**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 September 30, 2007**





OR





o   TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      transition period from _____ to _____





Commission
      File Number:  0-21696





**ARIAD
      Pharmaceuticals, Inc.**


(Exact
      name of Registrant as specified in its charter)




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





**26
      Landsdowne Street, Cambridge, Massachusetts 02139**


(Address
      of principal executive offices) (Zip Code)





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





Former
      Name, Former Address and Former Fiscal Year,


If
      Changed
      Since Last Report:  Not Applicable





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




**Yes  x**
            **No  o**




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 o**
            **Accelerated
                filer x**
            **Non-accelerated
                filer o**








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




**Yes  o**
            **No  x**




The
      number
      of shares of the Registrant’s common stock outstanding as of October 31, 2007
      was 69,238,890.









**ARIAD
        PHARMACEUTICALS, INC.**
 
 **TABLE
        OF CONTENTS**
  **PART
                    I.**
                **FINANCIAL
                    INFORMATION**
                1**ITEM
                    1.**
                **UNAUDITED
                    FINANCIAL STATEMENTS**
                1Condensed
                    Consolidated Balance Sheets – September 30, 2007
                    and December 31, 2006
                1Condensed
                    Consolidated Statements of Operations for the
                    Three Months and Nine Months Ended September 30, 2007 and
                    2006
                2Condensed
                    Consolidated Statements of Cash Flows for
                    theNine
                    Months Ended September 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**
                12**ITEM
                    3.**
                **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES
                    ABOUT****MARKET
                    RISK**
                24**ITEM
                    4.**
                **CONTROLS
                    AND PROCEDURES**
                24**PART
                    II.**
                **OTHER
                    INFORMATION**
                26**ITEM
                    1.**
                **LEGAL
                    PROCEEDINGS**
                26**ITEM
                    6.**
                **EXHIBITS**
                27**SIGNATURES**
                28**EXHIBIT
                    INDEX**
                29









**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***
                
                **September
                    30,**
                  **2007**
                
                
                **December
                    31,**
                  **2006****(Unaudited)****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                68,875
                
                
                $
                31,728Marketable
                    securities
                
                
                17,235
                
                
                
                8,076Amounts
                    due under collaboration agreement
                
                
                3,421
                
                
                
                -Inventory
                    and other current assets
                
                
                2,438
                
                
                
                1,839Total
                    current assets
                
                
                91,969
                
                
                
                41,643Property
                    and equipment:Leasehold
                    improvements
                
                
                18,172
                
                
                
                18,126Equipment
                    and furniture
                
                
                11,356
                
                
                
                10,677Total
                
                
                29,528
                
                
                
                28,803Less
                    accumulated depreciation and amortization
                
                
                (24,837
                )
                
                
                (23,721
                )Property
                    and equipment, net
                
                
                4,691
                
                
                
                5,082Intangible
                    and other assets, net
                
                
                4,044
                
                
                
                4,318Total
                    assets
                
                $
                100,704
                
                
                $
                51,043**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Current
                    portion of long-term debt
                
                $
                4,295
                
                
                $
                1,920Accounts
                    payable
                
                
                2,103
                
                
                
                4,003Accrued
                    compensation and benefits
                
                
                772
                
                
                
                428Accrued
                    product development expenses
                
                
                6,479
                
                
                
                6,612Other
                    accrued expenses
                
                
                5,061
                
                
                
                1,841Current
                    portion of deferred executive compensation
                
                
                456
                
                
                
                528Current
                    portion of deferred revenue
                
                
                5,859
                
                
                
                452Total
                    current liabilities
                
                
                25,025
                
                
                
                15,784Long-term
                    debt
                
                
                
                
                
                
                3,815Deferred
                    revenue
                
                
                67,939
                
                
                
                2Deferred
                    executive compensation
                
                
                1,489
                
                
                
                1,180Stockholders’
                    equity:Common
                    stock, $.001 par value; authorized, 145,000,000 shares;
                    issued
                  and
                    outstanding, 69,223,129 shares in 2007 and 65,391,347 shares
                    in
                    2006
                
                
                69
                
                
                
                65Additional
                    paid-in capital
                
                
                358,000
                
                
                
                339,220Accumulated
                    other comprehensive income
                
                
                14
                
                
                
                3Accumulated
                    deficit
                
                
                (351,832
                )
                
                
                (309,026
                )Total
                    stockholders’ equity
                
                
                6,251
                
                
                
                30,262Total
                    liabilities and stockholders’ equity
                
                $
                100,704
                
                
                $
                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**
              
              
              **Nine
                  Months Ended****September
                  30,**
              
              
              **September
                  30,*****In
                  thousands, except share and per share data***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**License
                  and collaboration revenue
              
              $
              1,602
              
              
              $
              229
              
              
              $
              1,981
              
              
              $
              688Operating
                  expenses:Research
                  and development
              
              
              8,242
              
              
              
              10,564
              
              
              
              29,805
              
              
              
              32,382General
                  and administrative
              
              
              5,006
              
              
              
              5,244
              
              
              
              16,307
              
              
              
              17,231Total
                  operating expenses
              
              
              13,248
              
              
              
              15,808
              
              
              
              46,112
              
              
              
              49,613Loss
                  from operations
              
              
              (11,646
              )
              
              
              (15,579
              )
              
              
              (44,131
              )
              
              
              (48,925
              )Other
                  income (expense):Interest
                  income
              
              
              878
              
              
              
              482
              
              
              
              1,609
              
              
              
              1,720Interest
                  expense
              
              
              (82
              )
              
              
              (123
              )
              
              
              (284
              )
              
              
              (369
              )Other
                  income, net
              
              
              796
              
              
              
              359
              
              
              
              1,325
              
              
              
              1,351Net
                  loss
              
              $
              (10,850
              )
              
              $
              (15,220
              )
              
              $
              (42,806
              )
              
              $
              (47,574
              )Net
                  loss per share
              
              $
              (.16
              )
              
              $
              (.25
              )
              
              $
              (.63
              )
              
              $
              (.77
              )Weighted-average
                  number of shares of common stock outstanding
              
              
              69,160,289
              
              
              
              62,120,381
              
              
              
              67,870,622
              
              
              
              62,013,462




See
        notes
        to unaudited condensed consolidated financial statements.
  2




**ARIAD
                      PHARMACEUTICALS, INC. AND SUBSIDIARIES**
                    **CONDENSED
                      CONSOLIDATED STATEMENTS OF CASH
                      FLOWS**
                    **(Unaudited)****Nine
                      Months Ended**
                    **September
                      30,*****In
                      thousands***
                  
                  **2007**
                  
                  
                  **2006**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (42,806
                  )
                  
                  $
                  (47,574
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  1,765
                  
                  
                  
                  3,476Accretion
                      of discount on marketable securities
                  
                  
                  (609
                  )
                  
                  
                  (1,313
                  )Deferred
                      executive compensation expense
                  
                  
                  745
                  
                  
                  
                  669Stock-based
                      compensation
                  
                  
                  4,487
                  
                  
                  
                  3,388Increase
                      (decrease) from:Inventory
                      and other current assets
                  
                  
                  (599
                  )
                  
                  
                  (93
                  )Amounts
                      due under collaboration agreement
                  
                  
                  (3,421
                  )Other
                      assets
                  
                  
                  (4
                  )
                  
                  
                  35Accounts
                      payable
                  
                  
                  (1,900
                  )
                  
                  
                  97Accrued
                      compensation and benefits
                  
                  
                  344
                  
                  
                  
                  407Accrued
                      product development expenses
                  
                  
                  (133
                  )
                  
                  
                  (1,440
                  )Other
                      accrued expenses
                  
                  
                  3,220
                  
                  
                  
                  901Deferred
                      revenue
                  
                  
                  73,344
                  
                  
                  
                  (363
                  )Deferred
                      executive compensation paid
                  
                  
                  (508
                  )
                  
                  
                  (423
                  )Net
                      cash provided by (used in) operating activities
                  
                  
                  33,925
                  
                  
                  
                  (42,233
                  )Cash
                      flows from investing activities:Proceeds
                      from maturities of marketable securities
                  
                  
                  43,377
                  
                  
                  
                  70,766Purchases
                      of marketable securities
                  
                  
                  (51,916
                  )
                  
                  
                  (37,761
                  )Investment
                      in property and equipment
                  
                  
                  (725
                  )
                  
                  
                  (1,018
                  )Investment
                      in intangible assets
                  
                  
                  (371
                  )
                  
                  
                  (434
                  )Net
                      cash (used in) provided by investing activities
                  
                  
                  (9,635
                  )
                  
                  
                  31,553Cash
                      flows from financing activities:Repayment
                      of borrowings
                  
                  
                  (1,440
                  )
                  
                  
                  (1,440
                  )Proceeds
                      from the issuance of stock , net of issuance costs
                  
                  
                  12,300Proceeds
                      from issuance of stock pursuant to stock option and purchase
                      plans
                  
                  
                  1,997
                  
                  
                  
                  1,488Net
                      cash provided by financing activities
                  
                  
                  12,857
                  
                  
                  
                  48Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  37,147
                  
                  
                  
                  (10,632
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  31,728
                  
                  
                  
                  25,453Cash
                      and cash equivalents, end of period
                  
                  $
                  68,875
                  
                  
                  $
                  14,821
 
 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 September 30, 2007, the results of operations for the three-month
        and nine-month periods ended September 30, 2007 and 2006 and cash flows for
        the
        nine-month periods ended September 30, 2007 and 2006.  The results of
        operations for the three-month and nine-month periods ended September 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
        September 30, 2007, the Company has cash, cash equivalents and marketable
        securities totaling $86.1 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 3)
        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.     
          Revenue Recognition Policy**
 The
        Company generates revenue from license and collaboration agreements with
        third
        parties related to use of the Company’s technology and/or development and
        commercialization of product candidates.  Such agreements may provide
        for payment to the Company of up front payments, periodic license payments,
        milestone payments and royalties.
 
 The
        Company recognizes revenue in accordance with the Securities and Exchange
        Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101,***Revenue
        Recognition in Financial Statements*, SAB No. 104, *Revenue
        Recognition*, and Emerging Issues Task Force (“EITF”) No. 00-21,
*Accounting for Revenue Arrangements with Multiple
        Deliverables*.  Revenue is recognized when there is persuasive
        evidence that an arrangement exists, delivery has occurred, the price is
        fixed
        and determinable and collection is reasonably assured.  Revenue
        arrangements with multiple elements are divided into separate units of
        accounting if certain criteria are met, including whether the delivered element
        has stand-alone value to the customer and whether there is objective and
        reliable evidence of the fair value of the undelivered
        items.  Consideration received is allocated to the separate units of
        accounting based on the fair value of each unit and the appropriate revenue
        recognition principles are applied to each unit.
 
 Up-front
        and annual license fees associated with collaboration and license agreements
        are
        recorded as deferred revenue upon receipt and recognized as revenue on a
        systematic basis over the period of time they are earned in accordance with
        the
        terms of the agreements.  Milestone payments are also recognized as
        revenue on a systematic basis over the remaining performance period of the
        agreements, commencing when the milestone has been achieved or is probable
        of
        achievement.  Royalty payments are recognized as revenue based on
        contract terms and reported sales of licensed products, when reported sales
        are
        reliably measurable and collectibility is reasonably assured.
 
 **3.      Collaboration
        Agreement with Merck & Co., Inc.**
 
 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”).
  4
  Under
        the
        terms of the Collaboration Agreement, Merck and the Company will conduct
        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.
 
 The
        Collaboration Agreement provides that, in the United States, the Company
        and
        Merck will co-promote the Product, the Company will distribute and sell the
        Product for all cancer indications and record all sales, and each party will
        receive 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 paid the Company an initial up-front
        payment of $75 million in July 2007, and has agreed to pay up to $452 million
        in
        milestone payments 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.  All amounts to be paid to the Company by Merck, with the
        exception of any development cost advances, are non-refundable.
 
 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.
 
 Under
        the
        terms of the Collaboration Agreement, the Company and Merck have established
        a
        series of joint committees which are 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.  Either party may choose not to appoint members to any of the
        joint committees and such a determination by either party has no impact on
        the
        financial or other terms of the collaboration.
 
 The
        up-front payment of $75 million received by the Company has been deferred
        and is
        being recognized as revenue on a straight-line basis through 2023, the estimated
        expiration of the patents related to the underlying technology.  The
        Company has also deemed as probable the expected receipt of the first milestone
        payment of $13.5 million, related to the start of the Phase 3 clinical trial
        of
        deforolimus in patients with metastatic sarcomas, and therefore began
        recognizing revenue related to such milestone in the third quarter of 2007
        on
        the same basis as the up-front payment.
  5
  Development
        costs under the Collaboration Agreement are aggregated and split between
        the
        Company and Merck in accordance with the terms of the agreement.  The
        Company’s share of such development costs are reflected in operating expenses in
        the Company’s statement of operations.  Any amounts due to or from
        Merck in respect of such development costs are recorded as such on the Company’s
        balance sheet.  At September 30, 2007, the Company has recorded an
        amount due from Merck under the collaboration agreement of $3.4
        million.
 
 **4.      Marketable
        Securities**
 
 The
        Company has classified its marketable securities as available-for-sale and,
        accordingly, carries such securities at aggregate fair value.  At
        September 30, 2007, all of the Company’s marketable securities consisted of
        United States government or agency securities.
 
 At
        September 30, 2007, the aggregate fair value and amortized cost of the Company’s
        marketable securities were $17,235,000 and 17,221,000,
        respectively.  Gross unrealized gains and losses were $15,000 and
        $1,000, respectively, at September 30, 2007.  The gross unrealized
        losses of $1,000 pertain to one marketable security with an aggregate fair
        value
        of $1,499,000, which has 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 have remaining maturities
        of less than 90 days and are guaranteed by the U.S. government or an agency
        thereof.  Therefore,  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 nine months ended September
        30, 2007.  Changes in market values resulted in a decrease in net
        unrealized gains of $11,000 for the nine-month period ended September 30,
        2007.
 
 **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 agreement expires in August
        2008.  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.
 
 6
  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 nine-month periods ended September 30, 2007 and 2006 as
        follows:
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              
              **Nine
                  Months Ended**
                **September
                  30,*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Compensation
                  cost from:Stock
                  options
              
              $
              1,170
              
              
              $
              920
              
              
              $
              3,862
              
              
              $
              2,801Stock
                  and stock
                  units
              
              
              91
              
              
              
              184
              
              
              
              571
              
              
              
              553Purchases
                  of common stock at a
                  discount
              
              
              18
              
              
              
              12
              
              
              
              54
              
              
              
              34$
              1,279
              
              
              $
              1,116
              
              
              $
              4,487
              
              
              $
              3,388
 
 During
        the
        nine-month periods ended September 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:
  **Nine
                    Months Ended September 30,****2007**
                
                
                
                **2006****Weighted-**
                
                
                
                
                
                
                
                
                
                
                
                **Weighted-****Average**
                
                
                
                **Total**
                
                
                
                
                
                
                
                **Average**
                
                
                
                **Total****Grant-Date**
                
                
                
                **Fair**
                
                
                
                
                
                
                
                **Grant-Date**
                
                
                
                **Fair****Shares**
                
                
                
                **Fair
                    Value**
                
                
                
                **Value**
                
                
                
                **Shares**
                
                
                
                **Fair
                    Value**
                
                
                
                **Value*****(Per
                    Share)***
                
                
                
                ***(in
                    000’s)***
                
                
                
                
                
                
                
                ***(Per
                    Share)***
                
                
                
                ***(in
                    000’s)***Stock
                    options
                
                
                2,092,220
                
                
                $
                3.28
                
                
                $
                6,862
                
                
                
                563,895
                
                
                $
                4.37
                
                
                $
                2,464Stock
                    and stock units
                
                
                134,000
                
                
                
                4.94
                
                
                
                662
                
                
                
                80,000
                
                
                
                6.43
                
                
                
                514Purchases
                    of commonstock at a discount
                
                
                39,041
                
                
                
                1.41
                
                
                
                55
                
                
                
                27,896
                
                
                
                1.25
                
                
                
                342,265,261
                
                
                
                
                
                
                
                
                
                
                
                671,791
 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 nine-month periods ended
        September 30, 2007 and 2006 were as follows:
 
 7
 
 **Nine
                  Months Ended**
                **September
                  30,****2007**
              
              
              **2006**Expected
                  life of options granted (in years)
              
              
              7.60
              
              
              
              7.07Expected
                  volatility
              
              
              68.02
              %
              
              
              70.59
              %Risk
                  free interest rate
              
              
              4.47
              %
              
              
              4.68
              %Expected
                  annual dividends
              
              
              0
              %
              
              
              0
              %
  Stock
        and
        stock unit grants are valued based on the closing price of the Company’s common
        stock on the date of grant and compensation expense is recognized over the
        requisite service period or period during which restrictions remain on the
        common stock or stock units granted.  Compensation expense related to
        purchases of common stock by employees under the Company’s employee stock
        purchase plan is recognized in the period of grant.
 
 **7.      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.
 
 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 $745,000 and $669,000 for the nine-month periods ended
        September 30, 2007 and 2006, respectively.
 
 **8.      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 nine months ended September 30, 2007 and 2006, options
        to purchase 7,416,794 and 6,836,781 shares of common stock, respectively,
        were
        not included in the computation of net loss per share, because the effect
        would
        be anti-dilutive.
 
 **9.      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.
 
 8
  Both
        a
        jury
        trial
        and a bench trial were held in this case.  On May 4, 2007, following a
        trial, a jury rendered a verdict in favor of the Plaintiffs.  The jury
        found that the NF-κB ‘516 Claims asserted in the lawsuit are valid and infringed
        by Lilly through sales of Evista and Xigris in the United
        States.  The jury awarded damages of $65.2 million to the Plaintiffs,
        plus further damages equal to 2.3% of U.S. sales of Evista and Xigris from
        February 28, 2006 through the year 2019, when the patent
        expires.  Final Judgment was entered on September 10, 2007, following
        a bench trial after which the U.S. District Court held 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
        September 20, 2007, Lilly filed a renewed motion for judgment as a matter
        of
        law, or, in the alternative, for a new trial.  Following a ruling by
        the U.S. District Court on this motion, Lilly also has the right 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.  If the Final Judgment
        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%.
 
 *Amgen
        Litigation*
 
 *The
        ‘516 Patent*
 
 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®.  On April
        13, 2007, the Company, together with the institutional patentees, filed a
        counterclaim against Amgen, and joining Wyeth in the action.  The
        counterclaim against Amgen and Wyth alleges infringement of the ‘516 Patent
        based on activities related to Enbrel and Kineret, as well as the Company’s
        answer to Amgen’s complaint, counter-claim and demand for jury
        trial.
 
 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.  A ruling on this motion is pending.
 
 An
        amended
        scheduling order for this action has been issued by the Delaware
        Court.  The technology tutorial was held before the Delaware Court on
        May 1, 2007.  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.
 
 *The
        ‘374 and ‘090 Patents*
 
 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 September 13, 2007, the Delaware Court issued an order
        granting the Company’s motion to amend its counterclaims asserted against Amgen
        to include infringement of the ‘374 Patent and the ‘090 Patent. The trial with
        respect to these counterclaims is scheduled to commence on March 23,
        2007.
 
 *Reexamination
        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.  These two requests have been granted and were merged by the
        PTO into a single reexamination proceeding.
  9
  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.  The Company cancelled 8 of the 160 claims in its response
        to the first office action filed on November 9, 2006.  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.  The Company cancelled 94 of the 141 claims (none of
        which relate to the Lilly or Amgen litigations), and added 8 new claims,
        in its
        response to the final office action filed on October 22, 2007.  The
        Company also filed both a petition to withdraw the finality of July 6 office
        action on July 25, 2007 and a request for continued reexamination on October
        22,
        2007.
 
 The
        PTO
        granted the Company’s petition for continued reexamination on October 26, 2007,
        which has the effect of withdrawing the finality of the July 6 office
        action.  Consequently, the PTO may issue another office action or a
        final office action in response to the Company’s response to the July 6 office
        action.
 
 *Timing
        and Outcome of Litigation and Reexamination Proceedings*
 
 The
        timing
        and ultimate outcome of the Lilly and Amgen litigations and the reexamination
        proceedings in the PTO cannot be determined at this
        time.  Consequently, the Company cannot predict which of these
        proceedings will lead to a first appeal to the Court of Appeals for the Federal
        Circuit and 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 asserted in the Lilly and the Amgen
        litigations, nor can the Company predict whether the damages awarded by the
        jury
        in the U.S. District Court in the Lilly litigation 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.
 
 **10.     
        Recently Adopted or Issued Accounting Pronouncements**
 
 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 position or results of operations
        as of and for the period ended September 30, 2007.
 
 In
        September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”)
        No. 157, *Fair Value Measurements*.  SFAS No. 157 defines fair
        value, establishes a framework for measuring fair value, and expands disclosures
        related to fair value measurements.  SFAS No. 157 is effective for the
        fiscal year that begins subsequent to November 15, 2007 and shall be applied
        prospectively as of the beginning of the fiscal year in which it is
        adopted.  The Company has not yet determined the impact of adoption of
        SFAS No. 157 on its consolidated financial statements.
 
 In
        February 2007, FASB issued SFAS No. 159, *The Fair Value Option for Financial
        Assets and Financial Liabilities—Including an amendment of FASB Statement No.
        115*.  SFAS No. 159 allows companies to choose to measure many
        financial instruments and certain other items at fair value that are currently
        not required to be measured at fair value.  The fair value option is
        applied instrument by instrument, is irrevocable and is applied only to an
        entire instrument.  SFAS No. 159 is effective for the fiscal year that
        begins subsequent to November 15, 2007 and should not be applied retrospectively
        to fiscal years beginning prior to the effective date.  The Company
        has not yet determined the impact of adoption of SFAS No. 159 on its
        consolidated financial statements.
  10
  In
        June
        2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-3,
*Accounting for Nonrefundable Advance Payments for Goods or Services
        Received
        for Use in Future Research and Development Activities*.  EITF No.
        07-3 states that nonrefundable advance payments for goods or services that
        will
        be used for future research and development activities should be deferred
        and
        capitalized and that such amounts should be recognized as an expense as the
        goods are delivered or the services are performed.  EITF No. 07-3 is
        effective for the fiscal year that begins subsequent to December 15,
        2007.  The Company expects that the adoption of this EITF will not
        have a material impact on the Company’s consolidated financial
        statements.
 
 **11.     
        Subsequent Event**
 
 On
        October
        9, 2007, the Company entered into a non-exclusive license agreement with
        ICON
        Medical Corp. (“ICON”), a cardiovascular medical device company, to develop and
        commercialize drug-eluting stents that deliver the Company’s mTOR inhibitor,
        deforolimus, to prevent restenosis of injured vessels following interventions
        in
        which stents are used in conjunction with balloon angioplasty (the “Stent
        Products”).
 
 Under
        the
        license agreement, the Company granted to ICON a non-exclusive, world-wide,
        royalty-bearing license, under its patents and technology, to develop,
        manufacture and sell the Stent Products.  The term of the license
        agreement extends to the later to occur of the expiration of the Company’s
        patents relating to the rights granted to ICON under the license agreement
        or
        fifteen years after the first commercial sale of a Stent
        Product.  ICON is required under the license agreement to use
        commercially reasonable efforts to develop the Stent Products.  The
        license agreement provides that the Company will receive an equity stake
        in ICON
        pursuant to a stock purchase agreement, up to $27 million in payments based
        on
        achievement of certain clinical, regulatory and commercial milestones for
        two
        Stent Products and royalties based on worldwide sales of the Stent
        Products.  The Company is required to use commercially reasonable
        efforts to supply deforolimus to ICON for use in the development, manufacture
        and sale of the Stent Products.  The license may be terminated by
        either party for breach after a cure period of up to 90 days, by either party
        in
        the case of bankruptcy, by ICON upon 30 days prior written notice if it
        determines, in its reasonable business judgment, that it is not in its business
        interest to continue the development of any Stent Product, or by the Company
        upon 30 days prior written notice if it determines that it is not in its
        business interest to continue development and regulatory approval efforts
        with
        respect to deforolimus.
  11
 **ITEM
        2.       MANAGEMENTS’ DISCUSSION
        AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
        OPERATIONS**
 
 *Unless
        stated otherwise, references in this Quarterly Report on Form 10-Q to “we,”
“us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and
        our subsidiaries including our 80% owned subsidiary, ARIAD Gene Therapeutics,
        Inc., or AGTI, unless the context requires otherwise.*
 
 **Overview**
 
 We
        are
        engaged in the discovery and development of breakthrough medicines to treat
        cancers by regulating cell signaling with small molecules.  We are
        developing a comprehensive approach to patients with cancer that addresses
        the
        greatest medical need – aggressive and advanced-stage cancers for which current
        treatments are inadequate.  Our goal is to build a fully integrated
        oncology company focused on novel, molecularly targeted therapies to treat
        solid
        tumors and hematologic cancers, as well as the spread of primary tumors to
        distant sites.
 
 Our
        lead
        cancer product candidate, deforolimus, previously known as AP23573, has been
        or
        is being studied in multiple clinical trials in patients with various types
        of
        cancers, including sarcomas, hormone refractory prostate cancer, endometrial
        cancer, brain cancer and leukemias and lymphomas.  We initiated
        patient enrollment in our initial Phase 3 clinical trial of deforolimus in
        patients with metastatic sarcoma in the third quarter of 2007.  We
        discovered deforolimus in a research and development program conducted by
        us on
        behalf of ARIAD Gene Therapeutics, Inc., or AGTI, our 80%-owned
        subsidiary.  In July 2007, we entered into a global collaboration with
        Merck & Co., Inc., or Merck, to jointly develop and commercialize
        deforolimus for use in cancer.  We have also entered into partnerships
        with each of Medinol Ltd. and ICON Medical Corp., each a 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, which was paid to us in July 2007,
        up
        to $452 million in milestone payments based on the successful development
        of
        deforolimus in multiple cancer indications 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 profit from the sales of
        deforolimus in the United States, and Merck will pay us tiered double-digit
        royalties on sales of deforolimus outside the United States.
 
 12
  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 U.S. Food and
        Drug
        Administration, or FDA, in the fourth quarter 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 United States and
        one in
        Europe, including a pioneering U.S. patent covering methods of treating human
        disease by regulating NF-κB
        cell-signaling activity.  Additionally, we have developed a
        proprietary portfolio of cell-signaling regulation technologies, our
        ARGENT technology, to control intracellular processes with small molecules,
        which may be useful in the development of therapeutic vaccines and gene and
        cell
        therapy products and which provide versatile tools for applications in cell
        biology, functional genomics and drug discovery research.
 
 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
        September 30, 2007, we had an accumulated deficit of $351.8 million and cash,
        cash equivalents and marketable securities of $86.1 million and working capital
        of $66.9 million.  Since July 2007, pursuant to the terms of our
        collaboration agreement with Merck, we have been sharing with Merck ongoing
        global development costs for deforolimus on a 50/50 basis except that Merck
        is
        funding 100% of the cost of development that is specific to development or
        commercialization of deforolimus outside the United States.  Under the
        collaboration agreement, Merck is also required to pay us up to $452 million
        in
        milestone payments based on successful development of deforolimus in multiple
        cancer indications.  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, until August 2008.  As of September 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.
 
 13
  **Critical
        Accounting Policies and Estimates**
 
 Our
        financial position and results of operations are affected by subjective and
        complex judgments, particularly in the areas of revenue recognition, the
        carrying value of intangible assets, deferred compensation benefits for
        executives, and stock-based compensation.
 
 For
        the
        three and nine-month periods ended September 30, 2007, we reported license
        and
        collaboration revenue of $1.6 million and $2.0 million,
        respectively.  License and collaboration revenue is recorded based on
        up-front payments, periodic license payments and milestone payments received
        or
        deemed probable of receipt, spread over the estimated performance period
        of the
        license or collaboration agreement.  Regarding our collaboration with
        Merck for the development and commercialization of deforolimus, as of September
        30, 2007, we have received an up-front payment of $75 million and have deemed
        as
        probable of receipt a milestone payment of $13.5 million related to the start
        of
        our Phase 3 clinical trial of deforolimus in patients with metastatic
        sarcomas.  We are recognizing revenues related to such payments on a
        straight-line basis through 2023, the estimated patent life of the underlying
        technology.  Changes in development plans could impact the probability
        of receipt of future milestone payments on which revenue recognition is
        based.  In addition, changes in estimated performance periods,
        including changes in patent lives of underlying technology, could impact
        the
        rate of revenue recognition in any period.  Such changes in revenue
        could have a material impact on our statement of operations.
 
 At
        September 30, 2007, we reported $4.0 million of intangible assets, consisting
        of
        capitalized costs related primarily to purchased and issued patents, patent
        applications and licenses, net of accumulated amortization.  These
        costs are being amortized over the estimated useful lives of the underlying
        patents or licenses.  Changes in these lives or a decision to
        discontinue using the technologies could result in material changes to our
        balance sheet and statements of operations.  We have concluded that
        the carrying value of our intangible assets is not currently impaired because
        such carrying value does not exceed the future net cash flows expected to
        be
        generated by such intangible assets.  If we were to abandon the
        underlying technologies or terminate our efforts to pursue collaborations
        or
        license agreements, we may be required to write off a portion of the carrying
        value of our intangible assets.  The net book value as of September
        30, 2007 of intangible assets related to our NF-κB
        technology is $430,000.  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 September 30, 2007, we would have
        recognized an additional $94,000 in compensation expense in the nine-month
        period ended September 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 nine-month
        period ended September 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 $311,000, $121,000,
        or
        $364,000, respectively.  This increase or decrease in valuation would
        be recognized in our statement of operations over the vesting period of such
        awards.
 
 14
  **Results
        of Operations**
 
 ***For
        the three months ended September 30, 2007 and 2006***
 
 ***Revenue***
 
 We
        recognized license and collaboration revenue of $1.6 million in the three-month
        period ended September 30, 2007, compared to $229,000 in the corresponding
        period in 2006.  The increase in revenue is primarily due to the
        revenue recognized from the Merck collaboration of $1.4 million, based on
        the
        up-front payment and probable future milestone payments, in accordance with
        our
        revenue recognition policy.
 
 ***Operating
        Expenses***
 
 *Research
        and Development Expenses*
 
 Research
        and development expenses decreased by $2.3 million, or 22%, to $8.2 million
        in
        the three-month period ended September 30, 2007, compared to $10.6 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 R&D
        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.
 
 15
  Direct
        external expenses are further categorized as costs for clinical programs
        and
        costs for preclinical programs.  Preclinical programs include product
        candidates undergoing toxicology, pharmacology, metabolism and efficacy studies
        and manufacturing process development required before testing in humans can
        begin.  Product candidates are designated as clinical programs once we
        have filed an IND with the FDA, or a similar filing with regulatory agencies
        outside the United States, for the purpose of commencing clinical trials
        in
        humans.
 
 Our
        R&D expenses for the three-month period ended September 30, 2007, as
        compared to the corresponding period in 2006, were as follows:
 
 **Three
                  months ended September 30,**
              
              
              **Increase/*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              
              **(decrease)**Direct
                  external expenses:Clinical
                  programs
              
              $
              1,721
              
              
              $
              3,961
              
              
              $
              (2,240
              )Preclinical
                  programs
              
              
              508
              
              
              
              87
              
              
              
              421All
                  other R&D expenses
              
              
              6,013
              
              
              
              6,516
              
              
              
              (503
              )$
              8,242
              
              
              $
              10,564
              
              
              $
              (2,322
              )
 
 Deforolimus,
        our lead product candidate for which we have initiated our first Phase 3
        clinical trial, was our only clinical program in 2006 and to date in
        2007.  Commencing in the third quarter of 2007, the direct external
        expenses for deforolimus reflect our share of such expenses pursuant to the
        cost-sharing arrangements of our collaboration with Merck.  Direct
        external expenses for deforolimus decreased by $2.2 million in the three-month
        period ended September 30, 2007, as compared to the corresponding period
        in
        2006, due primarily to the impact of Merck’s share of such expenses in the third
        quarter of 2007 of $2.3 million, offset by an increase in contract manufacturing
        costs of $100,000 in the three-month period ended September 30, 2007, as
        compared to the corresponding period in 2006.Through
        September 30, 2007, we have incurred a total of approximately $65.6 million
        in
        direct external expenses for deforolimus from the date it became a clinical
        program, net of Merck’s share of such expenses.  We expect that our
        direct external costs for deforolimus, net of Merck’s share of such costs, will
        increase in the fourth quarter of 2007 as we accelerate enrollment in our
        initial Phase 3 clinical trial for this product candidate and expand other
        clinical and non-clinical development activities with Merck.
 
 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 $421,000 in the three-month period
        ended
        September 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 in the fourth quarter
        of 2007, as we prepare to file an IND for AP24534 in the fourth quarter of
        2007
        and continue to move our other preclinical programs forward in
        development.
 
 All
        other
        R&D expenses decreased by $503,000 in the three-month period ended September
        30, 2007 as compared to the corresponding period in 2006.  This
        decrease is due to the impact of Merck’s allocated share of such expenses under
        the terms of the collaboration agreement of $975,000 and a decrease in
        depreciation and amortization expense of $573,000 reflecting an increase
        in the
        useful life of leasehold improvements upon the extension of the term of the
        lease of our laboratory and office facility.  These favorable impacts
        were partially offset by an increase in personnel expenses related to
        stock-based compensation expense of $242,000 resulting from grants of stock
        options in the nine-month period ended September 30, 2007, an increase in
        overhead expenses of $520,000 due to the expiration of a sublease agreement
        for
        a portion of our office and laboratory facility in July 2007 and other
        miscellaneous increases in expenses.  We expect that all other R&D
        expenses will increase in the fourth quarter of 2007 to support our clinical
        and
        preclinical development programs.
 
 16
  The
        successful development of our product candidates is uncertain and subject
        to a
        number of risks.  We cannot be certain that any of our product
        candidates will prove to be safe and effective or will meet all of the
        applicable regulatory requirements needed to receive and maintain marketing
        approval.  Data from preclinical studies and clinical trials are
        susceptible to varying interpretations that could delay, limit or prevent
        regulatory clearance.  We, the FDA or other regulatory authorities may
        suspend clinical trials at any time if we or they believe that the subjects
        participating in such trials are being exposed to unacceptable risks or if
        such
        regulatory agencies find deficiencies in the conduct of the trials or other
        problems with our products under development.  Delays or rejections
        may be encountered based on additional governmental regulation, legislation,
        administrative action or changes in FDA or other regulatory policy during
        development or the review process.  Other risks associated with our
        product development programs are described under the heading “Risk Factors” in
        our Annual Report on Form 10-K for the fiscal year ended December 31, 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.
 
 *General
        and Administrative Expenses*
 
 General
        and administrative expenses decreased by $238,000, or 5%, to $5.0 million
        in the
        three-month period ended September 30, 2007, compared to $5.2 million in
        the
        corresponding period in 2006.  The decrease in expenses was due
        primarily to the decrease in professional services of $167,000, including
        legal
        fees associated with our patent litigation and fees associated with commercial
        and business development activities, and a decrease in corporate tax costs
        of
        $74,000 related to refunds of franchise taxes received from state tax
        authorities.  We expect that our general and administrative expenses
        will increase in the fourth quarter of 2007 as necessary to support our R&D
        programs.
 
 We
        expect
        that our operating expenses in total, net of Merck’s share of development costs
        of deforolimus will increase in the fourth quarter of 2007 for the reasons
        described above.  Operating expenses may fluctuate from quarter to
        quarter.  The actual amount of any change in operating expenses will
        depend on, among other things, the progress of our product development programs,
        including the planned increase in clinical trials and other studies related
        to
        deforolimus pursuant to our collaboration with Merck, preclinical studies
        and
        product manufacturing for AP24534, and the status of our patent infringement
        litigation with Lilly and Amgen.
 
 ***Interest
        Income/Expense***
 
 Interest
        income increased to $878,000 in the three-month period ended September 30,
        2007
        from $482,000 in the corresponding period in 2006, as a result of a higher
        average balance of funds invested in 2007 and higher interest yields from
        our
        securities.
 
 Interest
        expense decreased to $82,000 in the three-month period ended September 30,
        2007
        from $123,000 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.
 
 17
  ***Operating
        Results***
 
 We
        reported a loss from operations of $11.6 million in the three-month period
        ended
        September 30, 2007 compared to a loss from operations of $15.6 million in
        the
        corresponding period in 2006, a decrease of $3.9 million, or 25%.  We
        expect that our loss from operations will increase in the fourth quarter
        of 2007
        due to the various factors discussed under “Operating Expenses”
above.  Losses may fluctuate depending on the progress of our product
        development programs and the status of our patent infringement
        litigation.  The extent of operating losses will also depend on the
        sufficiency of funds on hand or available from time to time, which will
        influence the amount we will spend on R&D and the development timelines for
        our product candidates.
 
 We
        reported a net loss of $10.9 million in the three-month period ended September
        30, 2007, compared to a net loss of $15.2 million in the corresponding period
        in
        2006, a decrease of $4.4 million or 28%, and a net loss per share of $0.16
        and
        $0.25, respectively.
 
 **Results
        of Operations**
 
 ***For
        the nine months ended September 30, 2007 and 2006***
 
 ***Revenue***
 
 We
        recognized license and collaboration revenue of $2.0 million in the nine-month
        period ended September 30, 2007, compared to $688,000 in the corresponding
        period in 2006.  The increase in revenue is primarily due to the
        revenue recognized from the Merck collaboration of $1.4 million, based on
        the
        up-front payment and probable future milestone payments, in accordance with
        our
        revenue recognition policy.
 
 ***Operating
        Expenses***
 
 *Research
        and Development Expenses*
 
 Research
        and development expenses decreased by $2.6 million, or 8%, to $29.8 million
        in
        the nine-month period ended September 30, 2007, compared to $32.4 million
        in the
        corresponding period in 2006.
 
 Our
        research and development expenses for the nine-month period ended September
        30,
        2007, as compared to the corresponding period in 2006, were as
        follows:
 
 **Nine
                  months ended September 30,**
              
              
              **Increase/*****In
                  thousands***
              
              **2007**
              
              
              **2006**
              
              
              **(decrease)**Direct
                  external expenses:Clinical
                  programs
              
              $
              7,516
              
              
              $
              11,385
              
              
              $
              (3,869
              )Preclinical
                  programs
              
              
              3,344
              
              
              
              464
              
              
              
              2,880All
                  other R&D expenses
              
              
              18,945
              
              
              
              20,533
              
              
              
              (1,588
              )$
              29,805
              
              
              $
              32,382
              
              
              $
              (2,577
              )
 
 Direct
        external expenses for deforolimus, our only clinical program in 2006 and
        to date
        in 2007, decreased by $3.9 million in the nine-month period ended September
        30,
        2007, as compared to the corresponding period in 2006, due primarily to the
        impact of Merck’s share of such expenses in the third quarter of 2007 of $2.3
        million, as well as decreases in manufacturing related costs of $661,000
        and
        clinical trial costs of $1.0 million.  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.
  18
 Direct
        external expenses for preclinical programs increased by $2.9 million in the
        nine-month period ended September 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 $1.6 million in the nine-month period ended
          September 30, 2007 as compared to the corresponding period in 2006, due
          to the
          impact of Merck’s allocated share of such expenses of $975,000, a decrease in
          depreciation and amortization expense of $1.7 million reflecting an increase
          in
          the useful life of leasehold improvements upon the extension of the term
          of the
          lease of our laboratory and office facility, and a decrease in laboratory
          supplies and services of $334,000 as we shifted later stage preclinical
          testing
          from internal studies to external contract laboratories.  These
          favorable impacts were partially offset by an increase in personnel expenses
          related to stock-based compensation expense of $597,000 resulting from
          grants of
          stock options in the nine-month period ended September 30, 2007 and an
          increase
          in overhead expenses of $534,000 due to the expiration of a sub-lease agreement
          for a portion or our office and laboratory facility in July 2007.
 
 *General
          and Administrative Expenses*
 
 General
          and administrative expenses decreased by $924,000, or 5%, to $16.3 million
          in
          the nine-month period ended September 30, 2007, compared to $17.2 million
          in the
          corresponding period in 2006.  The decrease in expenses was due
          primarily to decreases in professional services of $964,000, including
          legal
          fees associated with our patent litigation and fees associated with business
          and
          commercial development initiatives completed in 2006, a decrease in corporate
          tax costs of $233,000 related to refunds of franchise taxes received from
          state
          tax authorities, and miscellaneous decreases in other expenses, offset
          in part
          by an increase in personnel expenses related to stock-based compensation
          expense
          of $614,000 resulting from grants of stock options and restricted stock
          and
          stock units in the nine-month period ended September 30, 2007.
 
 ***Interest
          Income/Expense***
 
 Interest
          income decreased to $1.6 million in the nine-month period ended September
          30,
          2007 from $1.7 million in the corresponding period in 2006, as a result
          of a
          lower interest yields from our securities in 2007.
 
 Interest
          expense decreased to $284,000 in the nine-month period ended September
          30, 2007
          from $369,000 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 $44.1 million in the nine-month period
          ended
          September 30, 2007 compared to a loss from operations of $48.9 million
          in the
          corresponding period in 2006, a decrease of $4.8 million, or
          11%.  Such decrease was due primarily to the decrease in operating
          expenses noted above and the increase in license and collaboration revenue
          of
          $1.3 million as a result of the Merck collaboration.
 
 We
          reported a net loss of $42.8 million in the nine-month period ended September
          30, 2007, compared to a net loss of $47.6 million in the corresponding
          period in
          2006, a decrease of $4.8 million or 10%, and a net loss per share of $0.63
          and
          $0.77, respectively.
 19
  **Liquidity
            and Capital Resources**
 
 We
            have
            financed our operations and investments to date primarily through sales
            of our
            common stock to institutional investors and, to a lesser extent, through
            issuances of our common stock pursuant to our stock option and employee
            stock
            purchase plans, supplemented by the issuance of long-term debt.  We
            sell securities and incur debt when the terms of such transactions are
            deemed
            favorable to us and as necessary to fund our current and projected cash
            needs.  Our collaboration with Merck for the development and
            commercialization of deforolimus provides for 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.
 
 ***Sources
            of Funds***
 
 For
            the
            three months and nine months ended September 30, 2007 and 2006, our sources
            of
            funds were as follows:
  **Three
                        Months Ended**
                      **September
                        30,**
                    
                    
                    **Nine
                        Months Ended**
                      **September
                        30,*****In
                        thousands***
                    
                    **2007**
                    
                    
                    **2006**
                    
                    
                    **2007**
                    
                    
                    **2006**Upfront
                        payment from Merck, included in cash
                      provided
                        by operations
                    
                    $
                    75,000
                    
                    
                    $
                    ---
                    
                    
                    $
                    75,000
                    
                    
                    $
                    ---Maturities
                        of marketable securities,
                      net
                        of purchases
                    
                    
                    2,922
                    
                    
                    
                    5,790
                    
                    
                    
                    (8,539
                    )
                    
                    
                    33,005Proceeds
                        from issuance of common stock,
                      net
                        of issuance costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,300Proceeds
                        from issuance of common stock
                      pursuant
                        to stock option and purchase plans
                    
                    
                    877
                    
                    
                    
                    139
                    
                    
                    
                    1,997
                    
                    
                    
                    1,488$
                    78,799
                    
                    
                    $
                    5,929
                    
                    
                    $
                    80,758
                    
                    
                    $
                    34,493
  Our
                $75
                million up-front payment from Merck was received pursuant to our
                collaboration
                agreement for the development and commercialization of
                deforolimus.  The agreement also provides for, among other things, the
                payment by Merck of up to $452 million in development and regulatory
                milestones
                during the remaining development of deforolimus, including a $13.5
                million
                milestone payment, to be made in the fourth quarter of 2007, related
                to the
                start of our Phase 3 clinical trial in patients with metastatic sarcomas,
                and up
                to $200 million based on the achievement of specified product sales
                thresholds.  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 nine-month periods ended
                September 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**
                          **September
                            30,**
                        
                        
                        **Nine
                            Months Ended**
                          **September
                            30,*****In
                            thousands***
                        
                        **2007**
                        
                        
                        **2006**
                        
                        
                        **2007**
                        
                        
                        **2006**Proceeds
                            from sales and maturities of marketable securities
                        
                        $
                        20,034
                        
                        
                        $
                        17,013
                        
                        
                        $
                        43,377
                        
                        
                        $
                        70,766Purchases
                            of marketable securities
                        
                        
                        (17,112
                        )
                        
                        
                        (11,223
                        )
                        
                        
                        (51,916
                        )
                        
                        
                        (37,761
                        )$
                        2,922
                        
                        
                        $
                        5,790
                        
                        
                        $
                        (8,539
                        )
                        
                        $
                        33,005
  20
  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 agreement expires in August
            2008.  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.
 
 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.
 
 At
            September 30, 2007, the balance outstanding on our term loan agreement
            was $4.3
            million.  The loan is payable in monthly installments of $160,000 plus
            interest 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.
 
 ***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 nine months ended September
            30, 2007 and 2006, our uses of funds were as follows:
 
 **Three
                      Months Ended**
                    **September
                      30,**
                  
                  
                  **Nine
                      Months Ended**
                    **September
                      30,*****In
                      thousands***
                  
                  **2007**
                  
                  
                  **2006**
                  
                  
                  **2007**
                  
                  
                  **2006**Net
                      cash used in operating activities, excluding
                    the
                      up-front payment from Merck
                  
                  $
                  14,708
                  
                  
                  $
                  14,862
                  
                  
                  $
                  41,075
                  
                  
                  $
                  42,233Repayment
                      of borrowings
                  
                  
                  480
                  
                  
                  
                  480
                  
                  
                  
                  1,440
                  
                  
                  
                  1,440Investment
                      in intangible assets
                  
                  
                  72
                  
                  
                  
                  107
                  
                  
                  
                  371
                  
                  
                  
                  434Investment
                      in property and equipment
                  
                  
                  431
                  
                  
                  
                  158
                  
                  
                  
                  725
                  
                  
                  
                  1,018$
                  15,691
                  
                  
                  $
                  15,607
                  
                  
                  $
                  43,611
                  
                  
                  $
                  45,125
  21
  The
            net
            cash used in operating activities for purposes of the above table is
            comprised
            of our net losses, adjusted for non-cash expenses and working capital
            requirements and excluding the favorable impact of the up-front payment
            from
            Merck of $75 million pursuant to our collaboration agreement.  As
            noted above, our net loss for the nine months ended September 30, 2007
            decreased
            by $4.7 million, as compared to the corresponding period in 2006, due
            primarily
            to decreased operating expenses.  As a result primarily of changes in
            working capital items representing timing differences between income
            statement
            recognition and impact on cash, our net cash used in operating activities
            for
            purposes of the above table decreased by only $1.2 million from the nine-month
            period ended September 30, 2006 to the corresponding period in
            2007.  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
            provide more than sufficient resources to fund such losses.  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.
 
 ***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 September 30, 2007:
 
 **Payments
                      Due By Period*****In
                      thousands***
                  
                  **Total**
                  
                  
                  **In**
                    **2007**
                  
                  
                  **2008**
                    **through**
                    **2010**
                  
                  
                  **2011**
                    **through**
                    **2012**
                  
                  
                  **After**
                    **2012**Long-term
                      debt
                  
                  $
                  4,295
                  
                  
                  $
                  480
                  
                  
                  $
                  3,815
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
                      leases
                  
                  
                  10,205
                  
                  
                  
                  492
                  
                  
                  
                  6,358
                  
                  
                  
                  3,355
                  
                  
                  
                  —Employment
                      agreements
                  
                  
                  12,559
                  
                  
                  
                  1,075
                  
                  
                  
                  10,907
                  
                  
                  
                  577
                  
                  
                  
                  —Other
                      long-term obligations
                  
                  
                  5,138
                  
                  
                  
                  118
                  
                  
                  
                  2,896
                  
                  
                  
                  1,729
                  
                  
                  
                  395Total
                      fixed contractual obligations
                  
                  $
                  32,197
                  
                  
                  $
                  2,165
                  
                  
                  $
                  23,976
                  
                  
                  $
                  5,661
                  
                  
                  $
                  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
            September 30, 2007, over the remaining term of the debt, our interest
            expense
            would total approximately $76,000 for the remainder of 2007 and $67,000
            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
            September 30, 2007, we had cash, cash equivalents and marketable securities
            totaling $86.1 million and working capital of $66.9 million, compared
            to cash,
            cash equivalents and marketable securities totaling $39.8 million and
            working
            capital of $25.9 million at December 31, 2006.  The increase in cash,
            cash equivalents and marketable securities and working capital is primarily
            attributable to the up-front payment of $75 million we received in July
            2007,
            under the collaboration agreement with Merck for the development and
            commercialization of deforolimus, offset in part by operating losses
            and changes
            in working capital requirements.
 22
  We
            will
            require substantial additional funding for our R&D 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.  There can be no assurance, however, that
            adequate resources will be available when needed or on terms acceptable
            to us,
            if at all.
 
 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 strategic partners
            and
            licensees, and other key parties for the successful development, manufacturing
            and commercialization of products, the adequacy of our capital resources
            and the
            availability of additional funding, patent protection and third-party
            intellectual property claims relating to our and any partner's product
            candidates, the timing, scope, cost and outcome of legal and patent office
            proceedings concerning our NF-kB patent
            portfolio,
            the potential acquisition of or other strategic transaction regarding
            the
            minority stockholders' interests in our 80%-owned subsidiary, ARIAD Gene
            Therapeutics, Inc., future capital needs, key employees, markets, economic
            conditions, prices, reimbursement rates, competition and other factors
            detailed
            under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form
            10-K for the year ended December 31, 2006 and in our other public filings
            with
            the U.S. Securities and Exchange Commission.  The information
            contained in this document is believed to be current as of the date of
            original
            issue.  We do not intend to update any of the forward-looking
            statements after the date of this document to conform these statements
            to actual
            results or to changes in our expectations, except as required by
            law.
 23
  **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 September 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 September 30, 2007, we would have incurred approximately
            $94,000 of
            additional compensation expense in the three-month period ended September
            30,
            2007.
 
 At
            September 30, 2007, we had $4.3 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 (74.2 basis
            points), we
            would incur approximately $8,000 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.
 24
  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.
 25
  **PART
                II.** OTHER INFORMATION
 **ITEM
                1.       LEGAL
                PROCEEDINGS**
 
 The
            information contained in Note 9 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.
  26
  **ITEM
              6.** **EXHIBITS**
  10.1
                  Collaboration
                      Agreement dated July 11, 2007 among ARIAD Pharmaceuticals,
                      Inc., ARIAD
                      Gene Therapeutics, Inc. and Merck & Co., Inc.*31.1
                  Certification
                      of the Chief Executive Officer.31.2
                  Certification
                      of the Chief Financial Officer.32.1
                  Certification
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.
 *
              Confidential treatment has been requested for portions of this
              exhibit.
  ARIAD
            and
            the ARIAD logo are our registered trademarks and ARGENT is our
            trademark.  The domain name and website address www.ariad.com, and all
            rights thereto, are registered in the name of, and owned by,
            ARIAD.  The information in our website is not intended to be part of
            this Quarterly Report on Form 10-Q.  We include our website address
            herein only as an inactive textual reference and do not intend it to
            be an
            active link to our website.
  27
  **SIGNATURES**
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, the Registrant
            has
            duly caused this report to be signed on its behalf by the undersigned,
            thereunto
            duly authorized.
  ARIAD
                        Pharmaceuticals, Inc.By:
                    /s/
                        Harvey J. Berger,
                        M.D.Harvey
                        J. Berger, M.D.Chairman
                        and Chief Executive OfficerBy:
                    /s/
                        Edward M.
                        FitzgeraldEdward
                        M. FitzgeraldSenior
                        Vice President,Finance
                        and Corporate Operations, andChief
                        Financial Officer(Principal
                        financial officerDate:  November
                        9, 2007
                    
                    and
                        chief accounting
                        officer)
  28
  **Exhibit**
                    **No.**
                  **Title**10.1
                  Collaboration
                      Agreement dated July 11, 2007 among ARIAD Pharmaceuticals,
                      Inc., ARIAD
                      Gene Therapeutics, Inc. and Merck & Co., Inc.*31.1
                  Certification
                      of the Chief Executive Officer.31.2
                  Certification
                      of the Chief Financial Officer.32.1
                  Certification
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.
 *
              Confidential treatment has been requested for portions of this
              exhibit.
  29