      2007, as compared to the corresponding period in 2006, were as
      follows:


14




**Three
                  months ended June 30,**
              
              **Increase/*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              **(decrease)**Direct
                  external expenses:Clinical
                  programs
              
              $
              2,625
              
              
              $
              3,238
              
              $
              (613
              )Preclinical
                  programs
              
              
              1,286
              
              
              
              243
              
              
              1,043All
                  other R&D expenses
              
              
              6,629
              
              
              
              6,663
              
              
              (34
              )$
              10,540
              
              
              $
              10,144
              
              $
              396




Deforolimus,
        our lead product candidate which is in Phase 2 clinical trials, was our only
        clinical program in 2006 and to date in 2007.  Direct external
        expenses for deforolimus decreased by $613,000 in the three-month period
        ended
        June 30, 2007, as compared to the corresponding period in 2006, due primarily
        to
        decreases in clinical trial costs of $746,000 offset in part by increased
        manufacturing related costs of $156,000.  The decrease in clinical
        trial costs is directly related to a decrease in number of patients on trial
        during the period driven by the successful conclusion of enrollment in several
        clinical trials in 2005 and 2006.  Through June 30, 2007, we have
        incurred a total of approximately $61.8 million in direct external expenses
        for
        deforolimus from the date it became a clinical program.  We expect
        that our direct external costs for deforolimus will increase during the
        remainder of 2007 as we initiate enrollment in our initial Phase 3 clinical
        trial for this product candidate and expand other clinical and non-clinical
        development activities with Merck.  This increase is expected to be
        more than offset by reimbursement from Merck pursuant to our collaboration
        agreement for its share of the development costs of deforolimus.
 
 Our
        preclinical programs are focused on the development of additional novel,
        small
        molecule, molecularly targeted therapies including kinase inhibitors targeting
        cancer-related processes such as cell survival, metastasis and
        angiogenesis.  Our kinase inhibitor program includes our second
        product candidate, AP24534.  Direct external expenses for preclinical
        programs will increase or decrease over time depending on the status and
        number
        of programs in this stage of development and the mix between external and
        internal efforts applied to such programs.  Direct external expenses
        for preclinical programs increased by $1.0 million in the three-month period
        ended June 30, 2007, as compared to the corresponding period in 2006, due
        primarily to the cost of certain toxicology and contract manufacturing studies
        we are conducting for AP24534 in 2007.  We expect that our direct
        external expenses for preclinical programs will increase during the remainder
        of
        2007, as resources allow, as we prepare to file an IND for AP24534 in the
        second
        half of 2007 and continue to move our other preclinical programs forward
        in
        development.
 
 All
        other
        R&D expenses decreased by $34,000 in the three-month period ended June 30,
        2007 as compared to the corresponding period in 2006 due to a decrease in
        depreciation and amortization expense of $559,000 due to an increase in the
        useful life of leasehold improvements upon the extension of the term of the
        lease of our lab and office facility, and a decrease in laboratory supplies
        and
        services of $100,000 as we shifted later stage preclinical testing from internal
        studies to external contract laboratories, offset by an increase in personnel
        expenses primarily from an increase in stock-based compensation expense of
        $608,000 resulting from grants of stock options in the six-month period ended
        June 30, 2007.  We expect that all other R&D expenses will
        increase during the remainder of 2007 to support our clinical and preclinical
        development programs.
 
 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
        Part II, Item 1A of this Quarterly Report on Form 10-Q and under the heading
        “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
        December 31, 2006 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.
 15




*General
        and Administrative Expenses*
 
 General
        and administrative expenses decreased by $633,000, or 8%, to $6.9 million
        in the
        three-month period ended June 30, 2007, compared to $7.5 million in the
        corresponding period in 2006.  The decrease in expenses was due
        primarily to decreases in costs related to business and commercial development
        initiatives completed in 2006 of $643,000, and decreases in professional
        services of $241,000, including legal fees associated with our patent
        litigation, offset in part by an increase in personnel expenses related to
        stock-based compensation expense of $254,000 resulting from grants of stock
        options in the six-month period ended June 30, 2007.  We expect that
        our general and administrative expenses will remain at approximately the
        current
        level for the remainder of 2007 as necessary to support our research and
        development programs.
 
 We
        expect
        that our operating expenses in total will increase during the remainder of
        2007
        for the reasons described above.  Such increases are expected to be
        largely offset by reimbursement from Merck for its share of the development
        costs of deforolimus.  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, preclinical
        studies and product manufacturing for AP24534 , and the status of our patent
        infringement litigation with Lilly and Amgen.
 
 ***Interest
        Income/Expense***
 
 Interest
        income decreased to $341,000 in the three-month period ended June 30, 2007
        from
        $574,000 in the corresponding period in 2006, as a result of a lower average
        balance of funds invested in 2007, offset in part by higher interest yields
        from
        our securities.
 
 Interest
        expense decreased to $97,000 in the three-month period ended June 30, 2007
        from
        $124,000 in the corresponding period in 2006, as a result of lower average
        loan
        balances in 2007, offset, in part, by higher interest rates on our long-term
        debt.
 
 ***Operating
        Results***
 
 We
        reported a loss from operations of $17.2 million in the three-month period
        ended
        June 30, 2007 compared to a loss from operations of $17.4 million in the
        corresponding period in 2006, a decrease in loss of $197,000, or
        1%.  We expect that our loss from operations will remain at
        approximately the current level during the reminder of 2007 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 research and development and the
        development timelines for our product candidates.
 16


We
      reported a net loss of $17.0 million in the three-month period ended June 30,
      2007, compared to a net loss of $17.0 million in the corresponding period in
      2006, an increase in net loss of $9,000 or less than 1%, and a net loss per
      share of $0.25 and $0.27, respectively.





**Results
      of Operations**





***For
      the six months ended June 30, 2007 and 2006***





***Revenue***





We
      recognized license revenue of $379,000 in the six-month period ended June 30,
      2007, compared to $458,000 in the corresponding period in 2006.  The
      decrease in license revenue was due primarily to the impact of the expected
      timing of receipt of future milestone payments pursuant to our agreement with
      Medinol Ltd., in accordance with our revenue recognition policy.





***Operating
      Expenses***





*Research
      and Development Expenses*





Research
      and development expenses decreased by $255,000, or 1%, to $21.6 million in
      the
      six-month period ended June 30, 2007, compared to $21.8 million in the
      corresponding period in 2006.





Our
      research and development expenses for the six-month period ended June 30, 2007,
      as compared to the corresponding period in 2006, were as follows:




**Three
                  months ended June 30,**
              
              **Increase/*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              **(decrease)**Direct
                  external expenses:Clinical
                  programs
              
              $
              5,795
              
              
              $
              7,424
              
              $
              (1,629
              )Preclinical
                  programs
              
              
              2,836
              
              
              
              377
              
              
              2,459All
                  other R&D expenses
              
              
              12,932
              
              
              
              14,017
              
              
              (1,085
              )$
              21,563
              
              
              $
              21,818
              
              $
              (255
              )




Direct
        external expenses for deforolimus, our only clinical program in 2006 and
        to date
        in 2007, decreased by $1.6 million in the six-month period ended June 30,
        2007,
        as compared to the corresponding period in 2006, due primarily to decreases
        in
        manufacturing related costs of $761,000 and clinical trial costs of
        $997,000.  The decrease in manufacturing related costs was due to the
        timing of production runs of deforolimus.  The decrease in clinical
        trial costs is directly related to a decrease in number of patients on trial
        during the period driven by the successful conclusion of enrollment in several
        clinical trials in 2005 and 2006.
 
 Direct
        external expenses for preclinical programs increased by $2.5 million in the
        six-month period ended June 30, 2007, as compared to the corresponding period
        in
        2006 due primarily to the costs of certain toxicology and contract manufacturing
        studies we are conducting for AP24534 in 2007.
 
 All
        other
        R&D expenses decreased by $1.1 million in the six-month period ended June
        30, 2007 as compared to the corresponding period in 2006 due to a decrease
        in
        depreciation and amortization expense of $1.1 million due to an increase
        in the
        useful life of leasehold improvements upon the extension of the term of the
        lease of our lab and office facility, and a decrease in laboratory supplies
        and
        services of $292,000 as we shifted later stage preclinical testing from internal
        studies to external contract laboratories, offset in part by an increase
        in
        personnel expenses related to stock-based compensation expense of $355,000
        resulting from grants of stock options in the six-month period ended June
        30,
        2007.
  17


*General
      and Administrative Expenses*





General
      and administrative expenses decreased by $686,000, or 6%, to $11.3 million
      in
      the six-month period ended June 30, 2007, compared to $12.0 million in the
      corresponding period in 2006.  The decrease in expenses was due
      primarily to decreases in professional services of $520,000, primarily in legal
      fees associated with our patent litigation, costs related to business and
      commercial development initiatives completed in 2006 of $426,000, and
      miscellaneous decreases in other expenses, offset in part by an increase in
      personnel expenses related to stock-based compensation expense of $655,000
      resulting from grants of stock options and restricted stock and stock units
      in
      the six-month period ended June 30, 2007.





***Interest
      Income/Expense***





Interest
      income decreased to $731,000 in the six-month period ended June 30, 2007 from
      $1.2 million in the corresponding period in 2006, as a result of a lower average
      balance of funds invested in 2007, offset in part by higher interest yields
      from
      our securities.





Interest
      expense decreased to $202,000 in the six-month period ended June 30, 2007 from
      $246,000 in the corresponding period in 2006, as a result of lower average
      loan
      balances in 2007, offset, in part, by higher interest rates on our long-term
      debt.





***Operating
      Results***





We
      reported a loss from operations of $32.5 million in the six-month period ended
      June 30, 2007 compared to a loss from operations of $33.3 million in the
      corresponding period in 2006, a decrease in loss of $862,000, or
      3%.  Such decrease was due primarily to the decrease in operating
      expenses noted above.





We
      reported a net loss of $32.0 million in the six-month period ended June 30,
      2007, compared to a net loss of $32.4 million in the corresponding period in
      2006, a decrease in net loss of $398,000 or 1%, and a net loss per share of
      $0.48 and $0.52, respectively.





**Liquidity
      and Capital Resources**





We
      have
      financed our operations and investments 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.  Our
      collaboration with Merck for the development and commercialization of
      deforolimus will result in additional funding in the form of up-front and
      milestone payments, as well as the sharing of development costs for
      deforolimus.  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.


18


***Sources
      of Funds***





For
      the
      three months and six months ended June 30, 2007 and 2006, our sources of funds
      were as follows:




**Three
                  Months Ended**
                **June
                  30,**
              
              
              **Six
                  Months Ended**
                **June
                  30,*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Maturities
                  of marketable securities,net
                  of purchases
              
              $
              (4,530
              )
              
              $
              16,024
              
              
              $
              (11,461
              )
              
              $
              27,215Proceeds
                  from issuance of common stock,net
                  of issuance costs
              
              
              
              
              
              
              
              
              
              
              12,300Proceeds
                  from issuance of common stockpursuant to stock option and purchase
                  plans
              
              
              873
              
              
              
              363
              
              
              
              1,120
              
              
              
              1,349$
              (3,657
              )
              
              $
              16,387
              
              
              $
              1,959
              
              
              $
              28,
                  564




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, 2007
        and 2006, proceeds from maturities of marketable securities, purchases of
        marketable securities and the resulting net amount retained as cash for payment
        of obligations or reinvested was as follows:
  **Three
                    Months Ended**
                  **June
                    30,**
                
                
                **Six
                    Months Ended**
                  **June
                    30,*****In
                    thousands***
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Proceeds
                    from sales and maturities of marketable securities
                
                $
                15,236
                
                
                $
                30,922
                
                
                $
                23,343
                
                
                $
                53,753Purchases
                    of marketable securities
                
                
                (19,766
                )
                
                
                (14,898
                )
                
                
                (34,804
                )
                
                
                (26,538
                )$
                (4,530
                )
                
                $
                16,024
                
                
                $
                (11,461
                )
                
                $
                27,
                    215




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.
 
 We
        have
        filed shelf registration statements with the SEC, from time to time, to register
        shares of our common stock 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 registering for issuance,
        from time to time, $100 million of common stock, preferred stock, various
        series
        of debt securities and/or warrants to purchase any of such securities, 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.  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%.  The term of the agreement is
        eighteen months.  Upon each sale of common stock to Azimuth, we will
        pay to Reedland Capital Partners a placement fee equal to 1.0% of the aggregate
        dollar amount received by us from such sale.
 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.  Following this transaction, 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.


In
        March
        2003, we entered into a term loan agreement with a bank for $7.5 million,
        the
        proceeds of which were used to repay existing long-term debt, to pay off
        our
        obligations under certain operating leases for equipment and for general
        working
        capital purposes.  The loan is secured by all of our assets excluding
        intellectual property, which we have agreed not to pledge to any other party
        without the consent of the bank.  The loan carries interest at the
        bank’s prime rate or LIBOR plus 2%.  We amended the terms of the loan
        on December 31, 2003 and December 31, 2004, receiving another $2.0 million
        and
        $3.0 million, respectively, in loan proceeds.  The amended loan is
        payable in monthly installments of $160,000 plus interest beginning in January
        2005 with a final payment of $3.5 million due in March 2008.  The
        terms of the loan require us to maintain at least $13.0 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 balance outstanding as of June 30, 2007 was
        $4,775,000.
 
 ***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, 2007
        and 2006, our uses of funds were as follows:
  **Three
                    Months Ended**
                  **June
                    30,**
                
                
                **Six
                    Months Ended**
                  **June
                    30,*****In
                    thousands***
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Net
                    cash used in operating activities
                
                $
                13,730
                
                
                $
                13,426
                
                
                $
                26,367
                
                
                $
                27,371Repayment
                    of borrowings
                
                
                480
                
                
                
                480
                
                
                
                960
                
                
                
                960Investment
                    in intangible assets
                
                
                99
                
                
                
                119
                
                
                
                299
                
                
                
                327Investment
                    in property and equipment
                
                
                214
                
                
                
                506
                
                
                
                294
                
                
                
                860$
                14,523
                
                
                $
                14,531
                
                
                $
                27,920
                
                
                $
                29,518




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, 2007 decreased by $398,000,
        as
        compared to the corresponding period in 2006, due primarily to decreased
        operating expenses.  As a result primarily of increases in non-cash
        expenses, particularly stock-based compensation expense, our net cash used
        in
        operating activities decreased by $1.0 million for the six months ended June
        30,
        2007, as compared with the corresponding period in 2006.  As noted
        above, we expect that our net loss will increase in the remainder of 2007
        due to
        continued progress in development of our product candidates.  However,
        the $75 million up-front payment received from Merck and any milestone payments
        to be recognized pursuant to our collaboration will be included in cash from
        operating activities and are expected to result in positive cash flow from
        operating activities for 2007.  We also expect that our investments in
        intangible assets and property and equipment, consisting of our intellectual
        property, will increase in support of our product development
        activities.
 20


***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, 2007:
  **Payments
                    Due By Period*****In
                    thousands***
                
                **Total**
                
                
                **In**
                  **2007**
                
                
                **2008**
                  **through**
                  **2010**
                
                
                **2011**
                  **through**
                  **2012**
                
                
                **After**
                  **2012**Long-term
                    debt
                
                $
                4,775
                
                
                $
                960
                
                
                $
                3,815
                
                
                $
                —
                
                
                $
                —Operating
                    leases, net of sub-leases
                
                
                10,496
                
                
                
                783
                
                
                
                6,358
                
                
                
                3,355
                
                
                
                —Employment
                    agreements
                
                
                9,576
                
                
                
                2,031
                
                
                
                7,545
                
                
                
                —
                
                
                
                —Other
                    long-term obligations
                
                
                4,293
                
                
                
                571
                
                
                
                3,037
                
                
                
                290
                
                
                
                395Total
                    fixed contractual obligations
                
                $
                29,140
                
                
                $
                4,345
                
                
                $
                20,755
                
                
                $
                3,645
                
                
                $
                395




Long-term
        debt consists of scheduled principal payments on such debt.  Interest
        on our long-term debt is based on variable interest rates.  Assuming a
        constant interest rate of 7.4%, our average interest rate on our debt at
        June
        30, 2007, over the remaining term of the debt, our interest expense would
        total
        approximately $159,000 for the remainder of 2007 and $66,000 in
        2008.
 
 Other
        long-term obligations are comprised primarily of 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.
 
 ***Liquidity***
 
 At
        June
        30, 2007, we had cash, cash equivalents and marketable securities totaling
        $25.7
        million and working capital of $7.8 million, compared to cash, cash equivalents
        and marketable securities totaling $39.8 million and working capital of $25.9
        million at December 31, 2006.  In July 2007, we entered into a
        collaboration agreement with Merck for the development and commercialization
        of
        deforolimus and received an up-front payment from Merck of $75
        million.  On a pro forma basis including the impact of this up-front
        payment, at June 30, 2007, we had cash, cash equivalents and marketable
        securities of $100.7 million and working capital of $82.5 million.  We
        are eligible to receive up to an additional $652 million in development,
        regulatory and commercial milestone payments as well as development cost-sharing
        in connection with this collaboration.
 
 We
        will
        require substantial additional funding for our research and development
        programs, including pre-clinical 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 securities of the Company  through public or
        private offerings as market conditions permit or to Azimuth under the equity
        financing facility, (2) enter into partnerships for our product candidates,
        and/or (3) license our cell-signaling technologies, including our ARGENT
        and
        NF-kB
        intellectual property portfolios.
  21


Taking
      into account the impact of the Merck collaboration, we believe that our cash,
      cash equivalents and marketable securities, should be sufficient to satisfy
      our
      capital and operating requirements for more than twelve months.However, 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 progress of our preclinical programs, the
      potential acquisition of or other strategic transaction regarding the minority
      stockholders’ interests in AGTI, and developments in our NF-kB litigation,
      among
      other factors.  These variables could result in earlier depletion 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 expect to need additional capital in order to pursue our business
      plan, which we will seek to raise through the sale of additional securities,
      including the possible sale of common stock to Azimuth under our equity
      financing facility, collaborative partnerships, and possible additional credit
      arrangements.  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*:  Except for the historical information contained in this
      Quarterly Report on Form 10-Q, some of the matters discussed herein are
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995.  Such statements 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 in
      connection with any discussion of future operating or financial
      performance.  Such statements are based on management’s current
      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 partners, including
      Merck & Co., Inc. and Medinol Ltd., 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, key employees, markets, economic
      conditions, prices, reimbursement rates, competition and other factors detailed
      under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on
      Form 10-Q, under the heading “Risk Factors” in Part I, Item 1A of our Annual
      Report on Form 10-K for the year ended December 31, 2006 and in  the
      Company's 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.  The Company does 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 the
      Company's 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, 2007, 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, 2007, we would have incurred approximately $143,000 of
      additional compensation expense in the three-month period ended June 30,
      2007.





At
      June
      30, 2007, we had $4.8 million outstanding under a bank term note which bears
      interest at prime or, alternatively, LIBOR + 2%.  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 (73.6 basis points),
      we
      would incur approximately $13,000 of additional interest expense per year based
      on expected balances over the next nine 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 in or additions to the risk factors included in our
      Annual Report on Form 10-K for the fiscal year ended December 31, 2006, other
      than as set forth below:





The
      following risk factor is added to the risk factors included in our Annual Report
      on Form 10-K for the fiscal year ended December 31,
      2006**:**





***We
      have recently entered into a collaboration with Merck & Co., Inc. relating
      to the development and commercialization of deforolimus.  If this
      collaboration is unsuccessful, our ability to commercialize deforolimus on
      a
      timely basis, or at all, could be affected and our business could be materially
      harmed.***





On
      July
      11, 2007, we entered into a collaboration agreement with Merck & Co., Inc.,
      or Merck, for the joint global development and commercialization of deforolimus,
      our lead product candidate, for use in cancer.  We do not have a
      history of working together with Merck and cannot predict the success of this
      collaboration.  The collaboration involves a complex allocation of
      responsibilities, costs and benefits and provides for milestone payments to
      us
      upon the achievement of specified clinical, regulatory and sales
      milestones.





With
      respect to responsibilities and control over decisions, we and Merck will
      establish a series of joint committees which will be responsible for the
      development and commercialization of deforolimus.  Under the committee
      structure, if the committees are unable to reach a decision, the matter is
      referred to senior executives of the parties.  Each party has ultimate
      decision making authority with respect to a specified limited set of issues,
      and
      for all other issues, the matter must be resolved by consensus of the
      parties.  Accordingly, Merck’s failure to devote sufficient resources
      to the development and commercialization of deforolimus or the failure of the
      parties to reach consensus on development or commercialization activities may
      delay its clinical development, which could lead to the delay in payment of
      clinical and regulatory milestones under the collaboration agreement and may
      delay commercialization of deforolimus.





In
      addition, 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.  Furthermore, the
      collaboration agreement may be terminated by Merck (i) based on an uncured
      breach by us, (ii) on or after the third anniversary of the effective date
      of
      the agreement by providing at least 12 months prior written notice, (iii) upon
      the failure of deforolimus to meet certain developmental and safety
      requirements, or (iv) after discussions between the parties, in the event Merck
      concludes that it is not advisable to continue the development of deforolimus
      for use in a cancer indication.  Any loss of Merck as a collaborator
      in the development or commercialization of deforolimus, any dispute over the
      terms of, or decisions regarding, the collaboration, or any other adverse
      developments in our relationship with Merck could result in our inability to
      fully develop and/or commercialize deforolimus, or at all, could materially
      harm
      our business and could accelerate our need for additional capital.





The
      following risk factors replace and supersede the corresponding risk factors
      set
      forth in our Annual Report on Form 10-K for the fiscal year ended December
      31,
      2006:




25


***We
      have only one product candidate in clinical trials, deforolimus, and we and
      our
      partners may never succeed in developing marketable products or generating
      product revenues.***





We
      are a
      biopharmaceutical company focused on the discovery and development of drugs
      to
      provide therapeutic intervention in treating human diseases at the cellular
      level.  As with all scientific endeavors, we face much trial and
      error, and we may fail at numerous stages along the way, which would inhibit
      us
      from successfully developing, manufacturing and marketing our drug
      candidates.





Our
      lead
      product candidate, deforolimus, is currently being developed in collaboration
      with Merck for cancer indications and by our partner, Medinol, for use in stents
      or other medical devices to reduce reblockage of injured arteries following
      stent-assisted angioplasty.  Deforolimus is currently in Phase 1b and
      2 clinical trials for certain cancers, and we expect to initiate patient
      enrollment in the initial Phase 3 clinical trial of deforolimus in patients
      with
      metastatic sarcoma in the third quarter of 2007.  We do not currently
      have any products on the market and have no product
      revenues.  Therefore, our near-term success is substantially dependent
      on our ability to work in collaboration with Merck to obtain marketing approval
      for deforolimus for cancer indications and the ability of our partner, Medinol,
      to obtain marketing approval for its stents delivering deforolimus.





We
      have
      not submitted any new drug applications for deforolimus or any other product
      candidate to the FDA or foreign regulatory authorities for marketing
      approval.  Factors which could affect our ability to obtain regulatory
      approval and to achieve market acceptance and gain market share for deforolimus
      and any other product candidates include, among other factors, product
      formulation, dose, dosage regimen, the ability to obtain timely and sufficient
      patient enrollment in clinical trials, the risk of occurrence of adverse side
      effects in patients participating in clinical trials, the ability to
      manufacture, directly or indirectly, sufficient and cost-effective quantities
      of
      our product candidates, the ability to fund commercial development and to build
      or access a sales force in the marketplace, the ability to successfully
      differentiate our product candidates from competitive product(s) and to sell,
      market and distribute, directly or indirectly, such product
      candidates.  Although we have entered into a collaboration agreement
      with Merck for the joint global development and commercialization of
      deforolimus, we do not currently have any partners to assist in developing
      and
      commercializing our other cancer product candidates.  We will depend
      heavily on Merck for the successful development and commercialization of
      deforolimus, particularly with respect to the commercialization of deforolimus
      outside of the United States.  We would expect to be dependent upon
      other partners, if we enter into arrangements with one or more of them, to
      successfully develop and commercialize our other cancer product
      candidates.  There can be no assurance that our collaboration with
      Merck will be successful or that we will be able to secure any other partners
      on
      terms favorable to us, or at all.





We
      and
      Medinol have limited experience in designing, conducting and managing the
      clinical trials necessary to obtain regulatory approval of stents or other
      medical devices that deliver small-molecule drugs.  We are dependent
      upon the success of Medinol and any future medical device partners to develop,
      manufacture and market stents or other medical devices to deliver deforolimus
      to
      reduce reblockage of injured arteries following stent-assisted
      angioplasty.  To date, we have entered into only one such agreement,
      with Medinol.  If Medinol is not successful and/or if we are not able
      to enter into agreements with additional medical device companies experienced
      in
      the development, manufacture, and marketing of medical devices to deliver
      deforolimus, we will not be able to generate revenues from the marketing of
      stents or other medical devices that deliver deforolimus.





We
      do not
      expect to have any products on the market before 2010, and, ultimately, we
      and
      our partners may not have any products on the market for several years, if
      at
      all.  We and our partners may not succeed in developing or
      commercializing any products which will generate product revenues for our
      company.  If we and our partners are not successful in developing or
      marketing deforolimus or other product candidates, we will not be
      profitable.




26


***Insufficient
      funding may jeopardize our research and development programs and may require
      us
      to reduce our operations or prevent commercialization of our products and
      technologies.***


We
        have
        funded our operations to date through sales of equity securities, debt and,
        to a
        limited extent, operating revenues.  Most of our operating revenue to
        date has been generated through previous collaborative research and development
        agreements and existing licenses.  In July 2007, we entered into a
        collaboration agreement with Merck  for the global development and
        commercialization of deforolimus, which provides substantial funding for
        the
        remaining development of deforolimus.  However, we will require
        substantial additional funding for our other research and development programs
        (including pre-clinical development and clinical trials), for the pursuit
        of
        regulatory approvals and for establishing or accessing manufacturing, marketing
        and sales capabilities related to other product candidates, and for other
        operating expenses (including intellectual property protection and
        enforcement).  We may from time to time access funding from our equity
        financing facility with Azimuth Opportunity Ltd., under which there remains
        $37.5 million available to us.  We may also from time to time seek
        additional funding from other product-based collaborations, technology
        licensing, and public or private financings.  However, such additional
        funding may not be available on terms acceptable to us, or at
        all.  Accordingly, we may not be able to secure the significant
        funding which is required to maintain our operations or continue to fund
        current
        or future research and development programs at their current levels or at
        levels
        that may be required in the future.  If we cannot secure adequate
        financing, we may be required to reduce our operations, to delay, scale back,
        eliminate or terminate clinical trials for one or more of our other research
        and
        development programs, or to enter into licenses, settlements or other
        arrangements with third parties on terms that may be unfavorable to us to
        purchase, commercialize or otherwise obtain rights in our products, technologies
        or intellectual property.
 
 ***We
        have limited manufacturing experience and are dependent upon the ability
        of
        third parties, including Merck, to manufacture our product candidates, which
        raises uncertainty as to our ability to develop and commercialize our product
        candidates.***
 
 Under
        our
        collaboration with Merck, we are responsible for providing the active
        pharmaceutical ingredient, or API, used in deforolimus and Merck will be
        responsible for the formulation of the finished product,
        deforolimus.  We have no experience in manufacturing any of our
        product candidates on a large scale and have contracted and expect to continue
        to contract with third party manufacturers, including Merck, to provide material
        for clinical trials and potential commercial launch, and to assist in the
        development and optimization of our manufacturing processes and
        methods.  Our ability to conduct clinical trials and commercialize our
        product candidates will depend on the ability of such third parties to
        manufacture our products on a large scale at a competitive cost and in
        accordance with current good manufacturing practices, or cGMPs, and other
        regulatory requirements.  If we are not able to obtain contract
        manufacturing on commercially reasonable terms, obtain or develop the necessary
        materials and technologies for manufacturing, or obtain intellectual property
        rights necessary for manufacturing, or if our contract manufacturers fail
        to
        provide us with the quantities and quality of the products we require in
        a
        timely manner, we may not be able to conduct or complete clinical trials
        or
        commercialize our product candidates, including deforolimus.  There
        can be no assurance that we will be able to obtain such requisite terms,
        materials, technologies and intellectual property necessary to successfully
        manufacture our product candidates for clinical trials or
        commercialization.
 
 ***If
        we are unable to establish sales, marketing and distribution capabilities
        or to
        enter into agreements with third parties to do so, we may be unable to
        successfully market and sell any products.***
 
 Pursuant
        to our collaboration with Merck, we will distribute and sell deforolimus
        for all
        cancer indications in the United States, and Merck will distribute and sell
        deforolimus outside the United States.  We are currently establishing
        a commercial oncology organization, but we have no experience in marketing
        or
        selling any products.  Accordingly, we may be unable to successfully,
        directly or indirectly, sell deforolimus or any other product candidates
        that we
        obtain marketing approval to sell.  If we are unable to effectively
        sell our products, our ability to generate revenues will be materially adversely
        affected.  We may not be able to hire, in a timely manner, the
        qualified sales and marketing personnel we need, if at all. In addition,
        we may
        not be able to enter into any marketing or distribution agreements on acceptable
        terms, if at all.  If we cannot establish sales, marketing and
        distribution capabilities as we intend, either by developing our own
        capabilities or entering into agreements with third parties, sales of any
        future
        products, including deforolimus, may be harmed.
 27


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





Our
      Annual
      Meeting of stockholders was held on June 19, 2007.  Of 68,676,033
      shares of common stock issued and outstanding and eligible to vote as of the
      record date of April 24, 2007, a quorum of 54,707,777 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 1 Directors of the
              Company.




**Voted
                  For**
              
              **Withheld
                  Authority**Athanase
                Lavidas, Ph.D.
              51,552,605
              
              3,151,172Peter
                J. Nelson
              51,551,764
              
              3,152,013




After
                  the meeting, Jay R. LaMarche, Sandford D. Smith and Elizabeth H.
                  S. Wyatt
                  continued to serve as our Class 2 Directors for terms which expire
                  in 2008
                  and until their successors are duly elected and qualified, and
                  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.
  (b)
                  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, 2007.  The voting results
                    were 54,085,537 votes for, 563,678 votes against, and 54,562
                    votes
                    abstaining.




28


**ITEM
      6. EXHIBITS**


10.1
              Employment
                  Agreement dated May 29, 2007 between the Company and Pierre F.
                  Dodion,
                  M.D.
 
 10.2
              Amendments
                  to Employment Agreements.
 
 10.3
              Executive
                  Compensation Arrangements.
 
 10.4
              Agreement
                  dated June 19, 2007 by and between ARIAD Pharmaceuticals, Inc.
                  and Harvey
                  J. Berger, M.D. and Jay R. LaMarche (Filed as Exhibit 10.1 to the
                  Company’s Current Report on Form 8-K filed with the SEC on June 21, 2007
                  (File No. 0-21696) and incorporated herein by
                  reference).  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.
 
 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.
  29




**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 Officer




By:
            /s/
                Edward M. FitzgeraldEdward
                M. FitzgeraldDate:  August
                9, 2007
            
            Senior
                Vice President,
              Finance
                  and Corporate Operations, and
                Chief
                    Financial Officer
                  (Principal
                      financial officer
                    and
                        chief accounting officer)






30




**EXHIBIT
        INDEX**
 
 **Exhibit                                                                Title**
 **No.**
 10.1
              Employment
                  Agreement dated May 29, 2007 between the Company and Pierre F.
                  Dodion,
                  M.D.
 
 10.2
              Amendments
                  to Employment Agreements.
 
 10.3
              Executive
                  Compensation Arrangements.
 
 10.4
              Agreement
                  dated June 19, 2007 by and between ARIAD Pharmaceuticals, Inc.
                  and Harvey
                  J. Berger, M.D. and Jay R. LaMarche (Filed as Exhibit 10.1 to the
                  Company’s Current Report on Form 8-K filed with the SEC on June 21, 2007
                  (File No. 0-21696) and incorporated herein by
                  reference).
 
 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.










31