**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM10-K******

| **x****ANNUAL REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES       EXCHANGE ACT OF 1934**                                                                                                                                                                                                            |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **For the  fiscal year ended June 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: 000-31979**

**ArrayBioPharma Inc.**

(Exact Name of Registrant as Specified in Its Charter)

| **Delaware**              |   | **84-1460811**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**3200Walnut Street, Boulder, Colorado 80301**

(Address of principal executive offices)

**(303)381-6600**

(Registrant’s telephone number, including area code)

Securitiesregistered pursuant to Section 12(b) of the Act:

**Common Stock, Par Value $.001 PerShare**

**The NASDAQ StockMarket LLC**

**(NASDAQ GlobalMarket)**

(Nameof Exchange on which Registered)

Securities registeredpursuant to Section 12(g) of the Act:

**None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or 15(d)of the Exchange Act.                   Yeso No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

Yes xNo o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o        AcceleratedFiler x         Non-Accelerated Filer o

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

Yes oNo x

 

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The aggregate marketvalue of voting stock held by non-affiliates of the registrant as of December31, 2006 (based upon the closing sale price of such shares as of the lasttrading day of the year, December 29, 2006, on the NASDAQ National Market nowknown as the NASDAQ Global Market) was $371,990,457. Shares of the Registrant’scommon stock held by each executive officer and director and by each entitythat owns 5% or more of the Registrant’s outstanding common stock have beenexcluded in that such persons or entities may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

Number of sharesoutstanding of the registrant’s class of common stock as of August 10, 2007:47,087,232

**Documents incorporated byreference:**

Portions of theregistrant’s definitive Proxy Statement to be filed with the Securities andExchange Commission on Form 14A for the 2007 Annual Meeting of Stockholders –Part III

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**TABLE OFCONTENTS**
|              | ** ** | ** **                                                                                                              | ** ** | **Page** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                    |       |     |
| Item  1.     |       | Business                                                                                                                |       | 4        |
| Item  1A.    |       | Risk Factors                                                                                                            |       | 17       |
| Item 1B.     |       | Unresolved Staff  Comments                                                                                              |       | 30       |
| Item  2.     |       | Properties                                                                                                              |       | 30       |
| Item 3.      |       | Legal Proceedings                                                                                                       |       | 30       |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                                    |       | 30       |
|         |       |                                                                                                                    |       |     |
| **PART II**  |       |                                                                                                                    |       |     |
| Item 5.      |       | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 31       |
| Item 6.      |       | Selected Financial  Data                                                                                                |       | 34       |
| Item 7.      |       | Management’s  Discussion and Analysis of Financial Condition and Results ofOperations                              |       | 35       |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures about Market Risk                                                             |       | 47       |
| Item 8.      |       | Financial  Statements and Supplementary Data                                                                            |       | 48       |
| Item 9.      |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosures                                  |       | 70       |
| Item 9A.     |       | Controls and  Procedures                                                                                                |       | 71       |
| Item 9B.     |       | Other Information                                                                                                       |       | 72       |
|         |       |                                                                                                                    |       |     |
| **PART III** |       |                                                                                                                    |       |     |
| Item 10.     |       | Directors and  Executive Officers of the Registrant.                                                                    |       | 74       |
| Item 11.     |       | Executive  Compensation.                                                                                                |       | 74       |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       | 74       |
| Item 13.     |       | Certain  Relationships and Related Transactions                                                                         |       | 75       |
| Item 14.     |       | Principal  Accountant Fees and Services                                                                                 |       | 75       |
|         |       |                                                                                                                    |       |     |
| **PART IV**  |       |                                                                                                                    |       |     |
| Item 15.     |       | Exhibits and  Financial Statement Schedules                                                                             |       | 76       |
|         |       |                                                                                                                    |       |     |
| Signatures   |       | 77                                                                                                                      |

 

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**FORWARD-LOOKINGSTATEMENTS**

    *This Annual Report filed on Form 10-K and other documents we file withthe Securities and Exchange Commission contain forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve significant risks and uncertainties. In addition, we may makeforward-looking statements in our press releases or in other oral or writtencommunications with the public. These statements do not relate tohistorical matters and reflect our current expectations concerning futureevents. Therefore our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of many factors.These factors include, but are not limited to, our ability to continue to fundand successfully progress internal research efforts and to create effective,commercially viable drugs, our ability to achieve and maintain profitability,the extent to which the pharmaceutical and biotechnology industries are willingto in-license drug candidates for their product pipelines and to collaboratewith and fund third parties on their drug discovery activities, our ability toout-license our proprietary candidates on favorable terms, risks associatedwith our dependence on our collaborators for the clinical development andcommercialization of our out-licensed drug candidates, the ability of ourcollaborators and of Array to meet objectives tied to milestones and royalties,our ability to attract and retain experienced scientists and management, andthe risk factors set forth below under the caption “Risk Factors.” We areproviding this information as of the date of this report. We undertake no dutyto update any forward-looking statements to reflect the occurrence of events orcircumstances after the date of such statements or of anticipated orunanticipated events that alter any assumptions underlying such statements.*****

**PART I**

**Item 1. *Business***

**OurBusiness**

Array BioPharmaInc. is a biopharmaceutical company focused on the discovery, development andcommercialization of targeted small molecule drugs to treat cancer andinflammatory diseases.  Our proprietarydrug development pipeline includes clinical candidates that are designed toregulate therapeutically important target proteins and are aimed at largemarket opportunities.  We currently have10 programs in our development pipeline, eight of which are wholly owned by us.

Our eight mostadvanced development programs that we wholly own and control consist ofARRY-543, an ErbB-2/EFGR dual inhibitor for cancer; ARRY-162, a MEK inhibitorfor inflammation; ARRY-797, a p38 inhibitor for inflammation and for cancer;ARRY-520, a KSP inhibitor for cancer; ARRY-380, an ErbB-2 inhibitor for cancer;and ARRY-614, a p38/Tie 2 dual inhibitor for inflammation and for cancer. Wehave also out-licensed to AstraZeneca PLC three MEK inhibitors for cancer –including  ARRY-886 (AZD6244), currentlyin multiple Phase 2 clinical trials, and ARRY-704 (AZD8330), currently in aPhase 1 clinical trial.  In addition tothese development programs, we have out-licensed two cancer programs toGenentech, Inc. which are in preclinical development.  Through collaborations, we have also inventeddrug candidates that are currently in clinical development including InterMune,Inc.’s hepatitis C virus, or HCV, NS3/4 protease inhibitor, ITMN-191, and EliLilly and Company’s CHK-1 inhibitor, IC83. The out-license and collaboration agreements with these partners providefor up-front payments, success-based milestone payments and / or royalties onproduct sales.

We also have aportfolio of discovery programs that we believe will generate two to threeInvestigational New Drug, or IND, applications during calendar 2008. Ourdiscovery efforts have also generated additional early-stage drug candidatesthat we may choose to out-license through research partnerships as we did withVentiRx Pharmaceuticals, Inc., which is described below. We believe thisbusiness strategy will enable us to receive a greater portion of the potentialfinancial upside than our previous research collaborations while controllingdevelopment costs. We also believe this strategy will allow us to maximize ourscientific efforts with other resources on programs for which we haveparticular expertise or which have synergies with our other developmentprograms.

We have built ourproprietary pipeline of development and discovery programs on a modestinvestment of approximately $150 million in research and development expensesfrom our inception through June 30, 2007. Additionally, we have recognized atotal of $258 million in research funding and in up-front and milestonepayments from our collaboration partners through June 30, 2007. Under ourexisting collaboration agreements, we have the potential to earn over $260 millionadditional milestone payments if we achieve all the drug discovery objectivesdetailed in these

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agreements, as well asroyalties on any resulting product sales from 16 drug development programs.

***Accomplishments During the Past Fiscal Year***

Below is a summary of our accomplishments during the fiscal year and ourcurrent plans to execute on our strategies.

***ARRY-886(AZD6244) and ARRY-704 (AZD8330) Targeting MEK for Cancer***

ARRY-886 andARRY-704 inhibit MEK, a critical enzyme at the intersection of severalbiological pathways that regulate cell proliferation and survival. Bothcompounds have shown tumor suppressive or regressive activity in multiplepreclinical models of human cancer including melanoma, pancreatic, colon, lungand breast cancers.

During fiscal2007, the following progress was made under our collaboration with AstraZeneca:

·                  AstraZeneca initiated dosing ARRY-886in cancer patients in a Phase 2 study. This randomized study compares ARRY-886to temozolomide in the treatment of metastatic melanoma patients and expects toenroll approximately 180 patients at 40 centers worldwide.  Additional Phase 2 studies are underway incolorectal, pancreatic and non-small cell lung cancers. AstraZeneca hasreported that it expects to present Phase 2 results in mid-2008.

·                  We reported Phase 1 results onARRY-886 at the 18th Annual EORTC-NCI-AACR Symposium on Molecular Targets andCancer Therapeutics. These results showed inhibition of the MEK pathway byARRY-886 in tumor tissue at the dose that was later selected for the Phase 2study and provided prolonged disease stabilization in a number of heavilypre-treated cancer patients.

·                  AstraZenecainitiated dosing ARRY-704 in a Phase 1 clinical trial in cancer patients.

***ARRY-543,Targeting ErbB-2 / EGFR for Cancer***

ARRY-543 is anoral, selective, reversible, tyrosine kinase inhibitor of both ErbB-2 and EGFR.In preclinical models, ARRY-543 demonstrated significant dose-related tumorgrowth inhibition when administered orally. Tykerb® (lapatinib), a small molecule drug thatmodulates ErbB-2 and EGFR, has been approved for the treatment of certainHerceptin® (trastuzumab)-resistant breast cancers and isstill undergoing clinical trials for other cancers.  We believe ARRY-543 has significantadvantages over Tykerb, including greater inhibition of EGFR, improved humandrug exposure and an improved safety profile.

During fiscal2007, the following progress was made on the program:

·                  Advanced ARRY-543 in a Phase 1aclinical trial in the United States and Canada and began preparations for anexpansion trial.

·                  Reported interim Phase 1a data at ourAnalyst Day Meeting in December 2006, showing that ARRY-543 demonstratedconsistent drug exposure and that four patients had stable disease at welltolerated doses.

·                  Initiatedplans to begin Phase 2 trials.

***ARRY-520,Targeting KSP for Cancer***

***ARRY-520 inhibits kinesin spindle protein, or KSP, a proteinthat plays an essential role in mitotic spindle formation. Similar to thetaxanes and vinca alkaloids, KSP inhibitors inhibit tumor growth by preventingmitotic spindle formation and cell division. However, unlike taxanes and vincaalkaloids, KSP inhibitors do not demonstrate certain side effects such asperipheral neuropathy.  ARRY-520 causedmarked tumor regression in preclinical models of human cancer at tolerateddoses.***

During fiscal2007, the following progress was made on the program:

·                  Filedan IND application with the U.S. Food and Drug Administration, or FDA, inDecember 2006 and dosed cancer patients in a Phase 1 trial.

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***ARRY-380,Targeting ErbB-2 for Cancer***

ARRY-380, aselective, orally-active ErbB-2 inhibitor, has shown efficacy and is well-toleratedin preclinical models of human cancer. ErbB-2 is a receptor kinase target thatis over-expressed in breast and other cancers. Herceptin, theintravenously-dosed protein therapeutic currently on the market, modulatesErbB-2 and generated over $3 billion in revenue in 2006.

During fiscal2007, the following progress was made on the program:

·                  Completed regulated safety assessmenttesting.

·                  Filedan IND application with the FDA, and are able to proceed with a Phase 1clinical trial.

***ARRY-162,Targeting MEK for Inflammation***

ARRY-162, anorally active MEK inhibitor, has shown efficacy and is well-tolerated inpreclinical models of human arthritis and other inflammatory diseases. Injectedprotein therapeutics currently on the market bind to and modulate the activityof the cytokines TNF or IL-1. MEK modulates biosynthesis of certainpro-inflammatory cytokines, in particular, TNF, IL-1 and IL-6. We believeinhibition of MEK will have applications in inflammatory diseases driven bythese cytokines, such as arthritis, Crohn’s disease, psoriasis and chronicobstructive pulmonary disease, or COPD.

During fiscal2007, the following progress was made on the program:

·                  Initiated a Phase 1 clinical trial inhealthy volunteers.

·                  Presented Phase 1 data at the AnnualEuropean Congress of Rheumatology, or EULAR, and the International Associationof Inflammation Societies’, or IAIS, 8th World Congress on Inflammation.  The multiple ascending dose, or MAD, studyshowed 50 to 90% inhibition of IL-1, TNF and IL-6 when measured over a 24-hourperiod with 40 mg daily.  ARRY-162 waswell-tolerated with no serious adverse events and showed dose proportionalhuman pharmacokinetics.

·                  Advanced ARRY-162 in a Phase 1bcombination trial with methotrexate in rheumatoid arthritis, or RA, patients.

·                  Conducted long-term toxicologystudies.

·                  Initiatedplans to begin a Phase 2 RA trial.

***ARRY-797,Targeting p38 for Inflammation and Cancer***

ARRY-797, aselective orally active p38 inhibitor, has shown good efficacy, controlledtissue distribution and is well-tolerated in preclinical models of humanarthritis and certain cytokine-driven cancers. p38 is a kinase target thatregulates the production of TNF, IL-1, IL-6 and PGE2. As described above, webelieve that inhibition of p38 will also regulate inflammatory cytokineproduction and will benefit patients with inflammatory disease. These cytokinescan also act as cellular growth factors or are up-regulated in certain cancersincluding prostate, ovarian and multiple myeloma, and may play a role incertain resistance mechanisms or metastatic progression in cancer.

During fiscal2007, the following progress was made on the program:

·                  Filed an IND application with the FDAand initiated Phase 1 clinical trials in healthy volunteers.

·                  Filed an IND application and are ableto proceed with a Phase 1b clinical trial in cancer patients.

·                  Presented Phase 1 single ascendingdose, or SAD, data at the EULAR and IAIS meetings. ARRY-797 met studyobjectives and was well-tolerated with no serious adverse events.  There were linear increases in exposure withincreasing oral dose ranging between 25 and 400 mg.  ARRY-797 demonstrated a maximum inhibition ofgreater than 90% for the production of IL-1, TNF and PGE2, and showed greaterthan 50% inhibition at 24 hours at the highest dose.

·                  Initiateda Phase 1 MAD study.

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***ARRY-614,Targeting p38 / Tie2 for Inflammation and Cancer***

ARRY-614, anorally active compound that inhibits both p38 and Tie2, blocks angiogenesis,inhibits inflammation and reduces growth of certain cytokine-driven cancers inpreclinical models.  ARRY-614 iswell-tolerated in preclinical models of human cancer and arthritis.  Increased production of certain cytokines cancause aberrant tissue proliferation. The growth, differentiation andmaintenance of new blood vessels, or angiogenesis, in proliferating tissue canlead to the uncontrolled cell growth that characterizes cancer and inflammatorydiseases.

During fiscal2007, the following progress was made on the program:

·                  AdvancedARRY-614 into regulated safety assessment testing.

***GrowingPartnered Research***

During fiscal2007, the following progress was made in our partnered research programs:

·                  Received $5 million in payments from AstraZeneca for achieving clinical milestones on the MEK for cancer program.

·                  InterMune, Inc. initiated patient dosing in January 2007 on a Phase 1a clinical trial with ITMN-191, an orally available HCV protease inhibitor, triggering a milestone payment to Array.

·                  Received a milestone payment from Eli Lilly and Company for dosing the CHK-1 inhibitor, IC83, in a Phase 1 clinical trial.  Scientists at Array and ICOS Corporation, which was acquired by Eli Lilly in 2007, collaborated to invent IC83.

·                  Entered into a license agreement with VentiRx Pharmaceuticals Inc., granting VentiRx exclusive worldwide rights to Array’s toll-like receptor, or TLR, program. Array received an equity stake in VentiRx, a privately held company, as well as an up-front payment, and is entitled to receive potential milestone payments and royalties on product sales. Array retains the option to acquire a 50% ownership position in all VentiRx clinical oncology products developed under this agreement.

***Enhancing Leadership***

During fiscal 2007, the following additions were made to ourleadership team:

·                  Appointed John Yates, M.B. Ch.B.,M.D., to the newly created position of Chief Medical Officer. Dr. Yates overseesthe medical strategy and clinical development of Array’s drug pipeline.

·                  Appointed Neil Spector, M.D., to ourScientific Advisory Board. Dr. Spector is helping Array in the development ofour cancer drug portfolio.

·                  Appointed Jonathan Kay, M.D., to our Scientific Advisory Board. Dr. Kay is working with Array in the development of our inflammation drug portfolio.

***StrengtheningFinancial Position***

We continued tomaintain our strong financial performance during****fiscal2007:

·                  Recognized $37 million in revenue,while investing $57 million in our proprietary research and development.

·                  Raised $85 million, net of offeringcosts, through an underwritten public offering of 7,000,000 shares of common stockat a price to the public of $13.00 per share in May 2007.

·                  Secured expansion space through 2016and received $32 million in net cash as a result of our sale of purchaseoptions and lease-back of our Boulder and Longmont facilities.

·                  Endedfiscal 2007 with approximately $141 million in cash, cash equivalents andmarketable securities.

**Researchand Development**

Ourprimary research efforts are centered on the treatment of cancer andinflammatory disease.  We believe thereis significant synergy between these two research areas, and developing drugsin one of the areas may lead to therapies in the other area.  Our research focuses on biologic functions,or pathways, that have been identified as important in the treatment of human 

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disease based onhuman clinical, genetic or preclinical data. Within these pathways, we seek tocreate first-in-class drugs regulating important therapeutic targets to treatpatients with serious or life-threatening conditions, primarily in cancer,inflammatory disease and other important disease areas.  In addition, we seek to identifyopportunities to improve upon existing therapies or drugs in clinicaldevelopment by creating clinical candidates with superior, or best-in-class,drug characteristics, including efficacy, tolerability or dosing, to providesafer, more effective drugs.

**DrugDevelopment Pipeline**

Thefollowing pipeline chart shows our ten most advanced programs and their stagein the drug development process.
| **Drug**           | ** **   | **Drug Target** | ** **   | **Marketing   Rights** | ** **   | **Current  Status (Expected Future Plans)**                          |
|--------------------|--------------|-----------------|--------------|------------------------|--------------|----------------------------------------------------------------------|
| ***Cancer***       |         |            |         |                   |         |                                                                 |
| ARRY-886           |         | MEK             |         | AstraZeneca            | ** **   | **Multiple  Phase 2 trials ongoing**(Phase 2 data expected mid-2008) |
| ARRY-543           |         | ErbB-2/EGFR     |         | Array                  | ** **   | **Phase 1  trial ongoing**(Initiate Phase 2 trial)                   |
| ARRY-797           |         | P38             |         | Array                  | ** **   | **Phase 1  trial ongoing**                                           |
| ARRY-520           |         | KSP             |         | Array                  | ** **   | **Phase 1  trial ongoing**(Expand Phase 1 in cancer patients)        |
| ARRY-704           |         | MEK             |         | AstraZeneca            | ** **   | **Phase 1  trial ongoing**                                           |
| ARRY-380           |         | ErbB-2          |         | Array                  | ** **   | **IND  Effective**(Initiate Phase 1 trial)                           |
| ARRY-614           |         | P38/Tie2        |         | Array                  | ** **   | **Regulated  Safety Assessment**(File IND (1))                       |
| ***Inflammation*** | *** *** | *** ***    | *** *** | *** ***           | *** *** | *** ***                                                         |
| ARRY-162           |         | MEK             |         | Array                  | ** **   | **Phase  1b trial ongoing**(Initiate Phase 2 trial)                  |
| ARRY-797           |         | P38             |         | Array                  | ** **   | **Phase 1  trial ongoing**(Initiate Phase 2 trial)                   |
| ARRY-614           |         | P38/Tie2        |         | Array                  | ** **   | **Regulated  Safety Assessment**(File IND (1))                       |

 

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(1) A single IND for thiscompound is expected to be filed in fiscal 2008.

***ARRY-886 (AZD6244) and ARRY-704(AZD8330) Targeting MEK for Cancer***

We initiated an anti-cancer research program targetingMEK in July 2001, and within 17 months identified ARRY-886, an orally activeclinical candidate. ARRY-886 and a subsequently identified candidate, ARRY-704,have both shown tumor suppressive or regressive activity in multiplepreclinical models of human cancer including melanoma, pancreatic, colon, lung,and breast cancers.  Potential advantagesof MEK inhibitors over current therapies include potential improved efficacyand reduced side effects. In December 2003, we entered into an out-licensingand collaboration agreement with AstraZeneca to develop our MEK program solelyin the field of oncology. We retain the rights to all MEK compounds not selectedby AstraZeneca.

Under our collaboration with AstraZeneca, we wereresponsible for conducting Phase 1 clinical testing, which we initiated in June2004.  The trial evaluated tolerabilityand pharmacokinetics of ARRY-886 following oral administration to patients withadvanced cancer.  In addition, the trialexamined patients for indications of biological activity as well aspharmacodynamic and tumor biomarkers.  Aswe reported in November 2006, Phase 1 testing showed that ARRY-886 inhibitedthe MEK pathway in tumor tissue at the dose that was later selected for thePhase 2 study and provided prolonged disease stabilization in a number ofheavily pre-treated cancer patients.

In June 2006, AstraZenecainitiated a Phase 2 study for ARRY-886 in malignant melanoma, resulting in a $3million milestone payment to us. The trial is a randomized Phase 2 study thatcompares ARRY-886 to temozolomide in the treatment of stage III / IV melanomapatients. AstraZeneca expects to enroll approximately 180 patients at 40centers worldwide. AstraZeneca initiated additional Phase 2 studies forARRY-886 in colorectal, pancreatic and non-small cell lung cancer during thesecond half of 2006. AstraZeneca has indicated that it expects to present Phase

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2 results in mid-2008.

In March 2007,AstraZeneca dosed its first cancer patient in a Phase 1 clinical trial with ourMEK inhibitor, ARRY-704 (AZD8330), triggering a $2 million milestone payment tous.

***ARRY-543, Targeting ErbB-2 / EGFRfor Cancer***

ErbB-2and EGFR are receptor kinase targets that are over-expressed in a number ofmalignancies, including breast, lung, pancreas, colon and head and neckcancers. Herceptin is an intravenously-dosed protein therapeutic currently onthe market for the treatment of breast cancers that over-express ErbB-2.Herceptin has also recently been reported to show promising therapeuticbenefits in early, post-surgery, breast cancer patients being treatedchronically. We believe these results suggest a high potential value for anorally active drug that regulates ErbB-2 and that can be conveniently dosed forextended periods of time. Erbitux® (cetuximab),an intravenously-dosed protein therapeutic, and Tarceva® (erlotinib),a small molecule inhibitor, are currently marketed drugs that modulate EGFRonly. Tykerb, a small molecule drug that modulates ErbB-2 and EGFR, has beenapproved for the treatment of certain Herceptin-resistant breast cancers and isstill undergoing clinical trials for other cancers.

We believe the concurrent inhibition of ErbB-2 andEGFR provides enhanced efficacy in cancer treatment. ARRY-543, a novel orallyactive dual inhibitor of EGFR and ErbB-2, behaves as a reversibleATP-competitive inhibitor with nanomolar potency both *in vitro* and in cell-based proliferationassays.  Selectivity for inhibition ofErbB family target proteins has been demonstrated by profiling against a panelof kinases *in vitro*.  In preclinical models, ARRY-543 demonstratedsignificant dose related tumor growth inhibition when administered orally.  ARRY-543 has demonstrated efficacy in certainpreclinical models where Tarcevaor Herceptin are not active and we believehas shown equivalent or improved efficacy compared to Tykerb.

We are nearing completion of a Phase 1a clinical trialin the United States and Canada of ARRY-543 and are preparing to initiate anexpansion trial.  We reported interimPhase 1a data in December 2006 for ARRY-543: the compound demonstrated consistentdrug exposure and four patients had stable disease at well-tolerated doses. Weare planning to initiate Phase 2 trials.

***ARRY-520, Targeting KSP for Cancer***

ARRY-520inhibits kinesin spindle protein, or KSP, a protein that plays an essentialrole in mitotic spindle formation. Similar to the taxanes and vinca alkaloids, KSPinhibitors inhibit tumor growth by preventing mitotic spindle formation andcell division. However, unlike taxanes and vinca alkaloids, KSP inhibitors donot demonstrate certain side effects such as peripheral neuropathy.  ARRY-520 caused marked tumor regression inpreclinical models of human cancer at tolerated doses.

*In vivo*, ARRY-520 caused marked tumor regression inpreclinical models of human cancer at tolerated doses.  In studies comparing the most clinicallyadvanced competitor against standard of care agents like taxanes and vincaalkaloids, ARRY-520 has shown superior efficacy in multiple preclinical models.We filed an IND application with the FDA in December 2006 and began a Phase 1clinical trial in May 2007.

***ARRY-380, Targeting ErbB-2 forCancer***

ErbB-2 is a receptor kinasetarget that has been found to be over-expressed in breast and other cancers.Our orally active ErbB-2 inhibitor, ARRY-380, has shown efficacy and a low sideeffect profile in preclinical models of human cancer. Recently, Herceptin, theintravenously-dosed protein inhibitor currently on the market that modulatesErbB-2, has shown promising therapeutic benefit when dosed as an adjuvant tosurgery in cancer patients. This scientific finding expanded an already largemarket for an ErbB-2 inhibitor. We believe this oral drug may broadly benefit HER2-positivecancer patients, including those that do not respond to Herceptin. We filed an IND application for ARRY-380with the FDA and plan to initiate a Phase 1 clinical trial.

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***ARRY-162, Targeting MEK forInflammation***

Pro-inflammatory proteins, or cytokines, have beenbroadly implicated as playing detrimental roles in a number of inflammatorydiseases. Modulation of certain cytokines has been shown to provide clinicalbenefit for the treatment of inflammatory disease. Injected proteintherapeutics currently on the market, including Enbrel® (etanercept), Remicade® (infliximab),Humira® (adalimumab) and Kineret® (anakinra),bind to and modulate the activity of the cytokines of TNF or IL-1. MEK has beendemonstrated to modulate the biosynthesis of certain pro-inflammatorycytokines, in particular, TNF, IL-1 and IL-6. We believe inhibition of MEK willhave applications in inflammatory diseases driven by these cytokines, such asarthritis, psoriasis and inflammatory bowel diseases such as Crohn’s. Ourextensive experience with inhibitors of MEK leads us to believe that thistarget may be amenable to chronic modulation that is well tolerated bypatients. ARRY-162, an orally-active MEK inhibitor, has shown efficacy and a lowside effect profile in preclinical models of human arthritis and otherinflammatory diseases.  We believe thiscompound may provide broad therapeutic benefits in the treatment ofinflammatory and chronic degenerative diseases. We initiated Phase 1 clinicaltrials in healthy volunteers in April 2006 and reported interim data in June2007. ARRY-162 showed no serious adverse events through 14 days of continuousdosing and significantly inhibited cytokine production after *ex-vivo* stimulation of clinical samples. We are completing aPhase 1b combination trial with methotrexate in RA patients and long-termtoxicology studies. Given appropriate results, we plan to initiate a Phase 2trial.

***ARRY-797, Targeting p38 forInflammation and Cancer***

p38 is another kinase target that modulates theproduction of TNF, IL-1 and IL-6.  Asdescribed above, we believe that inhibition of p38 will modulate inflammatorycytokine production and will benefit patients with inflammatory disease. Thesecytokines can also act as cellular growth factors including multiple myeloma.Additionally, p38 may play a role in certain resistance mechanisms or metastaticprogression in cancer. As a result, we believe inhibition of p38 may provide atherapeutic benefit in certain cancer patients. ARRY-797, a selective****orally active p38 inhibitor, has showngood efficacy, controlled tissue distribution and a low side effect profile inpreclinical models of human arthritis and certain cytokine-driven cancers.  We filed an IND application with the FDA inOctober 2006 and initiated Phase 1 clinical trials in healthy volunteers. Wealso filed an application to initiate a Phase 1b trial in cancer patients inApril 2007. We plan to initiate Phase 2 trails.

***ARRY614, Targeting p38/Tie2 for Inflammation and Cancer***

Increased production of certain cytokines can causeaberrant tissue proliferation. The growth, differentiation and maintenance ofnew blood vessels, or angionenesis, in proliferating tissue can lead touncontrolled cell growth that characterizes cancer and chronic inflammatorydiseases. p38 regulates the production of numerous pro-inflammatory andpro-proliferative cytokines, such as TNF, IL-1 and IL-6. Tie2 plays animportant role in angiogenesis and blood vessel growth. ARRY-614, an orallyactive compound that inhibits both p38 and Tie2, has been shown to blockangiogenesis, to inhibit inflammation and to antagonize tumor growth, whileshowing a low side effect profile after prolonged dosing in preclinical models.We believe this compound will have broad therapeutic benefits in various cancersand inflammatory diseases. This compound is in regulated safety assessment andwe plan to file an IND application in the second half of 2007.

**Opportunity**

There is atremendous opportunity in creating drugs for debilitating and life-threateningdiseases, especially in cancer and inflammation. The medical community isseeking targeted therapies that treat both the underlying disease as well ascontrol symptoms more effectively and/or more safely than currently availabledrugs. We believe future patient care will improve with the use of biomarkersto select targeted therapies for more effective disease treatment. Also,clinical trials aimed at a well defined patient population should show animproved response rate and increase the chances for approval by the FDA. Thisapproach may result in a greater number of marketed drugs aimed at a smallersubset of patients. Our research benefits from the evolving scientificunderstanding of how modulating specific protein targets can potentially treatboth cancer and inflammatory disease. As a result, a drug designed to treatcancer may also be useful in treating inflammatory disease, and vice-versa.

The worldwidemarket for targeted cancer drugs is expected to grow from $16 billion in2006 to $47 billion in 2012, representing the cancer drug market’s fastestgrowing segment. The inflammatory disease market is highly diverse and includesRA, osteoarthritis, COPD, cardiovascular disease, psoriasis, and kidneydiseases. According to EvaluatePharma, the worldwide market for injectabletargeted therapies for RA alone is expected to grow from $10 billion in2006 to $18 billion in 2012. Additionally, with the safety concerns overthe class of pain medications 

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known as COX-2inhibitors, new markets for replacement drugs to treat pain associated with RAand osteoarthritis, as well as other painful inflammatory disorders, are likelyto develop.

Another positivetrend for us is the pharmaceutical industry’s ongoing need to fill theirclinical development pipelines with new drugs to drive future revenue growth.Despite increased spending on internal research, the industry has been unableto meet this demand. As a result, they have become increasingly reliant onbiotech companies to acquire new drug candidates.  The scarcity of later stage clinical assetsavailable for in-licensing is driving these companies to enter into licensingdeals at earlier stages. We believe deal terms have increased significantly forearly stage drug candidates over the last several years and this trend willcontinue. As a result, this increasing demand for a limited number of clinicalassets should continue to increase the value of our drug pipeline.

***Cancer***

Despitea wide range of available cancer therapies, patient responses remain limitedand variable.  Targeted therapies offer amore specific approach than first generation, cytotoxic chemotherapy drugs byregulating discrete aspects of cellular function affecting cancer cells to agreater extent than normal cells, providing an improved side effect profile andpotentially increased efficacy. We believe certain cancers will eventuallybecome chronic diseases, treated with a combination of targeted therapies.  Array’s research focus in the cancer marketis to build a pipeline of complementary targeted therapies.

Accordingto the American Cancer Society, approximately 10.5 million Americans with ahistory of cancer were alive in January 2003 and more than 1.4 million newcases are expected to be diagnosed in 2007. The following table shows estimated new cases diagnosed in the UnitedStates:

| Estimated New Cases in 2007 | ** ** |
|-------------------------------------------------|------------|
| Prostate                                        |       | 219,000 |   |
| Breast                                          |       | 213,000 |   |
| Lung                                            |       | 181,000 |   |
| Colon                                           |       | 112,000 |   |
| Melanoma                                        |       | 60,000 |   |
| Pancreas                                        |       | 37,000 |   |

 

***Inflammatory Disease***

Inflammation is a naturalbiologic response to injury or infectious attack to the human body. Unregulatedinflammation results in a broad range of conditions, most of which areclassified by the tissue or organ where the inflammation occurs.  These conditions include RA in the joint,psoriasis in the skin, COPD in the lung, fibrotic disease in the liver andkidney, Crohn’s disease in the intestine, and atherosclerosis in the arteries. Currently,some of the most effective treatments for these diseases are injectable proteintherapeutics, which have significant cost and patient compliance issues.  Injectable protein therapeutics currently onthe market, such as Enbrel, Remicade, Humira and Kineret,  bind to and/or modulate the activity of theinflammatory cytokines TNF or IL-1. There remains a significant unmet medicalneed for therapies to treat COPD, asthma, fibrosis and to manage pain.  We believe there are significant opportunitiesto create orally active drugs to treat many of these often-chronic diseases andconditions. We are developing drugs that modulate important biological targetsin key intracellular pathways that control inflammation, potentially providingthe ability to treat multiple diseases and conditions with a single oral agent.

**PartneredResearch and Development**

Wehave research partnerships with leading pharmaceutical and biotechnologycompanies for which we design, create and optimize drug candidates, and conductpreclinical testing across a broad range of therapeutic areas.  In certain partnerships, we also performprocess research and development, and manufacture clinical supplies. Thesepartnerships involve either continued research and development on programs wehave out-licensed or drug discovery and development on targets selected by ourpartners. These collaborations provide research funding and, in a number of ourcurrent agreements, up-front fees, milestone payments and/or royalties based uponthe success of the program.  Our largestpartners, from whom we are receiving research funding or have the potential forfuture milestones or royalties, include AstraZeneca, Genentech, InterMune, OnoPharmaceutical Co., Ltd., Amgen Inc., Eli Lilly and Company (ICOS 

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Corporation),Japan Tobacco Inc., and Takeda Pharmaceutical Company, Ltd.

Our research teamhas produced more early-stage discovery assets than we can developinternally.  During the next three years,we intend to out-license certain of these assets through research partnershipsof higher value than our traditional collaborations.  We believe this strategy will createopportunities for greater financial upside while continuing to provide arevenue stream and will allow us to maintain a critical mass of scientistsrequired for a world-class research platform.

Information about collaboratorsthat comprise 10% or more of our total revenue and about revenue we receivewithin and outside the United States can be found in Note 11 – “Customer andGeographic Information” to our audited financial statements included elsewherein this Annual Report.

Beloware summaries of some of our partnered programs in which we are receivingresearch funding and/or are based on our out-licensed programs.

***AstraZeneca – MEK for Cancer Program / ARRY-886 and ARRY-704***

InDecember 2003, we entered into an out-licensing and collaboration agreementwith AstraZeneca to develop our MEK program solely in the field of oncology. Underthe agreement, AstraZeneca acquired exclusive worldwide rights to our clinicaldevelopment candidate, ARRY-886, together with ARRY-704 and anothersecond-generation compound for oncology indications we developed during thecollaboration. We retain the rights to all non-oncology therapeutic indicationsfor MEK compounds not selected by AstraZeneca for development. To date, we haveearned $21.5 million in up-front and milestone payments. The agreement alsoprovides for research funding, which is now complete, and potential additionaldevelopment milestone payments of approximately $75 million and royalties onproduct sales. AstraZeneca is responsible for further clinical development andcommercialization for ARRY-886, and for clinical development andcommercialization for ARRY-704 and for the third compound it licensed.

***Genentech – Oncology Programs***

Weentered into a licensing and collaboration agreement with Genentech inDecember 2003 to develop small molecule drugs against multiple therapeutictargets in the field of oncology. We initiated this collaboration withGenentech to advance two of our proprietary oncology programs into clinicaldevelopment. These programs included small molecule leads we had developedalong with additional, related intellectual property. Under the agreement,Genentech made an up-front payment to us, provides research funding and paid amilestone payment to us for nominating a clinical candidate and advancing itinto regulated safety assessment testing. In addition, Genentech has agreed to make additional potentialdevelopment milestone payments and pay us royalties on any resulting productsales. Genentech is responsible for clinical development and commercializationof the resulting products.

In April 2005, weexpanded our collaboration agreement with Genentech to develop clinicalcandidates directed against an additional cancer target.  Under the expanded agreement, we receiveadditional research funding, as well as potential research and developmentmilestone payments and product royalties based on the success of the newprogram.  Genentech has the soleresponsibility for clinical development and commercialization of any resultingproducts.  In October 2005, we furtherexpanded our collaboration with Genentech. Under the current agreement, weexpect to receive a total of $50 million in research funding through December2008, plus milestone and royalty payments based on success of the programs.Genentech may terminate its agreement with us upon 120 days’ notice.

***InterMune – Hepatitis C Virus Programs***

Our scientists andInterMune scientists have collaborated since 2002 to discover novel smallmolecule inhibitors of the HCV NS3/4 protease. During this collaboration, ourteam of scientists discovered ITMN-191, which InterMune is now developing.Under the terms of the agreement, InterMune funded drug discovery, preclinicaltesting, process development and manufacturing in conformity with current GoodManufacturing Practices, or cGMP, and will make milestone payments to us basedon the selection and progress of clinical drug candidates, as well as royaltieson sales of any products derived from the collaboration. As a result of ourresearch progress, we received our first milestone payment from InterMune inJune 2004.  Research funding under thisagreement ended June 30, 2007.

Wedesigned compounds under this program using computational modeling techniquesand optimized them to achieve superior efficacy and targeted tissue penetration.During 2006, we produced and delivered cGMP clinical supplies of 

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ITMN-191, andInterMune initiated a Phase 1 clinical trial. We received a $500,000 milestonepayment in February 2007 after the first subject was dosed.

***Ono Pharmaceutical – Research Program***

We entered into a drug discoverycollaboration with Ono Pharmaceutical in October 2005 to create small molecule drug candidates against aseries of kinases selected by Ono.Ono provides research funding and milestoneand royalty payments based on the success of the program.  Ono is responsible for clinical developmentand commercialization of any resulting products.  The research funding for this program endsMay 1, 2008.

***VentiRx Pharmaceuticals – Toll-Like Receptor Program***

We entered into a licensing and collaborationagreement with VentiRx, a privately held biopharmaceutical company, in February2007, under which we granted VentiRx exclusive worldwide rights to our TLRprogram. The program contains a number of compounds targeting TLR’s to activateinnate immunity. VentiRx has indicated that it expects to develop its first twocandidates in oncology and allergy. We received an equity stake in VentiRx aswell as an up-front payment, potential milestone payments and royalties onproduct sales. We retain the option to acquire a 50% ownership position in allVentiRx clinical oncology products developed under this agreement.

***Eli Lilly and Company – IC83 / CHK-1 Program***

We entered into a collaboration agreement with ICOSCorporation in 1999 to create small molecule CHK-1 inhibitors.  Array and ICOS scientists invented IC83, andArray received a milestone payment after the first patient was dosed with thismolecule in a Phase 1 clinical trial in early 2007.  The agreement provided research funding,which has now ended, and Array is entitled to receive additional milestonepayments based on Eli Lilly’s achievement of clinical milestones.  Eli Lilly acquired ICOS in 2007.

**OurResearch and Development Technologies and Expertise**

Ourscientists use the Array Discovery Platform, an integrated suite of drugdiscovery technologies, to create drug candidates and conduct preclinical andclinical development. A critical capability within the Array Discovery Platformis our proprietary software, which enables our scientists to share informationacross our company, analyze databases of existing drugs, generate novelpredictive databases and design novel drugs with potential competitiveadvantages over current therapies. We use *invitro*and *in vivo*predictivepharmacodynamic and pharmacokinetic models to select compounds for potentialdevelopment. Early in the drug discovery process, our scientists engineerdesirable drug characteristics, such as improved potency, specificity anddosing regimen and reduced side effect profile, into drug candidates. Theresulting compounds are tested for safety, efficacy and metabolism to selectthe most promising clinical candidates.

Ourexpanding development capabilities include clinical trial designs thatincorporate early markers of biological activity; in-house cGMP facilities,which allow us to rapidly produce clinical drug supplies; clinical developmentstrategies that incorporate trials to provide rapid proof of concept;therapeutically focused clinical teams that drive rapid protocol development,clinical site selection, trial initiation and monitoring, and study resultevaluation.

 We believe our drug discovery and developmentapproach can significantly improve on the industry’s existing clinicalattrition rates through our use of:

·                  Proprietary chemoinformatic databasesthat relate chemical structure to compound development potential;

·                  Multiple lead generation strategiesincluding high throughput screening, virtual screening and proprietary *de novo* design software;

·                  State-of-the-art protein x-raycrystallography, structural databases and computational modeling;

·                  An extensive battery of *in vivo* and *in vitro*metabolic and safety drug profiling assays;

·                  A company-wide electronic laboratorynotebook that enables our scientists to collect, analyze and share informationacross the organization; and

·                  Innovativeclinical trial designs, incorporating markers of biological activity.

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**OurStrategy**

We are building a fullyintegrated, commercial-stage biopharmaceutical company that invents, developsand markets safe and effective small molecule drugs to treat patients afflictedwith cancer and inflammatory disease. We intend to accomplish this through thefollowing strategies:

·                  Inventing targeted small moleculedrugs that are either first-in-class or second generation drugs thatdemonstrate a competitive advantage over drugs on the market or in clinicaldevelopment;

·                  Commercializing drugs that require atherapeutic specialty sales force;

·                  Partnering late-stage development andcommercialization of select drugs that require worldwide distribution or aimedat the primary care market;

·                  Partnering select early-stageprograms for continued research and development under which we would receiveresearch funding, plus significant milestones and royalties; and

·                  Evaluatingopportunities to in-license later stage clinical or commercial programs toaccelerate our transition to a commercial-stage biotech company.

**Competitors**

Thepharmaceutical and biotechnology industries are characterized by rapid andcontinuous technological innovation. We compete with companies worldwide thatare engaged in the research and discovery, licensing, development and commercializationof drug candidates, including Arena Pharmaceuticals Inc.; Arqule; CytokineticsInc.; Exelixis Inc.; Incyte Corporation.; Theravance, Inc.; and VertexPharmaceuticals Incorporated. Some of our competitors have a broader range ofcapabilities and have greater access to financial, technical, scientific,regulatory, business development, recruiting and other resources than we do.Their access to greater resources may allow them to develop processes orproducts that are more effective, safer or less costly, or gain greater marketacceptance, than products we develop or for which they obtain FDA approval morerapidly than we do. We anticipate that we will face increased competition inthe future as new companies enter the market and advanced technologies becomeavailable.

**Research and Development Expenses**

Research and development expenses consist of costs associated with ourproprietary drug programs for salaries and benefits of scientific personnel,consulting and outsourced services, laboratory supplies, allocated facilitiescosts and depreciation. Research and development expenses were $57.5 millionfor the year ended June 30, 2007, compared to $33.4 million for fiscal 2006 and$22.9 million for fiscal 2005.

**GovernmentRegulation**

Biopharmaceuticalcompanies are subject to substantial regulation by governmental agencies in theUnited States and other countries. Virtually all pharmaceutical products aresubject to rigorous preclinical and clinical testing and other approval proceduresby the FDA and by foreign regulatory agencies. Before a drug product isapproved by the FDA for commercial marketing, three phases of human clinicaltrials are usually conducted to test the safety and effectiveness of theproduct.  Phase 1 clinical trials mosttypically involve testing the drug on a small number of healthy volunteers toassess the safety profile of the drug at different dosage levels.  Phase 2 clinical trials, which also enroll arelatively small number of volunteers, are designed to further evaluate thedrug’s safety profile and to provide preliminary data as to the drug’seffectiveness in humans.  Phase 3clinical trials consist of larger, well-controlled studies that may involveseveral hundred volunteers representing the drug’s targeted population.  During any of these phases, the clinicaltrial can be placed on “clinical hold,” or temporarily or permanently stoppedfor a variety of reasons, principally for safety concerns.

Theapproval process is time-consuming and expensive, and there are no assurancesthat approval will be granted on a timely basis, or at all. Even if regulatoryapprovals are granted, a marketed product is subject to continual review underfederal and state laws and regulations. Post-marketing requirements include reporting adverse events,recordkeeping, compliance with current good manufacturing practices (cGMP) andmarketing requirements.

Ifdrug candidates we develop are approved for commercial marketing by the FDA,they would be subject to the provisions of the Drug Price Competition andPatent Term Restoration Act of 1984 known as the “Hatch-Waxman Act.”  The Hatch-Waxman Act provides companies withmarketing exclusivity for new chemical entities and allows companies to applyto extend patent protection for up to five additional years. It also provides ameans for approving generic versions 

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of a drug productonce the marketing exclusivity period has ended and all relevant patents haveexpired (or have been successfully challenged and defeated).  The period of exclusive marketing may beshortened, however, by a successful patent challenge.

Allfacilities and manufacturing processes used in the production of ActivePharmaceutical Ingredients for clinical use in the United States must beoperated in conformity with cGMP as established by the FDA. We have a cGMPmanufacturing facility, which allows us to produce cGMP compliant compounds. Inour facility, we have the capacity to produce Active Pharmaceutical Ingredientsfor Phase 1 clinical testing. We have validated this capability for compliancewith FDA regulations and began our first cGMP manufacturing campaign in 2002.Our cGMP facility is subject to periodic regulatory inspections to ensurecompliance with cGMP requirements. We could also be required to comply withspecific requirements or specifications of our collaborators, which may be morestringent than regulatory requirements. If we fail to comply withapplicable regulations, the FDA could require us to cease ongoing research ordisqualify the data submitted to regulatory authorities. A finding that we hadmaterially violated cGMP requirements could result in additional regulatorysanctions and, in severe cases, could result in a mandated closing of our cGMPfacility, which would materially and adversely affect our business, financialcondition and results of operations.

In thecourse of our business, we handle, store and dispose of chemicals andbiological samples. We are subject to various federal, state and local laws andregulations relating to the use, manufacture, storage, handling and disposal ofhazardous materials and waste products. These environmental laws generallyimpose liability regardless of the negligence or fault of a party and mayexpose us to liability for the conduct of, or conditions caused by, others.

Mosthealth care providers, including research institutions from whom we or ourcollaborators obtain patient information, are subject to privacy rules underthe Health Insurance Portability and Accountability Act of 1996 (HIPAA).  Although our clinical development efforts arenot directly regulated by these privacy regulations, we could face substantialcriminal penalties if we knowingly receive individually identifiable healthinformation from a health care provider that has not satisfied HIPAA’sdisclosure standards. In addition, certain state privacy laws and genetictesting laws may apply directly to our operations and/or those of ourcollaborators and may impose restrictions on the use and dissemination ofindividuals’ health information.

We aresubject to other regulations, including regulations under the OccupationalSafety and Health Act, regulations promulgated by the United States Departmentof Agriculture, and regulations under other federal, state and local laws.

**IntellectualProperty**

Oursuccess depends in part on our ability to protect our proprietary software,potential drug candidates and other intellectual property rights. To establishand protect our proprietary technologies and products, we rely on a combinationof patent, copyright, trademark and trade secret laws, as well asconfidentiality provisions in our contracts with collaborators.

Weattempt to protect our trade secrets by entering into confidentialityagreements with our employees, third parties and consultants. Our employeesalso sign agreements requiring that they assign to us their interests ininventions, original expressions and any corresponding patents and copyrightsarising from their work for us. However, it is possible that these agreementsmay be breached, invalidated or rendered unenforceable, and if so, we may nothave an adequate remedy available. Despite the measures we have taken toprotect our intellectual property, parties to our agreements may breach theconfidentiality provisions or infringe or misappropriate our patents,copyrights, trademarks, trade secrets and other proprietary rights. Inaddition, third parties may independently discover or invent competingtechnologies or reverse-engineer our trade secrets or other technology.

Ourpatent strategy is designed to protect technology, inventions and improvementsto inventions that are commercially important to our business. We currentlyhave fourteen issued United States patents and numerous patent applications onfile with the United States Patent and Trademark Office and around the world.The source code for our proprietary software programs is protected both as atrade secret and as a copyrighted work.

UnitedStates patents issued from applications filed on or after June 8, 1995,have a term of 20 years from the application filing date or earlierclaimed priority. All of our patent applications were filed after June 8,1995. Patents in most other countries have a term of 20 years from thedate of filing of the patent application. Because the time from filing patentapplications to issuance of patents is often several years, this process mayresult in a period of patent protection 

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significantlyshorter than 20 years, which may adversely affect our ability to excludecompetitors from our markets. Our success will depend in part upon our abilityto develop proprietary products and technologies and to obtain patent coveragefor these products and technologies. We intend to continue to file patentapplications covering newly developed products and technologies. We may not,however, commercialize the technology underlying any or all of our existing orfuture patent applications.

Patentsprovide some degree of protection for our proprietary technology. However, thepursuit and assertion of patent rights, particularly in areas likepharmaceuticals and biotechnology, involve complex legal and factualdeterminations and, therefore, are characterized by some uncertainty. Inaddition, the laws governing patentability and the scope of patent coveragecontinue to evolve, particularly in biotechnology. As a result, patents may notbe issued from any of our patent applications or from applications licensed tous. The scope of any of our patents, if issued, may not be sufficiently broadto offer meaningful protection. In addition, our patents or patents licensed tous, if they are issued, may be successfully challenged, invalidated,circumvented or rendered unenforceable so that our patent rights might notcreate an effective competitive barrier. Moreover, the laws of some foreigncountries may not protect our proprietary rights to the same extent as do thelaws of the United States. Any patents issued to us or our strategic partnersmay not provide a legal basis for establishing an exclusive market for ourproducts or provide us with any competitive advantages. Moreover, the patentsheld by others may adversely affect our ability to do business or to continueto use our technologies freely. In view of these factors, our intellectualproperty positions bear some degree of uncertainty.

**Employees**

As ofJune 30, 2007, we had 311 full-time employees, including 237 scientists, ofwhom 113 have PhD’s. None of our employees are covered by collective bargainingagreements, and we consider our employee relations to be good.

**OurCorporate Information**

Foundedin 1998, we are headquartered in Boulder, Colorado and have laboratoryfacilities in Longmont, Colorado, which together with our headquarters, encompass230,000 square feet of laboratory facilities. We became a public company inNovember 2000, and our stock is listed on the Nasdaq Global Market underthe symbol “ARRY.” The mailing address and telephone number of our principalexecutive offices are 3200 Walnut Street, Boulder, Colorado 80301,(303) 381-6600.

**AvailableInformation**

The annual reportson Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports, that we file with or furnish to the SEC areavailable on our web site free of charge as soon as reasonably practicablefollowing the filing or furnishing of these reports to the SEC.  Our web site can be found atwww.arraybiopharma.com. Information on our web site does not constitute anypart of this Annual Report on Form 10-K.

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**ITEM 1A. RISKFACTORS**

*In addition to the other factorsdiscussed elsewhere in this report and in other reports we file with the SEC,the following factors could cause actual results or events to differ materiallyfrom those contained in any forward-looking statements made by us or on ourbehalf.  In addition, other risks anduncertainties not presently known to us or that we currently deem immaterialmay impair our business operations.  Ifany of the following risks or such other risks occur, it could adversely affectour business, operating results and financial condition, as well as cause thevalue of our common stock to decline.*

**RISKSRELATED TO OUR BUSINESS**

**We have a history of losses and maynot achieve or sustain profitability.**

We areat an early stage of executing our business plan, and we have a limited historyof developing and out-licensing our proprietary drug candidates and offeringour drug discovery capabilities. We have incurred significant operating and netlosses and negative cash flows from operations since our inception. As ofJune 30, 2007, we had an accumulated deficit of $189.1 million. We had netlosses of $55.4 million, $39.6 million and $23.2 million for thefiscal years ended June 30, 2007, 2006 and 2005, respectively. We expectto incur additional losses and negative cash flows in the future, and theselosses may continue or increase due in part to anticipated increases inexpenses for research and development, particularly clinical development,expansion of our clinical and scientific capabilities, acquisitions ofcomplementary technologies or in-licensed drug candidates. At the same time, weexpect that revenue from the sale of our research tools and services willcontinue to decline as a percentage of total revenue as we devote moreresources to drug discovery and our proprietary drug programs.  As a result, we may not be able to achieve ormaintain profitability. Moreover, if we do achieve profitability, the level ofany profitability cannot be predicted and may vary significantly.

Muchof our current revenue is non-recurring in nature and unpredictable as totiming and amount. While several of our out-license and collaborationagreements provide for royalties on product sales, given that none of our drugcandidates have been approved for commercial sale, that our drug candidates areat early stages of development and that drug development entails a high risk offailure, we do not expect to receive any royalty revenue for several years, ifat all. For the same reasons, we may never realize much of the milestonerevenue provided for in our out-license and collaboration agreements. Similarly, drugs we select to commercializeourselves or partner for later-stage co-development and commercializationmay not generate revenue for several years, or at all.

**Our drug candidates are at earlystages of development, and we may not successfully develop a drug candidatethat becomes a commercially viable drug.**

Thedrug discovery and development process is highly uncertain, and we have notdeveloped, and may never develop, a drug candidate that ultimately leads to acommercially viable drug. All of our drug candidates are in the early stages ofdevelopment, and we do not have any drugs approved for commercial sale. Beforea drug product is approved by the FDA for commercial marketing, it is testedfor safety and effectiveness in clinical trials that can take up to six yearsor longer. At any time, the FDA may place a clinical trial on “clinical hold”,or temporarily or permanently stop the trial for a variety of reasons,principally for safety concerns. Only one of our candidates, ARRY-886, is in aPhase 2 clinical trial initiated in June 2006 by our partner AstraZeneca. AstraZeneca has initiated a Phase 1 clinicaltrial for ARRY-704; five of our other candidates, ARRY-543, ARRY-162, ARRY-797,ARRY-520 and ARRY-380, are currently in Phase 1 trials; and another, ARRY-614,is expected to enter a Phase 1 trial. Promising results in preclinicaldevelopment or clinical trials may not be predictive of results obtained inlater clinical trials. A number of pharmaceutical companies have experiencedsignificant setbacks in advanced clinical trials, even after obtainingpromising results in earlier preclinical and clinical trials. We or ourcollaborators may experience numerous unforeseen events during, or as a resultof, the clinical process that could delay or prevent our drug candidates frombeing approved, including:

·                  thefailure to achieve clinical trial results that indicate a candidate iseffective in treating a specified condition or illness in humans;

·                  thepresence of harmful side effects;

·                  theFDA’s determination that the submitted data do not satisfy the criteria forapproval;

·                  thelack of commercial viability of the drug;

·                  thefailure to acquire, on reasonable terms, intellectual property rights necessaryfor commercialization; and

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·                  theexistence of therapeutics that are more effective.

At anytime, we or our collaborators may decide to discontinue the development of adrug candidate or not to commercialize a candidate. If weterminate a preclinical program in which we have invested significantresources, we will have expended resources on a program that will not provideany or a full return on our investment and we will have missed the opportunityto have allocated those resources to potentially more productive uses. Evenif one of our drug candidates receives regulatory approval for marketing,physicians or consumers may not find that its effectiveness, ease of use, sideeffect profile, cost or other factors make it effective in treating disease ormore beneficial than or preferable to other drugs on the market. Additionally,third party payors, such as government health plans and health insurance plansor maintenance organizations, may choose not to include our drugs on theirformulary lists for reimbursement. As a result, our drugs may not be used ormay be used only for restricted applications.

**We may not be successful inentering into additional out-license agreements on favorable terms.**

We are committing significant resources to create our ownproprietary drug candidates and to build a commercial-stagebiopharmaceutical company. In fiscal 2007, we increased our investment inproprietary research to $57.5 million in research and developmentexpenses, compared to $33.4 million, and $22.9 million for fiscalyears 2006 and 2005, respectively. Our proprietary drug discovery programs arein their early stage of development and are unproven. To date, we have enteredinto four out-licensing agreements for the development and commercialization ofour drug candidates. Although we have expended, and continue to expend,resources on internal research and development for our proprietary programs, wemay not be successful in entering into additional out-licensing agreements withfavorable terms, including up-front, milestone, royalty and/or licensepayments, as a result of factors, many of which are outside of our control, andwhich include:

·                  ourability to create valuable proprietary drug candidates targeting large marketopportunities;

·                  theresearch and spending priorities of potential licensing partners;

·                  thewillingness of and the resources available to pharmaceutical and biotechnologycompanies to in-license drug candidates to fill their clinical pipelines;

·                  ourability or inability to agree with the potential partner on the value of theproprietary drug candidates, or on the related terms; or

·                  our belief thatthe maximum value of a proprietary drug candidate is best achieved by retainingthe rights and not seeking a partner.

In addition, we may undertake and fund, solely at ourexpense, further development, clinical trials, manufacturing and marketingactivities for a greater number of proprietary candidates than we planned. As aresult, our requirements for capital could increase significantly, and we maybe unable to raise additional capital on favorable terms, or at all, or we maybe required to substantially reduce our development efforts, which would delay,limit or prevent our ability to commercialize our drug candidates.

**We may not out-license ourproprietary programs at the most appropriate time to maximize the total valueor return of these programs to us.**

Acritical aspect of our business strategy is to out-license drug candidates forlate-stage development, co-development and/or commercialization to obtain thehighest possible value while also evaluating earlier out-licensingopportunities to maximize our risk-adjusted return on our investment inproprietary research. Because the costs and risk of failure of bringing a drugto market are high, the value of out-licensing a drug candidate generallyincreases as it successfully progresses through clinical trials. We may chooseor be forced to out-license a drug candidate or program on terms that requireus to relinquish commercial or market rights or at a point in the research anddevelopment process that does not provide as great a value or return than whatmight have been obtained if we had further developed the candidate or programinternally. Likewise, we may decline, or be unable to obtain favorable, earlyout-licensing opportunities in programs that do not result in a commerciallyviable drug, which could leave the resulting program with little or no valueeven though significant resources were invested in its development.

**Weexpect that revenue from our funded research collaborations will decline in thefuture as we focus more resources on our proprietary research programs.**

We expect that revenue from our funded researchcollaborations to discover drug candidates against targets our collaboratorsselect will decline.  Historically,revenue from these collaborations has partially funded development of a

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drug discovery platform for identifying and developing early stage drugcandidates.  We believe the value of thedrug candidates we have created for many of our collaborators under thesecollaboration agreements has exceeded the economic reward provided to us underthe agreements.  One of our primarybusiness strategies is to transition to a partnering strategy where, inaddition to potentially obtaining higher milestone and royalty rates, we wouldout-license later stage candidates and retain commercialization or promotionalrights in parts of the world.  In orderto transition to this approach, we expect to make significant investments inour own drug discovery efforts to discover additional candidates forout-licensing and that our collaboration revenue will decline as our historicalcollaborations end.

**We have limited clinical development and commercialization experience.**

One of our business strategies isto develop select drug candidates through later stage clinical trials beforeout-licensing them to a pharmaceutical or biotechnology partner for furtherclinical development and commercialization and to commercialize select drugcandidates ourselves. We have not yet conducted a Phase 2 or later stageclinical trial ourselves, nor have we commercialized a drug. We have limitedexperience conducting clinical trials and obtaining regulatory approvals, andwe may not be successful in some or all of these activities. We have noexperience as a company in the sales, marketing and distribution ofpharmaceutical products and do not currently have a sales and marketingorganization. We expect to expend significant amounts to recruit and retainhigh quality personnel with clinical development experience. Developingcommercialization capabilities would be expensive and time-consuming, coulddelay any product launch, and we may never be able to develop this capacity. Tothe extent we are unable or determine not to develop these resourcesinternally, we may be forced to rely on third-party clinicalinvestigators, clinical research or marketing organizations, which couldsubject us to costs and to delays that are outside our control. If we areunable to establish adequate capabilities independently or with others, we maybe unable to generate product revenues for certain candidates.

**Delays in the commencement or completion of clinical testing couldresult in increased costs to us and delay or limit our ability to generaterevenues.**

Delays in the commencement orcompletion of clinical testing could significantly affect our productdevelopment costs and the value of such products. We do not know whetherplanned clinical trials will begin on time or be completed on schedule, if atall. The commencement and completion of clinical trials can be delayed for anumber of reasons, including delays related to:

·                  obtainingregulatory approval to commence a clinical trial;

·                  reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and trial sites, the terms of which can be subject to extensivenegotiation and may vary significantly among different CROs and trial sites;

·                  manufacturingsufficient quantities of a product candidate for use in clinical trials;

·                  obtaininginstitutional review board, or IRB, approval to conduct a clinical trial at aprospective site;

·                  recruitingand enrolling patients to participate in clinical trials for reasons includingcompetition from other clinical trial programs for the same or similarindications; and

·                  retainingpatients who have initiated a clinical trial but may be prone to withdraw dueto side effects from the therapy, lack of efficacy or personal issues, or whoare lost to further follow-up.

Clinical trialsmay also be delayed as a result of ambiguous or negative interim results. Inaddition, a clinical trial may be suspended or terminated by us, the FDA, theIRB overseeing the clinical trial at issue, any of our clinical trial siteswith respect to that site, or other regulatory authorities due to a number offactors, including:

·                  failure toconduct the clinical trial in accordance with regulatory requirements or ourclinical protocols;

·                  inspection ofthe clinical trial operations or trial sites by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold;

·                  unforeseensafety issues, and

·                  lack of adequatefunding to continue the clinical trial.

Additionally,changes in regulatory requirements and guidance may occur and we may need toamend clinical trial protocols to reflect these changes. Amendments may requireus to resubmit our clinical trial protocols to IRBs for reexamination, whichmay impact the costs, timing or successful completion of a clinical trial. Ifwe experience delays in completion of, or if we terminate, any of our clinicaltrials, the commercial prospects for our product candidates may be harmed andour ability to generate product revenues will be delayed and/or reduced. Inaddition, many of the factors that cause, or lead to, a

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delay in the commencement orcompletion of clinical trials may also ultimately lead to the denial ofregulatory approval of a product candidate.

**Drug candidates that we develop withour collaborators or on our own may not receive regulatory approval.**

The developmentand commercialization of drug candidates for our collaborators and our owninternal drug discovery efforts are subject to regulation. Pharmaceuticalproducts require lengthy and costly testing in animals and humans andregulatory approval by governmental agencies prior to commercialization. Ittakes several years to complete testing, and failure can occur at any stage oftesting. Results attained in preclinical testing and early clinical trials forany of our drug candidates may not be indicative of results that are obtainedin later studies, and significant setbacks in advanced clinical trials mayarise, even after promising results in earlier studies. Clinical trials may notdemonstrate sufficient safety and efficacy to obtain the requisite regulatoryapprovals or result in marketable products. Furthermore,data obtained from preclinical and clinical studies are susceptible to varyinginterpretations that may delay, limit or prevent regulatory approval. Inaddition, the administration of any drug candidate we develop may produceundesirable side effects or safety issues that could result in theinterruption, delay or suspension of clinical trials, or the failure to obtainFDA or other regulatory approval for any or all targeted indications.Based on results at any stage of testing, we or our collaborators may decide torepeat or redesign a trial or discontinue development of a drug candidate.

Approvalof a drug candidate as safe and effective for use in humans is never certain,and regulatory agencies may delay or deny approval of drug candidates forcommercialization. These agencies may also delay or deny approval based onadditional government regulation or administrative action, on changes in regulatorypolicy during the period of clinical trials in humans and regulatory review oron the availability of alternative treatments. Similar delays and denials maybe encountered in foreign countries. None of our collaborators have obtainedregulatory approval to manufacture and sell drug candidates owned by us oridentified or developed under an agreement with us. If we or our collaboratorscannot obtain this approval, we will not realize milestone or royalty paymentsbased on commercialization goals for these drug candidates.

In light of widely publicized events concerning thesafety of certain drug products, such as Vioxx, regulatory authorities, membersof Congress, the Government Accountability Office (“GAO”), medicalprofessionals, and the general public have raised concerns about potential drugsafety issues. These events have resulted in the withdrawal of drug products,revisions to drug labeling that further limit use of the drug products, andestablishment of risk management plans that may, for instance, restrictdistribution of drug products. Although drug safety concerns have occurred overtime, the increased attention to this issue may result in a more cautiousapproach by the FDA. As a result, data from clinical trials may receive greaterscrutiny with respect to safety. Safety concerns may result in the FDA or otherregulatory authorities terminating clinical trials before completion orrequiring longer or additional clinical trials that may result in substantialadditional expense and a delay or failure in obtaining approval or approval fora more limited indication than originally sought.

**Even if our drug candidates obtainregulatory approval, we and our collaborators will be subject to ongoinggovernment regulation.**

Evenif regulatory authorities approve any of our drug candidates, the manufacture,labeling, storage, recordkeeping, distribution, marketing and sale of thesedrugs will be subject to strict and ongoing regulation. Compliance with thisregulation consumes substantial financial and management resources and mayexpose us and our collaborators to the potential for other adversecircumstances. For example, approval for a drug may be conditioned on costlypost-marketing follow-up studies. Based on these studies, if a regulatory authoritydoes not believe that the drug demonstrates a clinical benefit to patients, itcould limit the indications for which a drug may be sold or revoke the drug’smarketing approval. In addition, identification of certain side effects after adrug is on the market may result in the subsequent withdrawal of approval,reformulation of a drug, additional preclinical and clinical trials and changesin labeling or distribution. Any of these events could delay or prevent us fromgenerating revenue from the commercialization of these drugs and cause us toincur significant additional costs.

Given the number of recent high profile safety eventswith certain drug products, the FDA may require, as a condition of approval,costly risk management programs with components including safety surveillance,restricted distribution and use, patient education, enhanced labeling, specialpackaging or labeling, expedited reporting of certain adverse events,preapproval of promotional materials, and restrictions on direct-to-consumer advertising.Furthermore, heightened Congressional scrutiny on the adequacy of the FDA’sdrug approval process and the agency’s efforts to assure the safety of

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marketed drugs has resulted in the proposal of new legislationaddressing drug safety issues. If enacted, any new legislation could result indelays or increased costs for manufacturers and drug sponsors during the periodof product development, clinical trials, and regulatory review and approval, aswell as increased costs to assure compliance with any new post-approvalregulatory requirements.

Inaddition, the marketing of these drugs by us or our collaborators will beregulated by federal and state laws pertaining to health care “fraud and abuse,”such as the federal anti-kickback law prohibiting bribes, kickbacks or otherremuneration for the order, purchase or recommendation of items or servicesreimbursed by federal health care programs. Many states have similar lawsapplicable to items or services reimbursed by commercial insurers. Violations offraud and abuse laws can result in fines and/or imprisonment.

**If our drug candidates do not gainmarket acceptance, we may be unable to generate significant revenue.**

Evenif our drug candidates are approved for sale, they may not be successful in themarketplace. Market acceptance of any of our drug candidates will depend on anumber of factors including:

·                  demonstrationof clinical effectiveness and safety;

·                  thepotential advantages of our drug candidates over alternative treatments;

·                  theability to offer our drug candidates for sale at competitive prices;

·                  theavailability of adequate third-party reimbursement; and

·                  theeffectiveness of marketing and distribution methods for the products.

If ourdrug candidates do not gain market acceptance among physicians, patients andothers in the medical community, our ability to generate meaningful revenuesfrom our drug candidates would be limited.

**If we need but are unable to obtainadditional funding to support our operations, we could be unable to successfullyexecute our operating plan or be forced to reduce our operations.**

Wehave historically funded our operations through revenue from our collaborationsand the issuance of equity securities. We used $44.5 million in our operatingactivities in fiscal 2007 while we used $24.3 million and $17.2 million in ouroperating activities in fiscal 2006 and 2005, respectively. Although weanticipate that we will use more cash in our operating activities in futureperiods, we believe that our existing cash, cash equivalents and marketablesecurities and anticipated cash flow from existing out-license andcollaboration agreements will be sufficient to support our current operatingplan for at least the next 12 months. However, our current operating planand assumptions could change as a result of many factors, and we could requireadditional funding sooner than anticipated.

To theextent that the cash from our future operating activities is insufficient tomeet our future capital requirements, we will have to raise additional funds tocontinue our proprietary research and development. We may not be able to raisefunds on favorable terms, if at all. To the extent that we raise additionalcapital through the sale of equity or convertible debt securities, the issuanceof those securities would result in dilution to our stockholders. We have acredit facility providing for a $10 million term loan, and a $5 millionequipment line of which a total of $15 million was advanced to us as of June30, 2007.  In addition we have a $6.8 millionrevolving line of credit to support standby letters of credit.  A portion of our cash flow will be dedicatedto the payment of principal and interest on such indebtedness, and possibly to fund increased compensating andrestricted cash balances with the lender, which could render us morevulnerable to competitive pressures and economic downturns and imposes somerestrictions on our operations. If we are unable to obtain additional fundswhen needed, we may be required to curtail operations significantly or toobtain funds through other arrangements on unattractive terms, which couldprevent us from successfully executing our operating plan.

**Our collaborators have substantialcontrol and discretion over the timing and the continued development and marketingof drug candidates we create for them.**

Ourcollaborators have significant discretion in determining the efforts and amountof resources that they dedicate to our collaborations. Our collaborators maydetermine not to proceed with clinical development or commercialization of aparticular drug candidate for a number of reasons that are beyond our control,even under circumstances where we might have continued such a program. Inaddition, our ability to generate milestone payments and royalties from ourcollaborators depends on our collaborators’ abilities to establish the safetyand efficacy of our drug candidates, obtain regulatory approvals and achievemarket acceptance of products developed from our drug candidates. We alsodepend on

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our collaboratorsto manufacture clinical scale quantities of some of our drug candidates andwould depend on them in the future for commercial scale manufacture,distribution and direct sales. Our collaborators may not be successful inmanufacturing our drug candidates on a commercial scale or in successfullycommercializing them.

Weface additional risks in connection with our collaborations, including thefollowing:

·                  ourcollaborators may develop and commercialize, either alone or with others,products and services that are similar to or competitive with the products thatare the subject of the collaboration with us;

·                  ourcollaborators may under fund or not commit sufficient resources to the testing,marketing, distribution or other development of our drug candidates;

·                  ourcollaborators may not properly maintain or defend our intellectual propertyrights or they may utilize our proprietary information in such a way as toinvite litigation that could jeopardize or potentially invalidate ourintellectual property or proprietary information or expose us to potentialliability;

·                  ourcollaborators may encounter conflicts of interest, changes in business strategyor other business issues which could adversely affect their willingness orability to fulfill their obligations to us (for example, pharmaceutical andbiotechnology companies historically have re-evaluated their prioritiesfollowing mergers and consolidations, which have been common in recent years inthese industries); and

·                  disputesmay arise between us and our collaborators delaying or terminating theresearch, development or commercialization of our drug candidates, resulting insignificant litigation or arbitration that could be time-consuming andexpensive, or causing collaborators to act in their own self-interest and notin the interest of our stockholders.

**Revenue from collaborationsdepends on the extent to which the pharmaceutical and biotechnology industriescollaborate with other companies for one or more aspects of their drugdiscovery process.**

Our capabilities include aspects of the drug discoveryprocess that pharmaceutical and biotechnology companies have traditionallyperformed internally. The willingness of these companies to expand or continuedrug discovery collaborations to enhance their research and development processis based on several factors that are beyond our control, any of which couldcause our revenue to decline. These include their ability to hire and retainqualified scientists, the resources available for entering into drug discovery collaborationsand the spending priorities among various types of research activities. Inaddition, our ability to convince these companies to use our drug discoverycapabilities, rather than develop them internally, depends on many factors,including our ability to:

·                  develop andimplement drug discovery technologies that will result in the identification ofhigher-quality drug candidates;

·                  attract andretain experienced, high caliber scientists;

·                  achieve timely,high-quality results at an acceptable cost; and

·                  design, createand manufacture our chemical compounds in quantities, at purity levels and atcosts that are acceptable to our collaborators.

The importance of these factors varies depending on thecompany and type of discovery program, and we may be unable to meet any or allof them in the future. Even if we are able to address these factors, thesecompanies may still decide to perform these activities internally or retainother companies that provide drug research and development expertise similar toours.

**Ourresearch and development capabilities may not produce viable drug candidates.**

Wehave entered into several research and development collaborations under whichwe provide drug discovery and development services to identify drug candidatesfor our collaborators. We also seek to identify and develop drug candidates forour proprietary programs. It is uncertain whether we will be able to providedrug discovery more efficiently or create high quality drug candidates that aresuitable for our or our collaborators’ purposes, which may result in delayed orlost revenue, loss of collaborators or failure to expand our existingrelationships. Our ability to create viable drug candidates for ourselves andour collaborators depends on many factors, including the implementation ofappropriate technologies, the development of effective new research tools, thecomplexity of the chemistry and biology, the lack of predictability in thescientific process and the performance and decision-making capabilities of ourscientists. Our information-driven technology platform, which we believe allowsour scientists to make better decisions, may not enable our scientists to makecorrect decisions or develop viable drug candidates.

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**Ifour drug discovery and development programs do not progress as anticipated, ourrevenue and stock price could be negatively impacted.**

Weestimate the timing of a variety of preclinical, clinical, regulatory and othermilestones for planning purposes, including when a drug candidate is expectedto enter clinical trials, when a clinical trial will be completed or when anapplication for regulatory approval will be filed. Some of our estimates areincluded in this report. We base our estimates on facts that are currentlyknown to us and on a variety of assumptions, many of which are beyond ourcontrol. Delays may be caused by regulatory or patent issues, interim or finalresults of on-going clinical trials, scheduling conflicts with participatingclinics and the availability of patients who meet the criteria for, and therate of patient enrollment in, clinical trials. If we or our collaborators donot achieve milestones when anticipated, we may not achieve our plannedrevenue, and our stock price could decline.

**We may not realize anticipated benefits from futureacquisitions.**

As part of ourbusiness strategy, we may acquire, invest in or form strategic partnershipswith businesses with complementary products, services and/or technologies.Acquisitions and strategic partnerships involve numerous risks, including, butnot limited to:

·                  difficultiesand increased costs in connection with integration of the personnel,operations, technologies and products of acquired companies;

·                  diversionof management’s attention from other operational matters;

·                  thepotential loss of key employees;

·                  thepotential loss of key collaborators;

·                  lackof synergy, or the inability to realize expected synergies, resulting from theacquisition or partnership; and

·                  impairmentof acquired intangible assets as a result of technological advancements or worse-than-expectedclinical results or performance of the acquired company or the partneredassets.

Mergers andacquisitions and strategic partnerships are inherently risky and involvesignificant investments in time and resources to effectively manage these risksand integrate an acquired business or create a successful drug with a strategicpartner. Even with investments in time and resources, an acquisition orstrategic partnership may not produce the revenues, earnings or businesssynergies we anticipate. An acquisition or strategic partnership that fails tomeet our expectations could materially and adversely affect our business,financial condition and results of operations.

**Becausewe rely on a small number of collaborators for a significant portion of ourrevenue, if one or more of our major collaborators terminates or reduces thescope of their agreement with us, our revenue may significantly decrease.**

Arelatively small number of collaborators account for a significant portion ofour revenue. Genentech, InterMune, AstraZeneca and Ono accounted for 42%, 21%,14% and 13%, respectively of our total revenue in fiscal 2007.  In fiscal 2006, the same collaboratorsaccounted for 35%, 24%, 16% and 7% respectively of our total revenue.  We expect that revenue from a limited numberof collaborators, including Genentech, Ono and VentiRx Pharmaceuticals, Inc.will account for a large portion of our revenue in future quarters. In general,our collaborators may terminate their contracts with us upon 90 to120 days’ notice for a number of reasons. In addition, some of our majorcollaborators can determine the amount of products delivered and research ordevelopment performed under these agreements. As a result, if any one of ourmajor collaborators cancels, declines to renew or reduces the scope of itscontract with us, our revenue may significantly decrease.

**Wemay not be able to recruit and retain the experienced scientists and managementwe need to compete in the drug research and development industry.**

Wehave approximately 311 employees as of June 30, 2007, and our future successdepends upon our ability to attract, retain and motivate highly skilledscientists and management. Our ability to achieve our business strategies,including progressing drug candidates through later stage development orcommercialization, attracting new collaborators and retaining, renewing andexpanding existing collaborations, depends on our ability to hire and retainhigh caliber scientists and other qualified experts.  We compete with pharmaceutical andbiotechnology companies, contract research companies and academic and researchinstitutions to recruit personnel and face significant competition forqualified personnel, particularly clinical development personnel. We may incurgreater costs than anticipated, or may not be successful, in

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attracting newscientists or management or in retaining or motivating our existing personnel.

Ourfuture success also depends on the personal efforts and abilities of theprincipal members of our senior management and scientific staff to providestrategic direction, manage our operations and maintain a cohesive and stableenvironment. In particular, we rely on the services of Robert E. Conway,our Chief Executive Officer; Dr. Kevin Koch, our President and ChiefScientific Officer; Dr. David L. Snitman, our Chief Operating Officer andVice President, Business Development; Dr. John Yates, our Chief MedicalOfficer, R. Michael Carruthers, our Chief Financial Officer; andJohn R. Moore, our Vice President and General Counsel. We have employmentagreements with all of the above personnel that are terminable upon30 days’ prior notice.

**Our cGMPand pharmacology facilities and practices may fail to comply with governmentregulations.**

Allfacilities and manufacturing processes used in the production of drug products,including Active Pharmaceutical Ingredients for clinical use in the UnitedStates must be operated in conformity with current Good Manufacturing Practices(cGMP), as established by the FDA. Similar requirements exist for manufactureof drug products for clinical use in other countries. These requirements include, among other things, quality control, qualityassurance and the maintenance of records and documentation. If we fail tocomply with these requirements, we may not be able to continue the productionof our products, and we could be subject to fines and penalties, suspension ofproduction, suspension or delay in product approval, product seizure or recall,or withdrawal of product approval. We operate a clinical-scalemanufacturing facility that we believe conforms to cGMP requirements. Thisfacility and our cGMP practices are subject to periodic regulatory inspectionsto ensure compliance with cGMP requirements. In addition, we could be requiredto comply with specific requirements of our collaborators, which may exceed FDAor other applicable regulations. Failure on our part to comply with applicableregulations and specific requirements of our collaborators could result in thetermination of ongoing research, disqualification of data for submission toregulatory authorities, delays or denials ofnew product approvals, warning letters, fines, consent decrees restricting orsuspending manufacturing operations, injunctions, civil penalties, recall orseizure of products, and criminal prosecution. Material violations ofcGMP requirements could result in regulatory sanctions and, in severe cases,could result in a mandated closing of our cGMP facility.

In connection with our application for commercialapprovals and, if any drug candidate is approved by the FDA or other regulatoryagencies for commercial sale, a significant scale-up in manufacturing mayrequire additional validation studies. If we are unable to successfullyincrease the manufacturing capacity for a drug candidate, the regulatoryapproval or commercial launch of that drug candidate may be delayed, or theremay be a shortage of supply, which could limit our ability to commercialize thedrug.

Inaddition, our pharmacology facility may be subject to the United StatesDepartment of Agriculture (USDA) regulations for certain animal species.Failure on our part to comply with applicable regulations and specific requirementsof our collaborators could result in the termination of ongoing pharmacologyresearch. Material violations of USDA requirements could result in additionalregulatory sanctions and, in severe cases, could result in a mandated closingof our pharmacology facility for certain species.

**Ourdevelopment, testing and manufacture of drug candidates may expose us toproduct liability and other lawsuits.**

Wedevelop, test and manufacture drug candidates that are generally intended foruse in humans. Our drug discovery activities, including clinical trials we orour collaborators conduct, that result in the future manufacture and sale ofdrugs by us or our collaborators expose us to the risk of liability forpersonal injury or death to persons using these drug candidates. We may berequired to pay substantial damages or incur legal costs in connection withdefending any of these product liability claims, or we may not receive revenuefrom expected royalty or milestone payments if the commercialization of a drugis limited or ceases as a result of such claims. We have product liabilityinsurance that contains customary exclusions and provides coverage up to$7.0 million per occurrence and in the aggregate, which we believe iscustomary in our industry for our current operations. However, our productliability insurance does not cover every type of product liability claim thatwe may face or loss we may incur, and may not adequately compensate us for theentire amount of covered claims or losses or for the harm to our businessreputation. We may be unable to acquire or maintain additional or maintain ourcurrent insurance policies at acceptable costs or at all.

**If ouruse of chemical and hazardous materials violates applicable laws or regulationsor causes personal injury we may be liable for damages.**

Ourdrug discovery activities, including the analysis and synthesis of chemicalcompounds, involve the controlled use

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of chemicals,including flammable, combustible, toxic and radioactive materials that arepotentially hazardous. Our use, storage, handling and disposal of thesematerials is subject to federal, state and local laws and regulations,including the Resource Conservation and Recovery Act, the Occupational Safetyand Health Act and local fire codes, and regulations promulgated by theDepartment of Transportation, the Drug Enforcement Agency, the Department ofEnergy, the Colorado Department of Public Health and Environment, and theColorado Department of Human Services, Alcohol and Drug Abuse Division. We mayincur significant costs to comply with these laws and regulations in thefuture. In addition, we cannot completely eliminate the risk of accidentalcontamination or injury from these materials, which could result in materialunanticipated expenses, such as substantial fines or penalties, remediationcosts or damages, or the loss of a permit or other authorization to operate orengage in our business. Those expenses could exceed our net worth and limit ourability to raise additional capital.

**Ouroperations could be interrupted by damage to our specialized laboratoryfacilities.**

Ouroperations are dependent upon the continued use of our highly specializedlaboratories and equipment in Boulder and Longmont, Colorado. Catastrophicevents, including fires or explosions, could damage our laboratories,equipment, scientific data, work in progress or inventories of chemicalcompounds and may materially interrupt our business. We employ safetyprecautions in our laboratory activities in order to reduce the likelihood of theoccurrence of these catastrophic events; however, we cannot eliminate thechance that such an event will occur. The availability of laboratory space inthese locations is limited, and rebuilding our facilities could be timeconsuming and result in substantial delays in fulfilling our agreements withour collaborators. We maintain business interruption insurance in the amount of$18.0 million to cover continuing expenses and lost revenue caused by suchoccurrences. However, this insurance does not compensate us for the loss ofopportunity and potential harm to customer relations that our inability to meetour collaborators’ needs in a timely manner could create.

**RISKS RELATED TO OUR INDUSTRY**

**Theconcentration of the pharmaceutical and biotechnology industry and any furtherconsolidation could reduce the number of our potential collaborators.**

There are alimited number of pharmaceutical and biotechnology companies, and thesecompanies represent a significant portion of the market for our capabilities.The number of our potential collaborators could decline even further throughconsolidation among these companies. If the number of our potentialcollaborators declines even further, they may be able to negotiate greaterrights to the intellectual property they license from us, price discounts orother terms that are unfavorable to us.

**Capitalmarket conditions may reduce our biotechnology collaborators’ ability to fundresearch.**

Traditionally,many unprofitable biotechnology companies have funded their research anddevelopment expenditures through raising capital in the equity markets.Declines and uncertainties in these markets have severely restricted raisingnew capital at times in the past and have affected these companies’ ability tocontinue to expand or fund existing research and development efforts. If ourcurrent or future biotechnology collaborators are unable to raise sufficientcapital to fund research and development expenditures, we may not be able toexpand or maintain current revenue.

**Healthcare reform and cost control initiatives by third-party payors could reduce theprices that can be charged for drugs, which could limit the commercial successof our drug candidates.**

In the United States, there have been and we expect therewill continue to be a number of legislative and regulatory proposals to changethe healthcare system in ways that could significantly affect our business.Federal and state lawmakers regularly propose and, at times, enact legislationthat would result in significant changes to the healthcare system, some ofwhich are intended to contain or reduce the costs of medical products andservices. For instance, the Medicare Prescription Drug Improvement andModernization Act of 2003, among other things, added a new Part D prescription drugbenefit for Medicare beneficiaries otherwise without prescription drugcoverage. Furthermore, future legislation may limit the prices that can becharged for drugs we develop and may limit our commercial opportunity andreduce any associated revenue and profits. For example, federal laws requiredrug manufacturers to pay specified rebates for medicines reimbursed byMedicaid and to provide discounts for out-patient medicines purchased bycertain public health service entities and “disproportionate share” hospitalsand for purchases by some federal governmental departments such as theDepartment of Veterans Affairs and the Department of Defense. In some countriesother than the United States, reimbursement, pricing

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and profitabilityof prescription pharmaceuticals and biopharmaceuticals are subject togovernment control. We are unable to predictwhat additional legislation or regulation, if any, relating to the healthcareindustry or third-party coverage and reimbursement may be enacted in thefuture or what effect such legislation or regulation would have on ourbusiness.

Also,we expect managed care plans will continue to put pressure on the pricing ofpharmaceutical and biopharmaceutical products. Cost control initiatives coulddecrease the price that we, or any potential collaborators, receive for any ofour future products, which could adversely affect our profitability. Theseinitiatives may also have the effect of reducing the resources thatpharmaceutical and biotechnology companies can devote to in-licensing drugcandidates and the research and development of new drugs, which could reduceour resulting revenue. Any cost containmentmeasures or other reforms that are adopted could have a negative impact on ourability to commercialize successfully our products or could limit or eliminateour spending on development of new drugs and affect our profitability.

**We orour collaborators may not obtain favorable reimbursement rates for our drugcandidates.**

The commercial success of our drug candidates will dependon the availability and adequacy of coverage and reimbursement from third-partypayors, including government and private insurance plans. Third-party payors are increasinglychallenging the prices charged for pharmaceuticals and other medical products. Ourproducts may be considered less cost-effective than existing products, and, assuch, coverage and reimbursement to the patient may not be available or besufficient to allow the sale of our products on a competitive basis.

In addition, the market for our drug candidates willdepend significantly on access to third-party payors’ drug formularies,or lists of medications for which third-party payors provide coverage andreimbursement. Industry competition to be included in such formularies canresult in downward pricing pressures on pharmaceutical companies. As such, wecannot provide assurances that our products will be placed on third-partypayors’ formularies. To the extent that our products are listed on third-partypayors’ formularies, we or our collaborators may not be able tonegotiate favorable reimbursement rates for our products. If we or ourcollaborators fail to obtain an adequate level of reimbursement for ourproducts by third-party payors, sales of the drugs would be adversely affected orthere may be no commercially viable market for the products.

**The drugresearch and development industry has a history of patent and otherintellectual property litigation, and we may be involved in costly intellectualproperty lawsuits.**

Thedrug research and development industry has a history of patent and otherintellectual property litigation, and we believe these lawsuits are likely tocontinue. Legal proceedings relating to intellectual property would beexpensive, take significant time and divert management’s attention from otherbusiness concerns. Because we produce drug candidates for a broad range oftherapeutic areas and provide many different capabilities in this industry, weface potential patent infringement suits by companies that control patents forsimilar drug candidates or capabilities or other suits alleging infringement oftheir intellectual property rights. There could be issued patents of which weare not aware that our products infringe or patents that we believe we do notinfringe that we are ultimately found to infringe. Moreover, patentapplications are in many cases maintained in secrecy for eighteen months afterfiling or even until patents are issued. The publication of discoveries in thescientific or patent literature frequently occurs substantially later than thedate on which the underlying discoveries were made and patent applications werefiled. Because patent applications can take many years to issue, there may becurrently pending applications of which we are unaware that may later result inissued patents that we infringe with our products. In addition, technologycreated under our research and development collaborations may infringe theintellectual property rights of third parties, in which case we may not receivemilestone or royalty revenue from those collaborations.

If wedo not prevail in an infringement lawsuit brought against us, we might have topay substantial damages, including triple damages, and we could be required tostop the infringing activity or obtain a license to use the patented technologyor redesign our products so as not to infringe the patent. We may not be ableto enter into licensing arrangements at a reasonable cost or effectivelyredesign our products. Any inability to secure licenses or alternativetechnology could delay the introduction of our products or prevent us frommanufacturing or selling products.

**Theintellectual property rights we rely on to protect our proprietary drugcandidates and the technology underlying our tools and techniques may beinadequate to prevent third parties from using our technology or developingcompeting capabilities or to protect our interests in our proprietary drugcandidates.**

Oursuccess depends in part on our ability to protect patents and maintain thesecrecy of proprietary processes and 

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other technologieswe develop for the testing and synthesis of chemical compounds in the drugdiscovery process. We currently have fourteen issued United States patents andnumerous patent applications on file with the United States Patent andTrademark Office and around the world.

Anypatents that we may own or license now or in the future may not affordmeaningful protection for our drug candidates or our technology and tools. Inorder to protect or enforce our intellectual property rights, we may have toinitiate legal proceedings against third parties. Our efforts to enforce andmaintain our intellectual property rights may not be successful and may resultin substantial costs and diversion of management time. In addition, othercompanies may challenge our patents and, as a result, these patents could benarrowed, invalidated or rendered unenforceable, or we may be forced to stopusing the technology covered by these patents or to license the technology fromthird parties. In addition, current and future patent applications on which wedepend may not result in the issuance of patents in the United States orforeign countries. Even if our rights are valid, enforceable and broad inscope, competitors may develop drug candidates or other products based onsimilar research or technology that is not covered by our patents.

Patentapplications relating to or affecting our business may have been filed by anumber of pharmaceutical and biopharmaceutical companies and academic institutions.A number of the technologies in these applications or patents may conflict withour technologies, patents or patent applications, which could reduce the scopeof patent protection we could otherwise obtain. We could also become involvedin interference proceedings in connection with one or more of our patents orpatent applications to determine priority of inventions. We cannot be certainthat we are the first creator of inventions covered by pending patentapplications, or that we were the first to file patent applications for anysuch inventions.

Drugcandidates we develop that are approved for commercial marketing by the FDAwould be eligible for market exclusivity forvarying time periods during which generic versions of a drug may not be marketed,and we could apply to extend patent protection for up to five additional yearsunder the provisions of the Drug Price Competition and Patent TermRestoration Act of 1984, known as the “Hatch-Waxman Act.” The Hatch-Waxman Actprovides a means for approving genericversions of a drug once the marketing exclusivity period has ended andall relevant patents have expired. The period of exclusive marketing, however,may be shortened if a patent is successfully challenged and defeated, whichcould reduce the amount of royalties we receive on the product.

**Agreementswe have with our employees, consultants and collaborators may not affordadequate protection for our trade secrets, confidential information and otherproprietary information.**

Inaddition to patent protection, we also rely on copyright and trademarkprotection, trade secrets, know-how, continuing technological innovation andlicensing opportunities. In an effort to maintain the confidentiality andownership of our trade secrets and proprietary information, we require ouremployees, consultants and advisors to execute confidentiality and proprietaryinformation agreements. However, these agreements may not provide us withadequate protection against improper use or disclosure of confidential informationand there may not be adequate remedies in the event of unauthorized use ordisclosure. Furthermore, we may from time to time hire scientific personnelformerly employed by other companies involved in one or more areas similar tothe activities we conduct. In some situations, our confidentiality andproprietary information agreements may conflict with, or be subject to, therights of third parties with whom our employees, consultants or advisors haveprior employment or consulting relationships. Although we require our employeesand consultants to maintain the confidentiality of all proprietary informationof their previous employers, these individuals, or we, may be subject toallegations of trade secret misappropriation or other similar claims as a resultof their prior affiliations. Finally, others may independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets. Our failure or inability to protect ourproprietary information and techniques may inhibit or limit our ability tocompete effectively, or exclude certain competitors from the market.

**The drugresearch and development industry is highly competitive, and we compete withsome companies that offer a broader range of capabilities and have betteraccess to resources than we do.**

Thepharmaceutical and biotechnology industries are characterized by rapid andcontinuous technological innovation. We compete with companies worldwide thatare engaged in the research and discovery, licensing, development andcommercialization of drug candidates, including Arena Pharmaceuticals Inc.;Arqule; Cytokinetics Inc.; Exelixis Inc.; Incyte Corporation.; Theravance,Inc.; and Vertex Pharmaceuticals Incorporated. Some of our competitors have abroader range of capabilities and have greater access to financial, technical,scientific, regulatory, business development, recruiting and other resourcesthan we do. Their access to greater resources may allow them to

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develop processesor products that are more effective, safer or less costly, or gain greatermarket acceptance, than products we develop or for which they obtain FDAapproval more rapidly than we do. We anticipate that we will face increasedcompetition in the future as new companies enter the market and advancedtechnologies become available.

**We facepotential liability related to the privacy of health information we obtain fromresearch institutions.**

Mosthealth care providers, including research institutions from which we or ourcollaborators obtain patient information, are subject to privacy regulationspromulgated under the Health Insurance Portability and Accountability Act of1996, or HIPAA. Our clinical research efforts are not directly regulated byHIPAA. However, conduct by a person that maynot be prosecuted directly under HIPAA’s criminal provisions could potentiallybe prosecuted under aiding and abetting or conspiracy laws. Consequently,depending on the facts and circumstances, we could face substantialcriminal penalties if we receive individually identifiable health informationfrom a health care provider or research institution that has not satisfiedHIPAA’s disclosure standards. In addition, certain state privacy laws andgenetic testing laws may apply directly to our operations and/or those of ourcollaborators and may impose restrictions on our use and dissemination ofindividuals’ health information. Moreover, patients about whom we or ourcollaborators obtain information, as well as the providers who share thisinformation with us, may have contractual rights that limit our ability to useand disclose the information. Claims that we have violated individuals’ privacyrights or breached our contractual obligations, even if we are not foundliable, could be expensive and time-consuming to defend and could result inadverse publicity that could harm our business.

**RISKS RELATED TO OUR STOCK**

**Our officers and directors have significant controlover us and their interests may differ from those of our stockholders.**

At June 30, 2007, our directors and officersbeneficially owned or controlled approximately 11% of our common stock.Individually and in the aggregate, these stockholders significantly influenceour management, affairs and all matters requiring stockholder approval. Thesestockholders may vote their shares in a way with which other stockholders donot agree. In particular, this concentration of ownership may have the effectof delaying, deferring or preventing an acquisition of us or entrenchingmanagement and may adversely affect the market price of our common stock.

**Ourquarterly operating results could fluctuate significantly, which could causeour stock price to decline.**

Ourquarterly operating results have fluctuated in the past and are likely to fluctuatein the future. Entering into licensing or drug discovery collaborationstypically involves significant technical evaluation and/or commitment ofcapital by our collaborators. Accordingly, negotiation can be lengthy and issubject to a number of significant risks, including collaborators’ budgetaryconstraints and internal acceptance reviews. In addition, a significant portionof our revenue is attributable to up-front payments and milestones that arenon-recurring.  Further, some of ourcollaborators can influence when we deliver products and perform services, andtherefore receive revenue, under their contracts with us. Due to these factors,our operating results could fluctuate significantly from quarter to quarter. Inaddition, we may experience significant fluctuations in quarterly operatingresults due to factors such as general and industry-specific economicconditions that may affect the research and development expenditures ofpharmaceutical and biotechnology companies.

Due tothe possibility of fluctuations in our revenue and expenses, we believe thatquarter-to-quarter comparisons of our operating results are not a goodindication of our future performance. Our operating results in some quartersmay not meet the expectations of stock market analysts and investors. If we donot meet analysts’ and/or investors’ expectations, our stock price coulddecline.

**Because our stock price may be volatile, our stockprice could experience substantial declines.**

The market price of our common stock has historicallyexperienced and may continue to experience volatility.  The high and low closing bids for our commonstock were $14.40 and $7.55 respectively in fiscal 2007, $9.67 and $5.99respectively in fiscal 2006, and $9.73 and $5.66, respectively, in fiscal 2005.Our quarterly operating results, the success or failure of our internal drugdiscovery efforts, changes in general conditions in the economy or thefinancial markets and other developments affecting our collaborators, ourcompetitors or us could cause the market price of our common stock to fluctuatesubstantially. This volatility coupled with market declines in our industryover the past several years have affected the market prices of securitiesissued by many companies, often for reasons unrelated to their operating

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performance,and may adversely affect the price of our common stock. In the past, securitiesclass action litigation has often been instituted following periods ofvolatility in the market price of a company’s securities. A securities classaction suit against us could result in potential liabilities, substantial costsand the diversion of management’s attention and resources, regardless ofwhether we win or lose.

**Because we do not intend to pay dividends,stockholders will benefit from an investment in our common stock only if itappreciates in value.**

We have never declared or paid any cash dividends onour common stock and are restricted in our ability to do so under our currentcredit agreement. We currently intend to retain our future earnings, if any, tofinance the expansion of our business and do not expect to pay any cashdividends in the foreseeable future. As a result, the success of an investmentin our common stock will depend entirely upon any future appreciation. There isno guarantee that our common stock will appreciate in value or even maintainthe price at which stockholders have purchased their shares.

**The ability of our stockholders to control ourpolicies and effect a change of control of our company is limited, which may notbe in the best interests of our stockholders.**

There are provisions in our certificate ofincorporation and bylaws that may discourage a third party from making aproposal to acquire us, even if some of our stockholders might consider theproposal to be in their best interests. These include the following provisionsin our certificate of incorporation:

·                  Our certificate of incorporation providesfor three classes of directors with the term of office of one class expiringeach year, commonly referred to as a “staggered board.” By preventingstockholders from voting on the election of more than one class of directors atany annual meeting of stockholders, this provision may have the effect ofkeeping the current members of our board of directors in control for a longerperiod of time than stockholders may desire.

·                  Our certificate of incorporationauthorizes our board of directors to issue shares of preferred stock withoutstockholder approval and to establish the preferences and rights of anypreferred stock issued, which would allow the board to issue one or moreclasses or series of preferred stock that could discourage or delay a tenderoffer or change in control.

In addition, our board of directors approved a RightsAgreement on August 2, 2001, which could prevent or deter a potentialunsolicited takeover of us by causing substantial dilution of an acquirer of15% or more of our outstanding common stock. We are also subject to thebusiness combination provisions of Section 203 of the Delaware GeneralCorporation Law, which, in general, imposes restrictions upon acquirers of 15%or more of our stock. As a result, it is difficult for a third party to acquirecontrol of us without the approval of the board of directors and, therefore,mergers and acquisitions of us that our stockholders may consider in their bestinterests may not occur.

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**ITEM 1B. UNRESOLVEDSTAFF COMMENTS**

     None.

**ITEM 2. PROPERTIES**

We areheadquartered in Boulder, Colorado, where we lease approximately 150,000 squarefeet of office and laboratory space under a lease that expires July 7,2016. We also lease a facility of approximately 78,000 total squarefeet of laboratory space in Longmont, Colorado under a lease thatexpires August 9,  2016.  Wehave options to extend each of the leases for up to two terms offive years each.

**ITEM 3. LEGALPROCEEDINGS**

We may be involved, from time to time, in variousclaims and legal proceedings arising in the ordinary course of our business. Weare not currently a party to any such claims or proceedings that, if decidedadversely to us, would either individually or in the aggregate have a materialadverse effect on our business, financial condition or results of operations.

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

No matters were submitted to a vote of our securityholders, through solicitation of proxies or otherwise, during the fourthquarter ended June 30, 2007.

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**PARTII**

###### **ITEM5. MARKET FOR THE REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

The followingtable sets forth, for the periods indicated, the range of the high and lowclosing bid information or sales prices for Array’s common stock as reported bythe Nasdaq Stock Market.
| Fiscal Year Ended June 30, 2007 | ** ** | **High**                                        | ** ** | **Low**                                         | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| First Quarter                                            |       | $       8.72 |       | $       7.55 |       |
| Second Quarter                                           |       | 13.57                                           |       | 8.30                                            |       |
| Third Quarter                                            |       | 13.92                                           |       | 11.42                                           |       |
| Fourth Quarter                                           |       | 14.40                                           |       | 11.04                                           |       |

 
| Fiscal Year Ended June 30, 2006 | ** ** | ** **                                      | ** ** | ** **                                      | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| First Quarter                   |       | $       7.77 |       | $       5.99 |       |
| Second Quarter                  |       | 7.47                                            |       | 6.27                                            |       |
| Third Quarter                   |       | 9.67                                            |       | 6.99                                            |       |
| Fourth Quarter                  |       | 8.95                                            |       | 6.62                                            |       |

 

As of August 10,2007, there were approximately 77 holders of record of our common stock. Thisdoes not include the number of persons whose stock is in nominee or “streetname” accounts through brokers.

**Dividends**

We have neverdeclared or paid any cash dividends on our common stock and we do not intend topay any cash dividends in the foreseeable future. In addition, the terms of ourloan agreement restrict our ability to pay cash dividends to our stockholders.We currently intend to retain all available funds and any future earnings foruse in the operations of our business and to fund future growth.

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**Performance Graph**

This performancegraph shall not be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject tothe liabilities under that Section and shall not be deemed to be incorporatedby reference into any filing of the company under the Securities Act of 1933,as amended or the Exchange Act.

The followinggraph compares, for the five year period ended June 30, 2007, the cumulativetotal stockholder return for our common stock, the Nasdaq Stock Market (U.S.companies) Index (the “Nasdaq Composite”), the Nasdaq Pharmaceutical Index (the“Nasdaq Pharmaceutical”) and the Nasdaq Biotechnology Index. The graph assumesthat $100 was invested on June 30, 2002 in the common stock of thecompany, and in the Nasdaq Composite, the Nasdaq Pharmaceutical and the NasdaqBiotechnology Index and assumes reinvestment of any dividends. The stock priceperformance on the following graph is not necessarily indicative of futurestock price performance.

**COMPARISON OF 5YEAR CUMULATIVE TOTAL RETURN*Among Array BioPharma Inc., The NASDAQ Composite Index,The Nasdaq Pharmaceutical Index And The Nasdaq Biotechnology Index**
| ** **                  | ** ** | **6/30/2002** | ** ** | **9/30/2002** | ** ** | **12/31/2002** | ** ** | **3/31/2003** | ** ** | **6/30/2003** | ** ** | **9/30/2003** | ** ** | **12/31/2003** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|
| **Array  BioPharma -NASGM** | ** ** | **100**       | ** ** | **81**        | ** ** | **58**         | ** ** | **44**        | ** ** | **32**        | ** ** | **57**        | ** ** | **59**         | ** ** |
| **NASDAQ  Composite**       | ** ** | **100**       | ** ** | **80**        | ** ** | **91**         | ** ** | **90**        | ** ** | **110**       | ** ** | **124**       | ** ** | **136**        | ** ** |
| **NASDAQ  Pharmaceutical**  | ** ** | **100**       | ** ** | **97**        | ** ** | **106**        | ** ** | **119**       | ** ** | **146**       | ** ** | **153**       | ** ** | **154**        | ** ** |
| **NASDAQ  Biotechnology**   | ** ** | **100**       | ** ** | **94**        | ** ** | **102**        | ** ** | **113**       | ** ** | **140**       | ** ** | **148**       | ** ** | **150**        | ** ** |

 

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| ** **                  | ** ** | **3/31/2004** | ** ** | **6/30/2004** | ** ** | **9/30/2004** | ** ** | **12/31/2004** | ** ** | **3/31/2005** | ** ** | **6/30/2005** | ** ** | **9/30/2005** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|
| **Array  BioPharma -NASGM** | ** ** | **93**        | ** ** | **82**        | ** ** | **73**        | ** ** | **99**         | ** ** | **73**        | ** ** | **65**        | ** ** | **74**        | ** ** |
| **NASDAQ  Composite**       | ** ** | **138**       | ** ** | **139**       | ** ** | **129**       | ** ** | **149**        | ** ** | **138**       | ** ** | **142**       | ** ** | **153**       | ** ** |
| **NASDAQ  Pharmaceutical**  | ** ** | **161**       | ** ** | **161**       | ** ** | **159**       | ** ** | **171**        | ** ** | **148**       | ** ** | **147**       | ** ** | **173**       | ** ** |
| **NASDAQ  Biotechnology**   | ** ** | **160**       | ** ** | **159**       | ** ** | **153**       | ** ** | **167**        | ** ** | **146**       | ** ** | **155**       | ** ** | **183**       | ** ** |

 
| ** **                  | ** ** | **12/31/2005** | ** ** | **3/31/2006** | ** ** | **6/30/2006** | ** ** | **9/30/2006** | ** ** | **12/31/2006** | ** ** | **3/31/2007** | ** ** | **6/30/2007** | ** ** |
|-----------------------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|
| **Array  BioPharma -NASGM** | ** ** | **73**         | ** ** | **95**        | ** ** | **89**        | ** ** | **88**        | ** ** | **134**        | ** ** | **132**       | ** ** | **121**       | ** ** |
| **NASDAQ  Composite**       | ** ** | **153**        | ** ** | **169**       | ** ** | **156**       | ** ** | **158**       | ** ** | **171**        | ** ** | **177**       | ** ** | **191**       | ** ** |
| **NASDAQ  Pharmaceutical**  | ** ** | **171**        | ** ** | **179**       | ** ** | **165**       | ** ** | **169**       | ** ** | **175**        | ** ** | **165**       | ** ** | **169**       | ** ** |
| **NASDAQ Biotechnology**    | ** ** | **188**        | ** ** | **195**       | ** ** | **175**       | ** ** | **182**       | ** ** | **185**        | ** ** | **180**       | ** ** | **186**       | ** ** |

 

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**ITEM6. SELECTED FINANCIAL DATA**

The followingselected financial data is derived from our audited financial statements. Thesehistorical results do not necessarily indicate future results. When you readthis data, it is important that you also read our financial statements andrelated notes, as well as the section “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” appearing elsewhere in thisAnnual Report on Form 10-K.
| ** **                                                        | ** ** | **Years Ended June.30,**                                 | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statements  of Operations Data**                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Collaboration revenue                                             |       | $      30,106                        |       | $      37,738 |   | $      34,343 |   | $      28,186 |   | $      33,633 |   |
| License and milestone revenue                                     |       | 6,864                                                              |       | 7,265 |   | 11,162 |   | 6,645 |   | 1,492 |   |
| Total revenue                                                     |       | 36,970                                                             |       | 45,003 |   | 45,505 |   | 34,831 |   | 35,125 |   |
|                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating  expenses (1)                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of revenue  (2)                                              |       | 24,936                                                             |       | 39,611 |   | 38,048 |   | 37,257 |   | 35,136 |   |
| Research and  development expenses for proprietary drug discovery |       | 57,464                                                             |       | 33,382 |   | 22,871 |   | 15,905 |   | 11,395 |   |
| General and  administrative expenses                              |       | 13,644                                                             |       | 13,789 |   | 9,372 |   | 8,016 |   | 8,901 |   |
| Total operating expenses                                          |       | 96,044                                                             |       | 86,782 |   | 70,291 |   | 61,178 |   | 55,432 |   |
|                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from operations                                              |       | (59,074                                                            | )          | (41,779 | ) | (24,786 | ) | (26,347 | ) | (20,307 | ) |
|                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest expense                                                  |       | (979                                                               | )          | (670 | ) | — |   | — |   | — |   |
| Interest income                                                   |       | 4,611                                                              |       | 2,835 |   | 1,542 |   | 381 |   | 787 |   |
| Other expense -  loss on investment                               |       | —                                                             |       | — |   | — |   | — |   | (500 | ) |
| Net loss                                                          |       | $    (55,442                                   | )          | $    (39,614 | ) | $    (23,244 | ) | $    (25,966 | ) | $    (20,020 | ) |
|                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net loss per  share - basic and diluted                           |       | $        (1.36             | )          | $        (1.02 | ) | $        (0.68 | ) | $        (0.91 | ) | $        (0.72 | ) |
|                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Shares used in  computing basic and diluted net loss per share    |       | 40,717                                                             |       | 38,759 |   | 34,043 |   | 28,511 |   | 27,830 |   |

 
| ** **                                                         | ** ** | **June 30,**                | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**          | ** ** |
| Cash, cash equivalents, restricted cash and  marketable securities |       | $    141,331 |       | $      70,100 |   | $      92,706 |   | $      37,446 |   | $      34,130 |   |
| Working capital                                                    |       | 120,829                          |       | 56,008 |   | 80,435 |   | 24,652 |   | 38,321 |   |
| Total assets                                                       |       | 174,974                          |       | 102,173 |   | 127,952 |   | 77,764 |   | 83,830 |   |
| Long term debt                                                     |       | 15,000                           |       | 14,150 |   | 10,000 |   | — |   | — |   |
| Total stockholders’  equity                                   |       | 107,703                          |       | 68,640 |   | 99,415 |   | 54,493 |   | 77,039 |   |

 

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(1) Operating expensesinclude share-based compensation expense of $4.8 million, $6.2 million,$151,000, $2.0 million, and $1.9 million for fiscal 2007, 2006, 2005, 2004, and2003, respectively. See Note 8 – “Stock Compensation Plans” of the Notes toFinancial Statements for further information regarding share-basedcompensation.

(2) Cost of revenueincludes a provision for excess inventory of $5.6 million and $4.1 million infiscal years 2004 and 2003, respectively.

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

*TheManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, including statements aboutour expectations related to the progress and success of our internalproprietary drug discovery activities, realizing new revenue streams andobtaining future out-licensing collaboration agreements that include up-frontmilestone and/or royalty payments, our ability to realize such up-frontmilestone and royalty payments under our existing or any future agreements,future research and development spending, our working capital requirements andour future headcount requirements.**In some cases, forward-lookingstatements can be identified by the use of terminology such as “may,” “will,” “expects,”“intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue”, orthe negative thereof or other comparable terminology. These statements are basedon current expectations and projections about our industry and assumptions madeby management and are not guarantees of future performance. Although we believethat the expectations reflected in the forward-looking statements containedherein are reasonable, these expectations or any of the forward-lookingstatements could prove to be incorrect, and actual results could differmaterially from those projected or assumed in the forward-looking statements.Our future financial condition, as well as any forward-looking statements aresubject to**significant risks and uncertainties**, including but not limited to thefactors set forth under the heading “Risk Factors” in Item 1A of this AnnualReport on Form 10-K. All forward looking statements and reasons why results maydiffer included in this Annual Report on Form 10-K are made as of the datehereof, and, unless required by law, we undertake no obligation to update anyforward-looking statements or reasons why actual results may differ in thisAnnual Report on Form 10-K.*

Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with the financial statements and notes to thosestatements included elsewhere in this report.

**Overview**

Array BioPharmaInc. is a biopharmaceutical company focused on the discovery, development andcommercialization of targeted small molecule drugs to treat debilitating andlife-threatening diseases.  Our proprietary drug development pipeline isfocused on the treatment of cancer and inflammatory disease and includesclinical candidates that are designed to regulate therapeutically importanttarget proteins.  We currently have 10 programs in our developmentpipeline, eight of which are wholly owned by us.

Our eight mostadvanced development programs that we wholly own and control consist ofARRY-543, an ErbB-2/EGFR dual inhibitor for cancer; ARRY-162, a MEK inhibitorfor inflammation; ARRY-797, a p38 inhibitor for inflammation and for cancer;ARRY-520, a KSP inhibitor for cancer; ARRY-380, an ErbB-2 inhibitor for cancer;and ARRY-614, a p38 and Tie2 dual inhibitor for inflammation and forcancer.  In addition, we haveout-licensed to AstraZeneca PLC three MEK inhibitors for cancer – includingARRY-886 (AZD6244), currently in multiple Phase 2 clinical trials, and ARRY-704(AZD8330), currently in a Phase 1 clinical trial.  The out-license and collaboration agreementswith these collaborators provide for up-front payments, research funding,success-based milestone payments and royalties on product sales.  Throughcollaborations we have also invented drug candidates that are currently inclinical development, including one for InterMune, Inc. (HCV NS3/4 proteaseinhibitor, ITMN-191), and one for Eli Lilly and Company (ICOS Corporation),IC83, a CHK1 inhibitor.

In addition tothese development programs, we have out-licensed two cancer programs toGenentech and we have a portfolio of discovery programs that we believe willgenerate two to three Investigational New Drug, or IND, applications per year overthe next three years.  Our discoveryefforts have also generated additional early-stage drug candidates that we maychoose to out-license through research partnerships. We have evolved ourresearch collaboration strategy to include seeking opportunities to out-licenseearly-stage drug candidates that do not meet our development criteria. Webelieve this strategy will result in our receiving a greater portion of thepotential financial upside than our previous research collaborations.  A recent example of this is our collaborationwith VentiRx Pharmaceuticals, Inc., which is described above under PartneredResearch and Development.  We alsobelieve this strategy will allow us to maximize our scientific efforts andother resources on programs for which we have particular expertise or whichhave synergies with our other development programs.

We have createdour proprietary pipeline of development and discovery programs on a modestinvestment of approximately $150 million in research and development expensesfrom our inception through June 30, 2007. Additionally, we have recognized a total of $258 million in researchfunding and in up-front and milestone payments from

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our collaborationpartners through June 30, 2007.  Underour existing collaboration agreements, we have the potential to earn over$260 million in additional milestone payments if we achieve all of thedrug discovery objectives detailed in these agreements, as well as royalties onany resulting product sales from 16 different drug development programs.

**BusinessDevelopment**

We currentlylicense certain of our compounds and/or programs and enter into collaborationsdirectly with pharmaceutical and biotechnology companies through opportunitiesidentified by our business development group, senior management, scientists andcustomer referrals. In addition, we license our compounds and enter intocollaborations in Japan through an agent.

Our top 10collaborators contributed approximately 98% of our total revenue during fiscal2007, and our current top four collaborators, Genentech, InterMune, AstraZenecaand Ono accounted for 42%,  21%, 14% and13%, respectively, of our total revenue. Duringfiscal year 2006 Genentech, InterMune, AstraZeneca and Ono accounted for 35%,24%, 16% and 7%, respectively, of our total revenue. In general, certain of ourcollaborators may terminate their collaboration agreements with us on 90 to 120days’ prior notice, including our agreement with Genentech which can beterminated on 120 days’ notice.

Internationalrevenue represented 31% of our total revenue during fiscal years 2007 and 2006.Our international revenue is primarily attributable to European and Japanesecollaborations. International revenue remained constant as a proportion oftotal revenues during fiscal year 2007 compared to fiscal year 2006 due to fullrecognition of two milestone payments from AstraZeneca in the current fiscalyear totaling $5.0 million for advancing ARRY-886 into Phase 2 clinical trialsand for the advancement of     ARRY-704 into Phase 1clinical trials.  This amount compares torevenues from the research funded portion of the same agreement withAstraZeneca which expired during fiscal 2006. All of our collaboration agreements are denominated in United Statesdollars.

We have incurrednet losses since inception and expect to incur losses in the near future as wecontinue to invest in our proprietary drug discovery programs. As of June 30,2007, we had an accumulated deficit of $189.1 million.

**CriticalAccounting Policies**

Our financial statementsand related notes are prepared in accordance with U.S. generally acceptedaccounting principles (GAAP), which requires us to make judgments, estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosures of contingent assets andliabilities. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstancesfor making judgments about the carrying value of assets and liabilities andother items that are not readily apparent from other sources. Actual resultsmay differ from these estimates due to actual outcomes that prove differentfrom those upon which we based our assumptions. Our senior management hasdiscussed the development, selection and disclosure of these estimates with theAudit Committee of our Board of Directors. We believe the following criticalaccounting policies have the most significant impact on the estimates andjudgments used when preparing our financial statements. Actual results maydiffer from these estimates under different assumptions or conditions.

An accountingpolicy is considered critical if it requires an accounting estimate to be madebased on assumptions about matters that are highly uncertain at the time theestimate is made, and if different estimates that reasonably could have beenused, or changes in the accounting estimates that are reasonably likely tooccur periodically, could materially impact the financial statements. We believethe following critical accounting policies reflect the more significantestimates and assumptions used in the preparation of our financial statements:

***Revenue Recognition***

Most of our revenue is derived from designing, creating, optimizing,evaluating and developing drug candidates for our collaborators. Our agreementswith our collaboration partners include fees based on contracted annual ratesfor full time equivalent employees working on a project, and may also includenon-refundable license and up-front fees, non-refundable milestone paymentsthat are triggered upon achievement of specific research or development goals,and future royalties on sales of products that result from the collaboration. Asmall portion of our revenue comes from fixed fee agreements or from sales ofcompounds on a per-compound basis.

We report revenue for lead generation and lead optimization research,custom synthesis and process research, the 

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development and sale of chemical compounds and the co-development ofproprietary drug candidates we out-license, as collaboration revenue. Licenseand milestone revenue is combined and reported separately from collaborationrevenue.

Arrangements that include multiple elements are evaluated under EmergingIssues Task Force No. 00-21 (“EITF 00-21”), “*RevenueArrangements with Multiple Deliverables*”, to determine whether theelement has value to the customer on a stand-alone basis and whether reliableevidence of fair value for the delivered and undelivered elements exists.Deliverables in an arrangement that do not meet the separation criteria of EITF00-21 are treated as a single unit of accounting, generally applying applicablerevenue recognition guidance for the final deliverable to the combined unit ofaccounting as defined in Staff Accounting Bulletin No. 104, “*Revenue Recognition*” (“SAB 104”). SAB 104 in turnestablished four criteria, each of which must be met, in order to recognizerevenue related to the performance of services or the shipment ofproducts.  Revenue is recognized when (a)persuasive evidence of an arrangement exists, (b) products are delivered orservices are rendered, (c) the sales price is fixed or determinable and (d)collectability is reasonably assured.

We recognizerevenue from non-refundable up-front payments and license fees on a straightline basis over the term of performance under the agreement, which is generallythe research term specified in the agreement. These advance payments aredeferred and recorded as advance payments from collaborators upon receipt,pending recognition, and are classified as a short-term or long-term liabilityon our balance sheet. When the performance period is not specificallyidentifiable from the agreement, we estimate the performance period based uponprovisions contained within the agreement, such as the duration of the researchterm, the specific level number of fulltime equivalent scientists working a defined number of hours per year at astated price under the agreement, the existence or likelihood ofdevelopment commitments, and other significant commitments of the company.  We determined that the performance periodsapplicable to our agreements with AstraZenca and Genentech were both for twoyears, which ended in November 2005; and we determined the performance periodfor our agreement with VentiRx to be one year ending in March 2008. Each ofthese periods coincides with the research terms specified in each agreement. Weperiodically review the expected performance periods under each of ouragreements that provide for non-refundable up-front payments and licensefees.  To date, there has not been asignificant change in an estimate or assumption of the expected period ofperformance that has had a material effect on the timing or amount of revenuerecognized.

Similarly to advancepayments, for agreements that provide for milestone payments, a portion of eachmilestone payment is recognized as revenue when the specific milestone isachieved based on the applicable percentage of the estimated research term thathas elapsed to the total estimated research term. Revenue recognition related to non-refundable license fees and up-frontpayments and to milestone payments could be accelerated in the event of earlytermination of programs.

In February 2007,we entered into a collaboration and licensing agreement in which we received anon-refundable cash technology access fee and shares of preferred stock valuedat $1.5 million based on the price at which such preferred stock was sold toinvestors in a private offering.  Boththe technology access fee and the value of the preferred stock were recorded asadvance payments from collaborators and deferred revenue, and are beingrecognized as revenue on a straight-line basis over the estimated one-yearresearch term.  The preferred stock valuehas been recorded as a long-term asset.

Revenue from sales of compounds in our Lead Generation Libraryand Optimer building blocks is generally recognized as the compounds areshipped. We recognize revenue based oncontracted annual rates for full time equivalent employees working on a projecton a monthly basis as work is performed.

***PreclinicalStudy and Clinical Trial Accruals***

Substantialportions of our preclinical studies and all of our clinical trials have beenperformed by third-party medical centers or contract research organizations(which we refer to collectively as “CROs”). Some CROs bill monthly for services performed, while others bill basedupon milestone achievement.  We accrueexpenses each month for agreements involving significant costs and that billbased on milestone achievement. For preclinical studies, accruals are basedupon the estimated percentage of work completed and the contract milestonesremaining.  For costs for clinical studyactivities performed by CROs, accruals are estimated based upon the estimatedwork completed on each study, and for clinical trial expenses, accruals are basedupon the number of patients enrolled and the expected duration of the study forwhich they will be enrolled.  We monitorpatient enrollment and related activities to the extent possible throughinternal reviews, correspondence with the CROs, clinical site visits, andreview of contractual terms.  Ourestimates are highly dependant upon the timeliness and accuracy of the data providedby its CROs regarding the status of each program and total program spending. Weperiodically evaluate our estimates to determine if adjustments are necessaryor appropriate based on information we receive concerning changingcircumstances, conditions or events that may affect such estimates.  No material adjustments to preclinical studyand clinical trial expenses have been recognized to date.

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***Investments in Marketable Securities***

Our short-terminvestments in marketable securities are comprised of U.S. Treasury, governmentor agency obligations, state and municipal obligations and domestic publiccorporate debt securities. Investments are classified as short-term orlong-term based on their original or remaining maturities and whether thesecurities represent the investment of funds available for current operations.All of our investments are held in our name at two major U.S. financialinstitutions. At June 30, 2007 and 2006, all of our investments were classifiedas available-for-sale and are reported at fair value based on quoted marketprices at the end of each reporting period. Unrealized gains or losses arerecorded as a separate component of cumulative other comprehensive income(loss) in stockholders’ equity. If these investments are sold at a loss or areconsidered to have experienced a decline in value that is other than temporary,a charge to operations is recorded. The specific identification method is usedto determine the cost of securities disposed of, with realized gains and lossesreflected in interest income, net.

***Leasehold Improvements***

We amortizeleasehold improvements for our Boulder and Longmont facilities over the shorterof their estimated economic useful lives or the related lease terms. Wedetermined the lease terms to be the original, fixed, non-cancelable ten-yearlease terms. This period does not include the optional lease extension periods availableto us under the lease agreements because we have determined that the exerciseof these options is not reasonably assured. Consequently, the leasehold improvements for our facilities areamortized over the original ten-year lease term as it is shorter than theremaining estimated useful life of the improvements. We periodically reassessthe expected remaining useful lives of our leased facilities to determinewhether the amortization period remains consistent with current expectationsand plans, and if there is any change, we will make appropriate adjustments tothe estimated lease terms and disclosures.

***DeferredRent***

During July and August 2006, we terminated our existing facility leasesand executed new lease agreements with a different landlord. Accordingly, theentire June 30, 2006 deferred rent balance of $1.6 million was reversed andrecorded as a reduction to our recognized rent expense for the first quarter offiscal 2007. Additionally, in conjunction with the assignment of facilitypurchase options as described in Note 10 - “Operating Leases” to our auditedfinancial statements included in this Annual Report, we received net proceedsof $32.3 million which was recorded as deferred rent and is being recognized ona straight-line basis as a reduction to rent expense over the related ten-yearterm of each of the new facilities leases. The current facilities leases provide for annual rent increases, and werecognize the average annual rent expense over the term of these leases on astraight-line basis. Thecurrent portion of the deferred rent balance reflected on our balance sheetrepresents the amount of expected deferred rent credits to be applied as areduction to our rent expense over the next twelve-month period.

***Share-Based Compensation***

On July 1, 2005, we adopted Statement of Financial Accounting StandardNo. 123 (revised 2004), “*Share-BasedPayment”* (“SFAS 123(R)”). SFAS 123(R), requires the measurement andrecognition of compensation expense based on estimated fair values for allshare-based payment awards made to employees and directors, including stockoptions and purchases of common stockby employees at a discount to market price under our Employee Stock PurchasePlan (or the “ESPP”). Stock-based compensation expense recognized underSFAS 123(R) was $4.8 million and $6.2 million, representing a loss of $0.12 and$0.16 per basic and diluted share, for the fiscal years ended June 30, 2007 and2006, respectively. For the year ended June 30, 2005, prior to the adoption ofFAS123(R), stock compensation expense of $151,000 was recognized. In accordancewith the modified prospective transition method of adoption of SFAS 123(R) thatwe elected, comparative results for the fiscal year 2005 have not been restatedand therefore are not comparable to the results for fiscal years 2006 and 2007.See Note 1 – “Accounting for Share-Based Compensation” and Note 8 – “StockCompensation Plans” for additional information. The estimated fair value of stock options is expensed on astraight-line basis over the expected term of the option. Compensationexpense for purchases under the ESPP is recognized based on the estimated fairvalue of the common stock during each offering period and the percentage of thepurchase discount.

Uponadoption of SFAS 123(R), we began to estimate the fair value of employee stockoptions on the date of grant, and the fair value of our common stock duringeach offering period under the ESPP, using a Black-Scholes model. Prior to theadoption of SFAS 123(R), the fair value of each stock option was estimated onthe grant date using a Black-Scholes model in order to provide the pro formafinancial disclosure information in accordance with SFAS 123. The determinationof fair value for share-based payment awards using an option pricing model ishighly judgmental and affected by our stock price as well as assumptions andestimates concerning other highly complex and subjective variables. Thesevariables and

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estimates include, butare not limited to, the number of options that will ultimately vest orconversely, be forfeited prior to vesting; the expected option term, or thelength of time between the grant date and date of exercise of the option; theexpected volatility of our stock price, or the amount that the market value pershare of our stock price will fluctuate over the estimated option term; and theexpected risk free market rate of interest over the estimated option term.

Theweighted average estimated fair value of stock option awards granted during theyear ended June 30, 2007 was $7.42 per share, using the Black-Scholes optionmodel with the following weighted average assumptions:
| **Assumption**           | ** ** | **Weighted  Average  Assumptions** | ** ** |
|--------------------------|------------|------------------------------------|------------|
| Expected option  term    |       | 6 1¤4  years                  |       |
| Expected  volatility     |       | 69.0                               | %          |
| Risk-free  interest rate |       | 4.7                                | %          |
| Expected dividend yield  |       | 0.0                                | %          |

 

Weestimated the expected option term in accordance with the method described inSEC Staff Accounting Bulletin No. 107 (“SAB 107”). We estimated volatilitybased upon historical experience because we have not identified a more reliableor appropriate method to estimate future volatility over the expected optionterm. Our risk free interest rate estimate is based upon observed interestrates comparable to the expected term of our options. Our dividend yieldassumption is based upon historical and expected dividends. Our estimates forthe pre-vesting forfeiture rate and the estimated option term have the mostsignificant impacts on the grant date option award fair values. If any of theseestimates change and we employ different estimates, assumptions, or a differentvaluation model in our application of SFAS 123(R) in future periods, thecompensation expense that we record under SFAS 123(R) may be significantlydifferent than what we have recorded in the current period.

Inaddition, SFAS 123(R) requires the expense for stock-based compensation to bereduced for estimated forfeitures of unvested equity awards based on an estimateof such forfeitures as of the grant date, which must be revised in subsequentperiods, if necessary, if actual pre-vesting forfeitures differ from theseestimates. We estimated expected pre-vesting forfeitures using our historicalforfeiture experience.

***DeferredIncome Taxes***

We estimate ouractual current tax expense together with our temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesetemporary differences result in deferred tax assets and/or liabilities. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent that we believe that it is more likelythan not we will not recover these deferred tax assets, we must establish avaluation allowance against these tax assets. Significant management judgmentis required in determining our provision for income taxes, our deferred taxassets and liabilities and any valuation allowance against our deferred taxassets. To the extent that we believe a valuation allowance is required, wemust include and expense the tax effect of the allowance within the taxprovision in our statement of operations. As of June 30, 2007 and 2006, we have$71.8 million and $51.6 million in deferred tax assets, respectively. In orderto fully utilize all or any portion of these deferred tax assets, we need togenerate sufficient amounts of future U.S. taxable income. Based upon ourhistory of losses and an analysis of projected net taxable income for futureoperating periods, we determined that it is more likely than not that we willnot realize our tax net operating loss carry forwards, tax credit carryforwards and other deferred tax assets, and have recorded a valuation allowancefor the full amount of our deferred tax assets, reducing the carrying amount ofnet deferred tax assets to zero as of June 30, 2007 and 2006.

**FutureOutlook**

We plan toincrease our investment in drug development to advance our product pipeline andto further enhance our clinical and regulatory capabilities. We will considercommercializing select programs ourselves with appropriate marketcharacteristics while continuing to evaluate out-licensing opportunities tomaximize the risk-adjusted return of our proprietary programs. As part of theseefforts, we expect near term general and administrative costs to rise inconnection with increased patent and other intellectual property related costsincurred to protect and enforce our intellectual property rights in ourproprietary programs and research and development for proprietary drugdiscovery costs to rise in connection with building our clinical and regulatorycapabilities. Because of our strategy to retain other proprietary programsuntil later in clinical development before out-licensing them orcommercializing them ourselves, we may not recognize significant revenue fromnew out-licensing opportunities in the near term. Our statements about futureevents in this

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paragraphare subject to many risks and uncertainties, including many that arebeyond our control. These risks are described more fully under the caption “RiskFactors” and elsewhere herein and in other reports filed by Array BioPharmawith the Securities and Exchange Commission.

**Resultsof Operations**

**Fiscal Years Ended June 30, 2007, 2006, and 2005**

***Revenue***

Collaboration revenue consists of revenue for lead generation and leadoptimization research, custom synthesis and process research, the developmentand sale of chemical compounds and the co-development of proprietary drugcandidates we out-license. License and milestone revenue is combined andreported separately from collaboration revenue.
| ** **                     | ** ** | **Years Ended June 30,**     | ** ** | **% increase (decrease)**         | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| Collaboration  revenue         |       | $      30,106 |       | $      37,738 |       | $      34,343 |   | (20 | )% | 10 | % |
| License and  milestone revenue |       | 6,864                                       |       | 7,265                                       |       | 11,162 |   | (6 | )% | (35 | )% |
| Total revenue                  |       | $      36,970 |       | $      45,003 |       | $      45,505 |   | (18 | )% | (1 | )% |

 

***Fiscal2007 as compared to Fiscal 2006***:  Total revenue for fiscal 2007 decreased 18%from 2006 due to a decrease in collaboration revenue of $7.6 million and adecrease in license and milestone revenue of approximately $400,000.  Collaboration revenue declined by $10.2million due to the expiration of collaborations with AstraZeneca, Roche and EliLilly and Company (ICOS Corporation) during the prior fiscal year as well as theresearch portions of collaborations with InterMune and Takeda PharmaceuticalCompany, Ltd., that expired in fiscal 2007. Additionally, collaboration revenue from the sale of Optimer buildingblocks and Lead Generation Libraries decreased by $1.0 million during thesesame periods.  Partially offsetting thesedecreases was increased revenue of $3.6 million from our collaborations withGenentech and Ono, as well as the initiation of a new research agreement withVentiRx Pharmaceuticals, Inc.

As of June 30,2006 previously received license and milestone payments from AstraZeneca andGenentech had been fully recognized as revenue, which accounted for a decreasein license and milestone revenue of $6.7 million during fiscal 2007.  This decrease was partially offset by therecognition of two milestone payments totaling $5.0 million from AstraZenecaduring fiscal 2007 for the advancement of ARRY-886 into Phase 2 clinical trialsand ARRY-704 into Phase 1 clinical trials. Additional license and milestone revenue of $1.3 million was recognizedin fiscal 2007 from VentiRx, InterMune and Eli Lilly (ICOS Corporation).

***Fiscal2006 as compared to Fiscal 2005*:** Total revenue for fiscal2006 decreased 1% from 2005 due to a decrease in license and milestone revenueof $3.9 million, which was offset by improvements in collaboration revenue totaling$3.4 million. The improvement in collaboration revenue was the result ofincreased revenue, totaling $16.1 million, from expanded programs withInterMune and Genentech and a new research collaboration with OnoPharmaceutical. This increase was partially offset by decreased collaborationrevenue of $11.1 million related to research programs that expired in fiscal2005 with Eli Lilly (ICOS Corporation) and QLT Inc., as well as the researchprogram with AstraZeneca that expired in November 2005. Additionally,collaboration revenue from the sale of Lead Generation Libraries decreasedduring  fiscal 2006 by $1.6 million, dueto the sale of a large number of our Lead Generation Library compounds to asingle collaborator during fiscal 2005.

All previously received license fee and milestone payments fromAstraZeneca and Genentech were fully recognized during fiscal 2006 resulting ina decrease in recognized revenue from fiscal 2005 of $5.8 million. Partiallyoffsetting this decrease was the recognition of $2.5 million of milestonepayments received from AstraZeneca during fiscal 2006 related to theadvancement of ARRY-886 into Phase 1b clinical trials and the selection of twoadditional drug candidates, as well as $500,000 of milestones earned from ourcollaboration with Takeda.

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***Costof Revenue***

Costof revenue represents research and development conducted for our collaboratorsand the cost of chemical compounds sold from our inventory. These costs consistmainly of compensation, associated fringe benefits and other collaboration-relatedcosts, including supplies, small tools, facilities, depreciation, recruitingand relocation and other direct and indirect chemical handling and laboratorysupport costs. Fine chemicals consumed as well as any required inventoryreserve adjustments are also recorded as cost of revenue. We review the levelsand values of our chemical inventories periodically and, when required, writedown the carrying cost of our inventories for non-marketability to estimatednet realizable value through an appropriate reserve.
|                 | ** ** | **Years Ended June 30, ** | ** ** | **% increase (decrease)**   | ** ** |
|-----------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **      | ** ** | **2007**                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| Cost of revenue |       | $     24,936         |       | $     39,611 |       | $     38,048 |   | (37 | )% | 4 | % |

 

***Fiscal2007 as compared to Fiscal 2006****:*Cost of revenue for fiscal 2007 decreased by 37% from fiscal 2006 primarilyreflecting a decrease in collaboration related services as a greater percentageof our resources were focused on advancing our proprietary drug discoveryprograms.  Cost of revenue as a percentage of collaboration revenue decreased to83% for the 2007 fiscal year compared with 105% for the prior fiscal year.These decreases were largely the result of increased average pricing receivedfrom collaborations for full-time equivalent scientists during fiscal 2007resulting in fewer scientific resources used in generating the same approximatelevel of collaboration revenue. Additionally, share-based compensation expensecharged to cost of revenue for 2007 fiscal year decreased by approximately$960,000 due to option shares that became fully vested in the prior fiscalyear.

On June 22, 2006,we assigned options we owned to purchase our Boulder and Longmont, Coloradofacilities to BioMed Realty L.P., or “BioMed”, which purchased those facilitiesin July and August 2006. We entered into new lease agreements for thesefacilities with BioMed over a ten-year lease term and began amortizing ourleasehold improvement costs for these facilities over a ten-year life. Prior tocompleting these transactions, we had determined that we were reasonably assured during fiscal 2006 that we would bevacating our Boulder facility at the end of the initial lease term in March2008 and therefore amortized the cost of leasehold improvements for thatfacility over an approximate two-year life. We determined the lease terms underour new facilities leases to be the fixed, non-cancelable ten-year term becausewe concluded that the exercise of optional extension periods available underthe leases is not reasonably assured. This conclusion was based on ourexperience with prior lease facilities and management’s determination that itwas unable to predict in the early years of a long-term lease whether it wouldremain in the facilities beyond the initial lease term as a result of changingbusiness, economic or other conditions. The change in the amortization periodfrom two to ten years resulted in a decrease of approximately $775,000 inamortized leasehold improvement costs charged to cost of revenue for 2007fiscal year compared to the prior fiscal year. In addition, during the firstquarter of fiscal 2007, following termination of our prior facility leases andexecution of new lease agreements with BioMed, we reversed and recorded theentire deferred rent balance of $1.6 million associated with our priorfacilities leases and listed as a current liability on June 30, 2006, as areduction to our recognized rent expense. This resulted in a decrease to costof revenue for the 2007 fiscal year of approximately $600,000.

***Fiscal2006 as compared to Fiscal 2005****:*Cost of revenue for fiscal 2006 increased 4% over 2005 primarily due to therecording of $2.1 million of share-based compensation expense in accordancewith SFAS 123(R). In addition, in June2005, we determined that we were reasonably assured that we would be vacatingour Boulder, Colorado facility at the end of the lease term in March 2008 andtherefore began amortizing the cost of leasehold improvements for our facilityover the remaining months of the initial lease term. Prior to that, all leaseholdimprovements were amortized over a period of 15 years, which included optionallease extension periods we were reasonably assured of exercising at that time.This change in estimated useful life resulted in an increase of approximately$505,000 in amortized leasehold improvement costs being charged to cost ofrevenue for the 2006 fiscal year. Improvements in cost of revenue as apercentage of collaboration revenue of 105% in fiscal 2006 compared to 111% infiscal 2005 is the result of improved average pricing from collaborationagreements. 

***Researchand Development Expenses***

Our research anddevelopment expenses for proprietary drug discovery include costs associatedwith our proprietary drug programs for scientific personnel, supplies,equipment, consultants, sponsored research, allocated facility costs, costsrelated to preclinical and clinical trials, and share-based compensation. Wemanage our proprietary programs based on scientific data and achievement ofresearch plan goals. Our scientists record their time to specific projects whenpossible. 

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However, many activitiessimultaneously benefit multiple projects and cannot be readily attributed to aspecific project. Accordingly, the accurate assignment of time and costs to aspecific project is difficult and may not give a true indication of the actualcosts of a particular project. As a result, we do not report costs on a programbasis. The following table shows our research and development expenses bycategories of costs for the periods presented:
| ** **                                                       | ** ** | **Years Ended June 30,** | ** ** | **% increase**                   | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| Salaries, benefits and share-based compensation  expense         |       | $     21,805   |       | $     12,394 |       | $       8,035 |   | 76 | % | 54 | % |
| Outsourced services and consulting                               |       | 19,953                                  |       | 7,921                                 |       | 4,998 |   | 152 | % | 58 | % |
| Laboratory supplies                                              |       | 6,878                                   |       | 5,538                                 |       | 3,739 |   | 24 | % | 48 | % |
| Facilities and depreciation                                      |       | 7,910                                   |       | 7,063                                 |       | 5,795 |   | 12 | % | 22 | % |
| Other                                                            |       | 918                                     |       | 466                                   |       | 304 |   | 97 | % | 53 | % |
| Research and  development expense for proprietary drug discovery |       | $     57,464   |       | $     33,382 |       | $     22,871 |   | 72 | % | 46 | % |

 

***Fiscal2007 as compared to Fiscal 2006***: Research and developmentexpenses increased 72% over the prior comparative fiscal year as a result ofincreases in the number of scientists devoted to proprietary programs,reflecting both increased headcount as well as a shift of existing scientificresources from collaborative projects to internal proprietary discovery. Themost significant increase in costs came from outsourced pharmacology studiesand clinical trial related expenses supporting the advancement of our ErbB-2/EGFR,MEK for inflammation, ErbB-2, P38/Tie2 and other programs. During fiscal 2007we expensed $1.7 million of share-based compensation expense to research anddevelopment expenses compared to $1.3 million for the prior fiscal year. Weexpect that proprietary research and development spending will continue toincrease significantly as we focus more resources on our proprietary drugdiscovery programs and continue to advance our programs through clinicaldevelopment.

These increaseswere partially offset by reductions in leasehold improvement amortization andrent expense allocated to research and development expenses as described incost of revenue above. The change in estimated useful life of our leaseholdimprovements resulted in a reduction of amortization of leasehold improvementcosts charged to research and development expenses for the 2007 fiscal year ofapproximately $900,000. Additionally,the reversal of the prior year deferred rent balance resulted in a reduction torent expense allocated to research and development expenses for the 2007fiscal year of approximately $850,000.

***Fiscal2006 as compared to Fiscal 2005***: Research and developmentexpenses increased 46% in fiscal 2006 over the prior fiscal year primarily dueto additional scientists working on proprietary programs, related increases inlaboratory supplies, share-based compensation expense, and increasedpharmacology studies supporting our expanded efforts to advance proprietarycompounds into regulated safety testing and clinical trials. The mostsignificant increase in costs came from outsourced pharmacology studies andclinical trial related expenses supporting the advancement of our ErbB-2/EGFR,MEK for inflammation, P38, KSP and other programs. For fiscal year 2006, weexpensed $1.3 million to research and development expenses related toshare-based compensation in accordance with SFAS 123(R). In addition, asdescribed in cost of revenue above, we recorded approximately $981,000 ofadditional leasehold improvement amortization to research and developmentexpenses during the 2006 fiscal year.

The scope andmagnitude of future research and development expenses are difficult to predictgiven the number of studies that will need to be conducted for any of ourpotential products, as well as our limited capital resources. In general, drugdevelopment involves a series of steps – beginning with identification of apotential target and including, among others, proof of concept in animalstudies and Phase 1, 2 and 3 clinical studies in humans – each of which istypically more expensive than the previous step. Therefore, we expect ourresearch and development costs to increase as we progress our programs throughlater-stage development.

The successful development and commercialization of drugs resultingfrom our proprietary programs is highly uncertain and subject to a number ofrisks that are beyond our control. The duration and cost of discovery,preclinical, non-clinical and clinical trials may vary significantly based onthe type, complexity and novelty of a product and are 

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difficultto predict. The FDA and comparable agencies in foreign countries imposesubstantial requirements on the introduction of therapeutic pharmaceuticalproducts, typically requiring lengthy and detailed laboratory and clinicaltesting procedures, sampling activities and other costly and time-consumingprocedures. Data obtained from preclinical, non-clinical and clinicalactivities at any step in the testing process may be adverse and lead todiscontinuation or redirection of development activity or be susceptible tovarying interpretations, which could delay, limit or prevent regulatoryapproval. Accurate and meaningful estimates of the ultimate costs to bring ourdrug candidates to market are not available. Given the uncertainties related todevelopment, we are currently unable to reliably estimate when, if ever, ourdrug candidates will generate revenue and net cash inflows.

***Statusof Significant Proprietary Programs***

Thefollowing table summarizes the status of our most advanced drug programs.
| Drug               | ** **   | **Drug Target** | ** **   | **Marketing   Rights** | ** **   | **Current  Status (Expected Future Plans)**                          |
|--------------------|--------------|-----------------|--------------|------------------------|--------------|----------------------------------------------------------------------|
| ***Cancer***       |         |            |         |                   |         |                                                                 |
| ARRY-886           |         | MEK             |         | AstraZeneca            | ** **   | **Multiple  Phase 2 trials ongoing**(Phase 2 data expected mid-2008) |
| ARRY-543           |         | ErbB-2/EGFR     |         | Array                  | ** **   | **Phase 1  trial ongoing**(Initiate Phase 2 trial)                   |
| ARRY-797           |         | P38             |         | Array                  | ** **   | **Phase 1 trial ongoing**                                            |
| ARRY-520           |         | KSP             |         | Array                  | ** **   | **Phase 1  trial ongoing**(Expand Phase 1 in cancer patients)        |
| ARRY-704           |         | MEK             |         | AstraZeneca            | ** **   | **Phase 1 trial ongoing**                                            |
| ARRY-380           |         | ErbB-2          |         | Array                  | ** **   | **IND  Effective**(Initiate Phase 1 trial)                           |
| ARRY-614           |         | P38/Tie2        |         | Array                  | ** **   | **Regulated  Safety Assessment**(File IND (1))                       |
| ***Inflammation*** | *** *** | *** ***    | *** *** | *** ***           | *** *** | *** ***                                                         |
| ARRY-162           |         | MEK             |         | Array                  | ** **   | **Phase  1b trial ongoing**(Initiate Phase 2 trial)                  |
| ARRY-797           |         | P38             |         | Array                  | ** **   | **Phase 1  trial ongoing**(Initiate Phase 2 trial)                   |
| ARRY-614           |         | P38/Tie2        |         | Array                  | ** **   | **Regulated  Safety Assessment**(File IND (1))                       |

 

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(1) A single IND for this compound is expected to be filed in fiscal 2008.

Clinical timelines, likelihood of success andtotal completion costs vary significantly for each drug candidate and aredifficult to estimate. We estimate that it takes 10 to 15 years, orpossibly longer, to discover, develop and bring to market a new pharmaceuticalproduct in the United States as outlined in the following table: 
| Phase:       | ** ** | **Objective:**                                                                                             | ** ** | **Estimated   Duration:** |
|--------------|------------|------------------------------------------------------------------------------------------------------------|------------|---------------------------|
| Discovery    |       | Lead  identification and target validation                                                                 |       | 2 to 4 years              |
| Preclinical  |       | Initial  toxicology for preliminary identification of risks for humans; gather early  pharmacokinetic data |       | 1 to 2 years              |
| Phase 1      |       | Evaluate safety  in humans; study how the drug works, metabolizes and interacts with other  drugs          |       | 1 to 2 years              |
| Phase 2      |       | Establish  effectiveness of the drug and its optimal dosage; continue safety evaluation                    |       | 2 to 4 years              |
| Phase 3      |       | Confirm efficacy,  dosage regime and safety profile of the drug; submit New Drug Application               |       | 2 to 4 years              |
| FDA approval |       | Approval by the  FDA to sell and market the drug under approved labeling                                   |       | 6 months to 2  years      |

 

Animal and other non-clinical studies are oftenconducted during each phase of human clinical studies. 

43

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We anticipate thatwe will make determinations as to which research programs to pursue and howmuch funding to direct to each program on an ongoing basis in response to thescientific and clinical success of each drug candidate. The lengthy process ofseeking regulatory approvals, and subsequent compliance with applicableregulations, require the expenditure of substantial resources. Any failure byus to obtain, or any delay in obtaining, regulatory approvals could cause ourresearch and development expenditures to increase and, in turn, have a materialadverse effect on our results of operations.

***Generaland Administrative Expenses***

General andadministrative expenses consist mainly of compensation and associated fringebenefits not included in cost of revenue or research and development expensesand include other management, business development, accounting, informationtechnology and administration costs, including patent prosecution, recruitingand relocation, consulting and professional services, travel and meals,advertising, sales commissions, facilities, depreciation and other officeexpenses.
|                                     | ** ** | **Years Ended June 30,** | ** ** | **% increase  (decrease)**       | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2007**                                | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| General and administrative expenses |       | $     13,644   |       | $     13,789 |       | $       9,372 |   | (1 | )% | 47 | % |

 

***Fiscal2007 as compared to Fiscal 2006***: General andadministrative expenses decreased by approximately $145,000 during the 2007fiscal year over the prior fiscal year primarily as a result of decreasedshare-based compensation expense of approximately $790,000 recognized upon thevesting of option shares in the prior fiscal year. As described in cost ofrevenue above, the change in estimated useful life of our leasehold improvementsresulted in a reduction of amortization of leasehold improvement costs chargedto general and administrative expenses for the 2007 fiscal year ofapproximately $90,000 and the reversalof the prior year deferred rent balance resulted in a reduction to rent expenseallocated to general and administrative expenses for the 2007 fiscal year ofapproximately $150,000. Partially offsetting all these decreases in general andadministrative expenses were increases in patents and patent applicationcosts of approximately $830,000 for the 2007 fiscal year associated with theadvancement of our propriety drug development programs. The remaining increase in generaland administrative expenses from the prior year was attributable to increasesin compensation and benefit expenses.

***Fiscal2006 as compared to Fiscal 2005*:** The increase in generaland administrative expenses for fiscal 2006 over fiscal 2005 was primarilyrelated to the recording of $2.7 million of share-based compensation expense inaccordance with SFAS 123(R). Patents and patent application costs increased byapproximately $353,000 related to our expanding proprietary drug developmentprograms. In addition, as described in cost of revenue above, we recordedapproximately $132,000 of additional leasehold improvement amortization togeneral and administrative expenses during the 2006 fiscal year. The remainingincrease within general and administrative expenses from the prior year wasattributable to increases in compensation and benefit related expenses.

***InterestExpense and Income***
|                  | ** ** | **Years Ended June 30,**                          | ** ** | **% increase**                                              | ** ** |
|------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **       | ** ** | **2007**                                                         | ** ** | **2006**                                                         | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| Interest expense |       | $          979 |       | $          670 |       | $           — |   | 46 | % | 100 | % |
| Interest  income |       | 4,611                                                            |       | 2,835                                                            |       | 1,542 |   | 63 | % | 84 | % |

 

***Fiscal2007 as compared to Fiscal 2006*:** Interest expenseincreased in fiscal 2007 compared to fiscal 2006 due to increased borrowingsand higher effective interest rates related to our long term borrowings.  Interest income increased in fiscal 2007compared to fiscal 2006 primarily due to higher effective interest rates andhigher average cash and investment balances.

***Fiscal2006 as compared to Fiscal 2005***: The increase in interestincome in fiscal 2006 compared to fiscal 2005 is due to higher investmentinterest rates earned on higher average cash and investment balances. Weincurred interest expense associated with our long term borrowings in fiscal2006. There were no borrowings in 2005. 

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**Liquidityand Capital Resources**
|                                                                              | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash, cash equivalents  and marketable securities                            |       | $ 141,331                    |       | $  70,100 |   | $  92,706 |   |
| Net increase (decrease)  in operating assets and liabilities, excluding cash |       | (4,210                            | )          | (154 | ) | 2,726 |   |
| Purchases of equipment,  leasehold improvements and other property           |       | 7,148                             |       | 5,180 |   | 5,682 |   |
|                                                                         |       |                              |       |   |   |   |   |
| Cash flows provided by  (used in):                                           |       |                              |       |   |   |   |   |
| Operating activities                                                         |       | (44,523                           | )          | (24,297 | ) | (17,178 | ) |
| Investing activities                                                         |       | (50,663                           | )          | 20,612 |   | (55,042 | ) |
| Financing activities                                                         |       | 90,288                            |       | 6,823 |   | 78,150 |   |

 

***Fiscal2007 as compared to Fiscal 2006***:  We have historically funded our operationsthrough revenue from our collaborations and the issuance of equitysecurities.  As of June 30, 2007, cash,cash equivalents, and marketable securities totaled $141.3 million comparedwith $70.1 million at June 30, 2006.  Netcash used in operating activities for fiscal year 2007 was $44.5 million,compared to $24.3 million for fiscal 2006. During fiscal year 2007, our net loss of $55.4 million was reduced bynoncash charges of $6.7 million, primarily associated with depreciation,share-based compensation expense, and deferred rent credits.  For fiscal year 2007, our net operatingassets and liabilities excluding cash decreased by $4.2 million.  This was primarily due to increases inaccounts payable and accrued compensation and benefits and decreases inaccounts receivable which were partially offset by decreases in advancepayments from collaborators.  Accountspayable increased by $3.9 million due to increased obligations for outsourcedpharmacology and clinical trial expenses, fine chemicals, and facilitiesimprovements. Accrued compensation and benefits increased by $1.0 million, halfof which was due to increased amounts reserved for fiscal year 2007 employeebonuses with the remainder due to increased vacation reserves as well asincreased 401(k), deferred compensation and Employee Stock Purchase Planpayroll withholdings attributable to our larger employee base.  Advance payments from collaborators decreasedby approximately $516,000 as we concluded collaboration programs with InterMuneand Takeda, which accounted for a year over year decrease of $3.3 million, andwe recorded $2.9 million of advance payments including $1.1 million non-cashequity stake, net of related amortization, as a result of a new collaborationagreement with VentiRx Pharmaceuticals, Inc. Accounts receivable decreased by $1.2 million in conjunction withcollaboration agreements that expired during fiscal 2007 as well as decreasedreceivables from sales of our Optimer building blocks.

During****fiscal year 2007, wereceived net proceeds of $32.3 million from BioMed related to the assignment ofpurchase options of our Boulder and Longmont, Colorado facilities. ****We invested $7.1million in property, plant and equipment, primarily in lab equipment for drugmetabolism, analytical research and development operations, processchemistry and biology, as well as in improvements to our facilities, andvarious computer hardware and software.  Purchases of marketable securities used $144.9 million of cash whileproceeds from the sale and maturity of marketable securities provided $69.2million of cash.  Financing activitiesprovided $90.3 million of cash consisting of $85.2 million in net proceeds fromour public common stock offering, $4.2 million of cash resulting from theexercise of stock options under our stock option plan and purchases of stockunder our ESPP, and approximately $850,000 of proceeds received from theissuance of long-term debt used to finance purchases of capital equipment.

***Fiscal2006 as compared to Fiscal 2005***: As of June 30, 2006,cash, cash equivalents, restricted cash and marketable securities totaled $70.1****million compared with $92.7 million at June 30, 2005. Netcash used in operating activities for fiscal year 2006 was $24.3 million,compared to $17.2 million for fiscal 2005. During fiscal year 2006, our netloss of $39.6 million was reduced by non cash charges of $15.2 million,primarily associated with depreciation and share-based compensation expense.For the fiscal year 2006, our net operating assets and liabilities, excludingcash, decreased by approximately $154,000. This was primarily due to increasesin accounts payable and accrued compensation and benefits, which were slightlyoffset by decreases in advance payment balances from collaborators. Accountspayable increased by $2.5 million due to increased obligations for outsourcedpharmacology and clinical trial related expenses, as well as laboratoryequipment received in June 2006. Accrued compensation and benefits increased by$1.4 million, half of which was due to increased amounts reserved for fiscalyear 2006 employee bonuses as well as $420,000 related to employee payrollwithholdings for the Employee Stock Purchase Plan due to the change in purchasedates within the plan. Advance payments from collaborators decreased by $3.8million during fiscal year 2006 due to the recognition of revenue frompreviously received up-front license and milestone payments, slightly offset bythe receipt of new milestone payments during the fiscal year. 

****Duringfiscal year 2006, we invested $5.2 million in laboratory equipment, primarilyfor biology, drug metabolism and analytical research and developmentoperations, as well as in various computer hardware and software.****Purchases of 

45

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marketable securitiesused $67.2 million of cash while proceeds from the sale and maturity ofmarketable securities provided $90.9 million of cash. Additionally, $2.0million of previously restricted cash became available for use in operations.Financing activities provided $6.8 million of cash consisting of $4.2 millionfor proceeds received from the issuance of long term debt used to financepurchases of capital equipment and $2.7 million of cash resulting from theexercise of stock options under our stock option plan and purchases of stockunder our employee stock purchase plan.

Our future capital requirements will depend on a number of factors,including the rate at which we invest in proprietary research, the growth ofour clinical development capabilities, the growth or decline of ourcollaboration business and the amount of collaboration research funding wereceive, the timing of milestone and royalty payments, if any, from ourcollaboration and out-licensed programs, our capital spending on new facilitiesand equipment, the number and size of Phase 2 or Phase 3 clinical trials wedecide to run, expenses associated with unforeseen litigation, regulatorychanges, competition, technological developments, general economic conditionsand the extent to which we acquire or invest in other businesses, products andtechnologies. 

In addition, ourfuture capital requirements may be impacted if we do not receive potentialmilestone or royalty payments under our existing or future collaboration agreements.Our ability to realize these payments is subject to a number of risks, many ofwhich are beyond our control and include the following: the drug developmentprocess is risky and highly uncertain, and we or our collaborators may not besuccessful in commercializing drug candidates we create; our collaborators havesubstantial control and discretion over the timing and continued developmentand marketing of drug candidates we create; the sale and manufacture of drugcandidates we develop may not obtain regulatory approval; and, if regulatoryapproval is received, drugs we develop will remain subject to regulation or maynot gain market acceptance, which could delay or prevent us from generatingmilestone, royalty revenue or product revenue from the commercialization ofthese drugs. 

We believe that our existing cash, cash equivalents and marketablesecurities and anticipated cash flow from existing collaboration agreementswill be sufficient to support our current operating plan for at least the next12 months. This estimate of our future capital requirements is aforward-looking statement that is based on assumptions that may prove to bewrong and that involve substantial risks and uncertainties.  Our actual future capital requirements could varyas a result of a number of factors, including:

·                  the progress of our research and developmentactivities;

·                  our ability to enter into agreements toout-license and co-develop our proprietary drug candidates, and the timing ofthose agreements in each candidate’s development stage;

·                  the number and scope of our research anddevelopment programs;

·                  the progress of our preclinical and clinicaldevelopment activities;

·                  the number and scope of phase 2 and phase 3studies we may decide to run;

·                  the progress of the development efforts of ourcollaborators;

·                  the availability of resources for revenuegenerating collaborations as we devote more resources to our proprietaryprograms;

·                  our ability to establish and maintain current andnew collaboration agreements;

·                  the ability of our collaborators to fund researchand development programs;

·                  the costs involved in enforcing patent claims andother intellectual property rights; 

·                  the costs and timing of regulatory approvals; and

·                  the costs of establishing clinical developmentand distribution or commercialization capabilities.

Until we can generate sufficient levels of cash from our operations,which we do not expect to achieve in the foreseeable future, we expect tocontinue to utilize our existing cash and marketable securities resources thatwere primarily generated from the proceeds of our equity offerings and from ourcollaborations. In addition, we may finance future cash needs through the saleof equity securities, strategic collaboration agreements and debt financing. Wecannot assure that we will be successful in obtaining new or in retainingexisting out-license or collaboration agreements, in securing agreements forthe co-development of our proprietary drug candidates, or in receivingmilestone and/or royalty payments under those agreements, that our existingcash and marketable securities resources will be adequate or that additionalfinancing will be available when needed or that, if available, this financingwill be obtained on terms favorable to us or our stockholders. Insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose, or may adversely affect our ability tooperate as a going concern. If we raise additional funds by issuing equitysecurities, substantial dilution to existing stockholders may result.

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**Obligationsand Commitments**

The following table shows our contractual obligationsand commitments as of June 30, 2007.
|                                                                    | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **Less than  1 year**           | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5  years** | ** ** | **Total** | ** ** |
| Operating lease  obligations                                       |       | $  7,256                        |       | $ 14,738 |   | $ 15,214 |   | $ 32,585 |   | $ 69,793 |   |
| Purchase obligations                                               |       | 7,275                                     |       | 2,532 |   | — |   | — |   | 9,807 |   |
| Debt obligations  (including interest, using current rate of 6.5%) |       | 975                                       |       | 16,950 |   | — |   | — |   | 17,925 |   |
| Total obligations                                                  |       | $ 15,506                             |       | $ 34,220 |   | $ 15,214 |   | $ 32,585 |   | $ 97,525 |   |

 

We are obligatedunder non-cancelable operating leases for our facilities and certain equipmentleases. Original lease terms for our facilities in effect as of June 30, 2007were ten years and generally require us to pay the real estate taxes, insuranceand other operating costs. Equipment leases generally range from three to fiveyears.

Purchaseobligations totaling $9.8 million were primarily for outsourced clinical andpharmacology services, facilities improvements, laboratory equipment, chemicalsand supplies. 

As described morefully above under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” on June 22, 2006, we entered into a series ofagreements involving the assignment to BioMed of options we acquired topurchase the facilities that we occupy in Boulder and Longmont, Colorado andthe subsequent lease of those facilities from BioMed.  Total operating lease obligations under theBoulder Lease amount to $52.0 million over the lease term, and account for $47million of operating lease obligations within the above table.  Total operating lease obligations under theLongmont Lease are $24.2 million over the lease term, and account for $22million of operating lease obligations within the above table.

## **ITEM7A.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk represents the risk of loss that may impact our financialposition, results of operations or cash flows due to adverse changes infinancial and commodity market prices, and interest rates. All of our collaboration agreements and nearlyall purchase orders are denominated in United States dollars. As a result,historically and as of June 30, 2007, we have had little or no exposure tomarket risk in the area of changes in foreign currency or exchange rates. 

Our exposure tomarket risk for changes in interest rates relates primarily to our investmentsin marketable securities. The investment portfolio is comprised primarily ofreadily marketable, high-quality securities diversified and structured tominimize market risks while providing a reasonable return on invested funds. Wetarget our average portfolio maturity at one year or less. Nevertheless, thesecurities held in our investments portfolio are subject to changes in marketvalue in response to changes in interest rates. In addition, a significantchange in market interest rates could have a material impact on interest incomeearned from our investment portfolio.  

Given the currentbalance of $141.3 million of investments classified as “cash and cashequivalents” and “marketable securities available for sale,” a theoretical 100basis point change in interest rates and security prices would impact our netincome (loss) positively or negatively by approximately $1.4 million.  Because our portfolio of marketablesecurities available for sale will mature in a short period of time, ourexposure to changes in the fair value of these investments is not significant.

We are alsoimpacted by adverse changes in interest rates relating to variable-rateborrowings under our credit facility. We pay interest on advances under ourloan agreement at one of three variable rates, which are adjusted periodicallyfor changes in the underlying prevailing rate. Changes in prevailing interestrates will not affect the fair value of our debt, but would impact futureresults of operations and cash flows. At June30, 2007, we had $15 million of long-term debt outstanding, and theinterest rate on our term loan and equipment advances was 6.5%. This rate isadjusted based on changes in the bank’s prime lending rate. Assumingconstant debt levels, a theoretical change of 100 basis points in our interestrate would result in a change in our annual interest expense of approximately$150,000.

Historically, andas of June 30, 2007, we have not used derivative instruments or engaged inhedging activities. 

47

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**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**INDEX TO FINANCIAL STATEMENTS**
|                                                                                                                                              | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                         |       |     |
| Report of KPMG LLP, Independent  Registered Public Accounting Firm                                                                           |       | 49       |
|                                                                                                                                         |       |     |
| Balance Sheets as of June 30, 2007 and 2006                                                                                                  |       | 50       |
|                                                                                                                                         |       |     |
| Statements of Operations for each of  the years in the three-year period ended June 30, 2007                                                 |       | 51       |
|                                                                                                                                         |       |     |
| Statements of Stockholders’ Equity  and Comprehensive Income (Loss) for each of the years in the three-year  period ended June 30, 2007 |       | 52       |
|                                                                                                                                         |       |     |
| Statements of Cash Flows  for each of the years in the three-year period ended June 30, 2007                                                 |       | 53       |
|                                                                                                                                         |       |     |
|  Notes to Financial Statements                                                                                                          |       | 54       |
|                                                                                                                                         |       |     |
| Report of KPMG  LLP, Independent Registered Public Accounting Firm on Internal Control over  Financial Reporting                             |       | 73       |

 

48

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 The Board of Directors andStockholders 

Array BioPharma Inc.:

We have audited theaccompanying balance sheets of Array BioPharma Inc. (the Company) as of June30, 2007 and 2006, and the related statements of operations, stockholders’equity and comprehensive income (loss), and cash flows for each of the years inthe three-year period ended June 30, 2007. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Array BioPharma Inc. as of June 30, 2007and 2006, and the results of its operations and its cash flows for each of the yearsin the three-year period ended June 30, 2007 in conformity with U.S. generallyaccepted accounting principles. 

As discussed in Note 1,effective July 1, 2005, the Company changed its method of accounting forstock-based compensation.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Array BioPharma Inc.’s internal controlover financial reporting as of June 30, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated September12, 2007 expressed an unqualified opinion on management’s assessment of, andthe effective operation of, internal control over financial reporting.
|                     |   | /s/     KPMG  LLP |   |
|---------------------|--------|--------------------------------------------|--------|
|                |   |                                       |
| Boulder,  Colorado  |   |                                       |
| September 12,  2007 |   |                                       |

 

49

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**ARRAYBIOPHARMA INC.**

**BALANCE SHEETS**

**(In thousands, except share data)**
| ** **                                                                                                                                                      | ** ** | **As of June 30,**                       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                      | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Current assets                                                                                                                                                  |       |                                                    |       |   |   |
| Cash and cash equivalents                                                                                                                                       |       | $        10,670 |       | $        15,568 |   |
| Marketable securities                                                                                                                                           |       | 130,661                                                 |       | 54,532 |   |
| Accounts receivable, net                                                                                                                                        |       | 209                                                     |       | 1,359 |   |
| Inventories, net                                                                                                                                                |       | 1,490                                                   |       | 1,645 |   |
| Prepaid expenses and other assets                                                                                                                               |       | 2,367                                                   |       | 1,760 |   |
| Total current assets                                                                                                                                            |       | 145,397                                                 |       | 74,864 |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| Equipment,  leasehold improvements and other property, net                                                                                                      |       | 28,077                                                  |       | 27,309 |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| Other assets                                                                                                                                                    |       | 1,500                                                   |       | — |   |
| Total assets                                                                                                                                                    |       | $      174,974            |       | $      102,173 |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Current  liabilities                                                                                                                                            |       |                                                    |       |   |   |
| Accounts payable                                                                                                                                                |       | $        10,079 |       | $          6,212 |   |
| Advance payments from collaborators                                                                                                                             |       | 3,333                                                   |       | 3,800 |   |
| Accrued compensation and benefits                                                                                                                               |       | 6,771                                                   |       | 5,770 |   |
| Deferred rent - current                                                                                                                                         |       | 2,728                                                   |       | 1,563 |   |
| Other current liabilities                                                                                                                                       |       | 1,657                                                   |       | 1,511 |   |
| Total current liabilities                                                                                                                                       |       | 24,568                                                  |       | 18,856 |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| Deferred rent -  non-current                                                                                                                                    |       | 27,146                                                  |       | — |   |
| Long term debt                                                                                                                                                  |       | 15,000                                                  |       | 14,150 |   |
| Other  liabilities                                                                                                                                              |       | 557                                                     |       | 527 |   |
| Total liabilities                                                                                                                                               |       | 67,271                                                  |       | 33,533 |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| Commitments and contingencies                                                                                                                                   |       |                                                    |       |   |   |
|                                                                                                                                                            |       |                                                    |       |   |   |
| Stockholders’  equity                                                                                                                                      |       |                                                    |       |   |   |
| Preferred stock, $0.001 par value; 10,000,000 shares  authorized, no shares issued or outstanding                                                               |       | —                                                  |       | — |   |
| Common stock, $0.001 par value; 60,000,000 shares  authorized; 47,076,172 and 39,124,494 shares issued and outstanding at June  30, 2007 and 2006, respectively |       | 47                                                      |       | 39 |   |
| Additional paid-in capital                                                                                                                                      |       | 296,767                                                 |       | 202,526 |   |
| Accumulated deficit                                                                                                                                             |       | (189,096                                                | )          | (133,654 | ) |
| Accumulated other comprehensive loss                                                                                                                            |       | (15                                                     | )          | (271 | ) |
| Total stockholders’ equity                                                                                                                                 |       | 107,703                                                 |       | 68,640 |   |
| Total  liabilities and stockholders’ equity                                                                                                                |       | $      174,974            |       | $      102,173 |   |

 

The accompanying notesare an integral part of these financial statements.

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**ARRAYBIOPHARMA INC.**

**STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

 
| ** **                                                        | ** ** | **Years Ended June 30,**    | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue**                                                       | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Collaboration revenue                                             |       | $   30,106                  |       | $   37,738 |   | $   34,343 |   |
| License and milestone revenue                                     |       | 6,864                                      |       | 7,265 |   | 11,162 |   |
| Total revenue                                                     |       | 36,970                                     |       | 45,003 |   | 45,505 |   |
|                                                              |       |                                       |       |   |   |   |   |
| **Operating  expenses**                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue                                                   |       | 24,936                                     |       | 39,611 |   | 38,048 |   |
| Research and development expenses for proprietary  drug discovery |       | 57,464                                     |       | 33,382 |   | 22,871 |   |
| General and administrative expenses                               |       | 13,644                                     |       | 13,789 |   | 9,372 |   |
| Total operating expenses                                          |       | 96,044                                     |       | 86,782 |   | 70,291 |   |
|                                                              |       |                                       |       |   |   |   |   |
| Loss from  operations                                             |       | (59,074                                    | )          | (41,779 | ) | (24,786 | ) |
|                                                              |       |                                       |       |   |   |   |   |
| Interest expense                                                  |       | (979                                       | )          | (670 | ) | — |   |
| Interest income                                                   |       | 4,611                                      |       | 2,835 |   | 1,542 |   |
|                                                              |       |                                       |       |   |   |   |   |
| **Net  loss**                                                     |       | $  (55,442                       | )          | $  (39,614 | ) | $  (23,244 | ) |
|                                                              |       |                                       |       |   |   |   |   |
| Net loss per  share, basic and diluted                            |       | $      (1.36 | )          | $      (1.02 | ) | $      (0.68 | ) |
|                                                              |       |                                       |       |   |   |   |   |
| Shares used in  computing basic and diluted net loss per share    |       | 40,717                                     |       | 38,759 |   | 34,043 |   |

 

**Supplemental Information**

Netloss includes stock-based compensation expense under Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment (“SFAS123(R)”) of $4.8 million and $6.2 million related to employee stock options andemployee stock purchases for fiscal 2007 and 2006, respectively. Fiscal 2005expenses included $151,000 of stock compensation expense from vesting of stockoptions granted prior to our initial public offering of common stock inNovember 2000. There was no stock-based compensation expense recognized underStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) in fiscal 2005 because the Company hadnot yet adopted SFAS 123(R). Net loss including pro forma stock-basedcompensation expense as previously disclosed in the notes to the FinancialStatements for fiscal 2005 was $(30.3) million or $(0.89) per share. See Note 8to the Financial Statements for additional information.

 

The accompanying notes are an integral part of thesefinancial statements.

51

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**ARRAY BIOPHARMA INC.**

**STATEMENTSOF STOCKHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE INCOME (LOSS)**

(In thousands)
| ** **                                                                          | ** ** | ** **            | ** ** | ** **                              | ** ** | ** **      | ** ** | ** **                             | ** ** | **Accumulated**                                                                                      | ** ** | ** **                                                                                              | ** ** | ** **                | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------------|------------|-----------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                          | ** ** | ** **            | ** ** | ** **                              | ** ** | **Additional**  | ** ** | ** **                             | ** ** | **Other**                                                                                            | ** ** | **Deferred**                                                                                            | ** ** | ** **                | ** ** |
| ** **                                                                          | ** ** | **Common Stock** | ** ** | **Paid-In**                             | ** ** | **Accumulated** | ** ** | **Comprehensive**                      | ** ** | **Stock-Based**                                                                                      | ** ** | ** **                                                                                              | ** ** |
| ** **                                                                          | ** ** | **Shares**            | ** ** | **Amount**                              | ** ** | **Capital**     | ** ** | **Deficit**                            | ** ** | **Income (Loss)**                                                                               | ** ** | **Compensation**                                                                                        | ** ** | **Total**                 | ** ** |
| Balance at July 1, 2005                                                             |       | 28,871                |       | $      29 |       | $ 125,556  |       | $     (70,796 | )          | $              (143            | )          | $            (151                           | )          | $   54,495 |       |
| Issuance of common stock for cash-public offering,  net of offering costs of $4,725 |       | 9,200                 |       | 9                                       |       | 66,566          |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 66,575                    |       |
| Issuance of common stock under stock option and  employee stock purchase plans      |       | 395                   |       | —                                  |       | 1,575           |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 1,575                     |       |
| Share-based compensation expense                                                    |       | —                |       | —                                  |       | —          |       | —                                 |       | —                                                                                               |       | 151                                                                                                     |       | 151                       |       |
| Net loss                                                                            |       | —                |       | —                                  |       | —          |       | (23,244                                | )          | —                                                                                               |       | —                                                                                                  |       | (23,244                   | )          |
| Change in unrealized loss on marketable securities                                  |       | —                |       | —                                  |       | —          |       | —                                 |       | (136                                                                                                 | )          | —                                                                                                  |       | (136                      | )          |
| Comprehensive loss                                                                  |       |                  |       |                                    |       |            |       |                                   |       |                                                                                                 |       |                                                                                                    |       | (23,380                   | )          |
| Balance at June 30, 2005                                                            |       | 38,466                |       | 38                                      |       | 193,697         |       | (94,040                                | )          | (279                                                                                                 | )          | —                                                                                                  |       | 99,416                    |       |
| Issuance of common stock under stock option and  employee stock purchase plans      |       | 658                   |       | 1                                       |       | 2,672           |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 2,673                     |       |
| Share-based compensation expense                                                    |       | —                |       | —                                  |       | 6,157           |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 6,157                     |       |
| Net loss                                                                            |       | —                |       | —                                  |       | —          |       | (39,614                                | )          | —                                                                                               |       | —                                                                                                  |       | (39,614                   | )          |
| Change in unrealized loss on marketable securities                                  |       | —                |       | —                                  |       | —          |       | —                                 |       | 8                                                                                                    |       | —                                                                                                  |       | 8                         |       |
| Comprehensive loss                                                                  |       |                  |       |                                    |       |            |       |                                   |       |                                                                                                 |       |                                                                                                    |       | (39,606                   | )          |
| Balance at June 30, 2006                                                            |       | 39,124                |       | 39                                      |       | 202,526         |       | (133,654                               | )          | (271                                                                                                 | )          | —                                                                                                  |       | 68,640                    |       |
| Issuance of common stock for cash-public offering,  net of offering costs of $5,764 |       | 7,000                 |       | 7                                       |       | 85,236          |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 85,243                    |       |
| Issuance of common stock under stock option and  employee stock purchase plans      |       | 952                   |       | 1                                       |       | 4,194           |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 4,195                     |       |
| Share-based compensation expense                                                    |       | —                |       | —                                  |       | 4,811           |       | —                                 |       | —                                                                                               |       | —                                                                                                  |       | 4,811                     |       |
| Net loss                                                                            |       | —                |       | —                                  |       | —          |       | (55,442                                | )          | —                                                                                               |       | —                                                                                                  |       | (55,442                   | )          |
| Change in unrealized loss on marketable securities                                  |       | —                |       | —                                  |       | —          |       | —                                 |       | 256                                                                                                  |       | —                                                                                                  |       | 256                       |       |
| Comprehensive loss                                                                  |       |                  |       |                                    |       |            |       |                                   |       |                                                                                                 |       |                                                                                                    |       | (55,186                   | )          |
| Balance at June  30, 2007                                                           |       | 47,076                |       | $      47 |       | $ 296,767  |       | $   (189,096            | )          | $                (15 | )          | $                — |       | $ 107,703            |       |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

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**ARRAYBIOPHARMA INC.**

**STATEMENTS OF CASH FLOWS**

(In thousands)
| ** **                                                                                        | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating activities**                                                                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                          |       | $                                       | (55,442    | ) | $ | (39,614 | ) | $ | (23,244 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                      |       |                                    |       |   |   |   |   |
| Depreciation and  amortization                                                                    |       | 6,379                                   |       | 9,033 |   | 8,028 |   |
| Deferred rent                                                                                     |       | (3,964                                  | )          | (133 | ) | 560 |   |
| Share-based  compensation expense                                                                 |       | 4,811                                   |       | 6,157 |   | 151 |   |
| Other                                                                                             |       | (517                                    | )          | 106 |   | 53 |   |
| Changes in  operating assets and liabilities:                                                     |       |                                    |       |   |   |   |   |
| Accounts  receivable                                                                              |       | 1,150                                   |       | (679 | ) | 401 |   |
| Inventories                                                                                       |       | 155                                     |       | 508 |   | 1,877 |   |
| Prepaid expenses  and other assets                                                                |       | (607                                    | )          | (653 | ) | 290 |   |
| Accounts payable                                                                                  |       | 3,867                                   |       | 2,503 |   | 1,300 |   |
| Advance payments  from collaborators                                                              |       | (1,583                                  | )          | (3,758 | ) | (10,639 | ) |
| Accrued  compensation and benefits                                                                |       | 1,002                                   |       | 1,449 |   | 3,272 |   |
| Other  liabilities                                                                                |       | 226                                     |       | 784 |   | 773 |   |
| **Net  cash used in operating activities**                                                        |       | (44,523                                 | )          | (24,297 | ) | (17,178 | ) |
|                                                                                              |       |                                    |       |   |   |   |   |
| **Investing activities**                                                                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of equipment,  leasehold improvements and property                                      |       | (7,148                                  | )          | (5,180 | ) | (5,682 | ) |
| Proceeds from sales of  equipment and property                                                    |       | —                                  |       | 39 |   | 105 |   |
| Purchases of marketable  securities                                                               |       | (144,940                                | )          | (67,151 | ) | (121,689 | ) |
| Proceeds from sale and  maturity of marketable securities                                         |       | 69,150                                  |       | 90,925 |   | 72,950 |   |
| Net proceeds from  assignment of facility purchase options                                        |       | 32,275                                  |       | — |   | — |   |
| Decrease (increase) in  restricted cash                                                           |       | —                                  |       | 1,979 |   | (726 | ) |
| **Net  cash provided by (used in) investing activities**                                          |       | (50,663                                 | )          | 20,612 |   | (55,042 | ) |
|                                                                                              |       |                                    |       |   |   |   |   |
| **Financing activities**                                                                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from sale of  common stock, net of issuance costs                                        |       | 85,243                                  |       | — |   | 66,575 |   |
| Proceeds from exercise  of stock options and shares issued under the employee stock purchase plan |       | 4,195                                   |       | 2,673 |   | 1,575 |   |
| Proceeds from the  issuance of long term debt                                                     |       | 850                                     |       | 4,150 |   | 10,000 |   |
| **Net  cash provided by financing activities**                                                    |       | 90,288                                  |       | 6,823 |   | 78,150 |   |
|                                                                                              |       |                                    |       |   |   |   |   |
| **Net increase (decrease) in cash  and cash equivalents**                                         |       | (4,898                                  | )          | 3,138 |   | 5,930 |   |
| Cash and cash  equivalents, beginning of year                                                     |       | 15,568                                  |       | 12,430 |   | 6,500 |   |
| Cash and cash  equivalents, end of year                                                           |       | $                                       | 10,670     |   | $ | 15,568 |   | $ | 12,430 |   |
|                                                                                              |       |                                    |       |   |   |   |   |
| **Supplemental disclosure of cash  flow information**                                             | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                            |       | $                                       | 969        |   | $ | 599 |   | $ | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**ARRAYBIOPHARMA INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(Inthousands, except shares and per share data, unless otherwise noted)**

**1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Organization***

Array BioPharmaInc. (the “Company”, “we”, “our” or “us”) is a biopharmaceutical companyfocused on the discovery, development and commercialization of targeted smallmolecule drugs to treat life threatening and debilitating diseases. Ourproprietary drug development pipeline is primarily focused on the treatment ofcancer and inflammatory disease and includes clinical candidates that are designedto regulate therapeutically important targets. In addition, leadingpharmaceutical and biotechnology companies partner with us to discover anddevelop drug candidates across a broad range of therapeutic areas.

***Use of Estimates***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States (“GAAP”) requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ significantly fromthese estimates.

** *CashEquivalents and Marketable Securities***

Cash equivalentsconsist of short-term, highly liquid financial instruments that are readilyconvertible to cash and have maturities of three months or less from the dateof purchase and may consist of money market funds, taxable commercial paper,U.S. government agency obligations and corporate notes and bonds with highcredit quality. Marketable securities consist of similar financial instrumentswith maturities of greater than three months when purchased.

At June 30, 2007and 2006, management designated marketable securities held by the Company asavailable-for-sale securities for purposes of Statement of Financial AccountingStandards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities.* We consider ouravailable-for-sale investments as readily available for use in currentoperations. Accordingly, we have classified certain investments as short-termmarketable securities, even though the stated maturity date may be more thanone year beyond the current balance sheet date. Securities available-for-saleare carried at fair value, including accrued interest, with unrealized gainsand losses reported as a component of stockholders’ equity until theirdisposition. The amortized cost of debt securities in this category is adjustedfor amortization of premiums and accretion of discounts to maturity. Suchamortization is included in interest income. Realized gains and losses,declines in value judged to be other-than-temporary on securitiesavailable-for-sale and interest on securities available-for-sale are includedin investment income. The cost of securities sold is based on the specificidentification method.

***EquityInvestment***

The Company mayenter into collaboration and licensing agreements in which it receives anequity interest in consideration for all or a portion of up-front, license orother fees under the terms of the agreement. The Company reports the value of equitysecurities received from non-publicly traded companies in which it does notexercise a significant controlling interest as other long term assets, at cost.The Company monitors its investment for impairment and makes appropriatereductions in the carrying value if it is determined that an impairment hasoccurred, based primarily on the financial condition and near term prospects ofthe company whose stock the Company was issued.

In February 2007, theCompany entered into a collaboration and licensing agreement in which theCompany received a non-refundable cash technology access fee and shares ofpreferred stock valued at $1.5 million based on the price at which suchpreferred stock was sold to investors in a private offering. Both thetechnology access fee and the value of the preferred stock were recorded asadvance payments from collaborators and deferred revenue, and are beingrecognized as revenue on a straight-line basis over the estimated one-yearresearch term. The preferred stock value has been recorded as 

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a long-term asset.

***  Fair Value ofFinancial Instruments***

At June 30, 2007and 2006, the Company’s financial instruments consisted of cash, cashequivalents, marketable securities, accounts receivable, accounts payable anddebt. Marketable securities recorded as available-for-sale are recorded attheir estimated fair value. The carrying amounts of all other instrumentsapproximate fair value. See Note 3 – “Investments”and Note 6 – “Debt” for related disclosure information.

***  Accounts Receivableand Allowance for Doubtful Accounts***

The Companyestablishes allowances for doubtful accounts for estimated losses resulting fromthe inability of the Company’s customers to make required payments. Thedecision to extend credit to a customer is a judgment we make on whether we canreasonably expect to collect from our customers, including such factors ascustomer credit-worthiness, past history with the customer, current customerindustry trends and changes in customer payment history. We make theseassessments before we extend credit and at regular intervals thereafter. Ifthese factors do not indicate reasonable assurance of collection, revenue, ifany, is deferred until collection does become reasonably assured, which isgenerally when the cash is received.

The Companyestablishes and maintains a provision for uncollectible accounts receivablebased on management’s review of the aging of the receivable balances, ourongoing assessments of our customers’ current ability to pay, and currentindustry and market conditions for our customers. Delinquent customer accountsare written-off after management has determined the likelihood of collection isno longer probable. The Company has not experienced significant credit lossesand the allowance for doubtful accounts was not significant as of June 30, 2007or 2006. Four separate customers accounted for approximately 36%, 21%, 19% and14% of the Company’s total accounts receivable balance as of June 30,2006.  As of June 30, 2007, those samecustomers accounted for approximately, 8%, 0%, 0% and 66% of the total accountsreceivable balance.

***  Concentrations of Credit Risk***

Financialinstruments that potentially subject the Company to concentrations of creditrisk are primarily cash and cash equivalents, accounts receivable andinvestments in marketable securities. The Company maintains its cash balancesin the form of bank demand deposits and money market funds. Cash equivalentsand restricted cash consist of money market funds. Marketable securitiesconsist of auction rate securities and federal agency mortgage-backedsecurities. All cash, cash equivalents and marketable securities are maintainedwith financial institutions that management believes are creditworthy. Accountsreceivable are typically unsecured and are concentrated in the pharmaceuticaland biotechnology industries. Accordingly, the Company may be exposed to creditrisk generally associated with pharmaceutical and biotechnology companies.

***  Inventories***

Inventoriesconsist of individual chemical compounds in the form of Optimerâ building blocks available-for-sale andcommercially available fine chemicals used in the Company’s proprietary drugdiscovery programs and research collaborations. Inventories are stated at thelower of cost or market, cost being determined under the first-in, first-outmethod. The Company designs and produces the chemical compounds comprising its Optimerbuilding blocks and capitalizes costs into inventory only after technologicalfeasibility has been established. The Company reviews the level and value ofits chemical inventories periodically and, when required, writes down thecarrying cost for non-marketability to estimated net realizable value throughan appropriate reserve.

***  Equipment, LeaseholdImprovements and Other Property***

Equipment,leasehold improvements and other property are stated at cost. Repairs andmaintenance are charged to operations as incurred, and significant expendituresfor additions and improvements are capitalized. Property and equipment aredepreciated using the straight-line method over their estimated useful livesranging from three to seven years, and leasehold improvements are amortized ona straight-line basis over the lease term as discussed further below.Depreciation and leasehold amortization expense for these assets was $6.4million, $9.0 million and $8.0 million for the fiscal years ended June 30,2007, 2006 and 2005, respectively.

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During 2002, theCompany entered into a building lease for its Longmont, Colorado facility andmodified an existing lease for its Boulder, Colorado facility, and in thisprocess obtained options to extend all significant building leases up to, andbeyond, 15 years. Due to the high cost to replace and the limited availabilityof laboratory facilities, the Company concluded that the exercise of a portionof its options to extend its lease terms to at least 15 years was reasonablyassured and therefore amortized its leasehold improvements over this period oftime. During the last quarter of fiscal 2005, the Company reassessed itsfacility requirements, and began to consider the possibility of consolidatingoperations in one of its existing locations, or a new location. At that timethe Company was no longer reasonably assured that it would remain in itsBoulder, Colorado location beyond the initial lease term, which would end inMarch 2008, but was reasonably assured that it would exercise its leaseextensions and lease its Longmont, Colorado facility for at least 13 moreyears. Therefore, as of June 2005, the Company began amortizing its Boulderleasehold improvements over an accelerated period of 34 months representing theremaining initial lease term, which resulted in an additional expense of $1.6million and approximately $141,000 for fiscal year 2006 and 2005, respectively.On June 22, 2006, the Company executed a series of agreements involving theassignment of facility purchase options that it owned and the subsequentsigning of lease agreements for these same facilities over a ten-year leaseterm. Therefore, during the latter part of June 2006, the Company beganamortizing its leasehold improvements over the new ten-year lease terms forboth the Boulder and Longmont, Colorado facilities.

***  Software Development Costs***

The Company usessoftware it develops for capturing, searching and presenting data. The Companycapitalizes direct, payroll-related software development costs for timeincurred during the software development stage where the computer softwareproject is intended to create a new system or add identifiable functionality toan existing system. All other costs, including time incurred for preliminaryproject planning, training, implementation or ongoing maintenance, are expensedin the period incurred. Total capitalized costs were approximately $284,000,$223,000 and $506,000 for fiscal years 2007, 2006, and 2005, respectively, andare being amortized on a straight-line basis over a period of three years.Software amortization expense was approximately $369,000, $774,000 and $1.1million for the fiscal years ended June 30, 2007, 2006 and 2005, respectively.

***  Impairment of Long-Lived Assets***

The carrying valuefor long-lived assets with finite lives is reviewed for impairment when eventsor changes in circumstances indicate the book value of the assets may not berecoverable. An impairment loss would be recognized when estimated undiscountedfuture cash flows from the use of the asset and its eventual disposition isless than its carrying amount. There were no impairments of long-lived assetsduring the fiscal years ended June 30, 2007, 2006 and 2005.

***  Deferred Rent***

During July and August 2006, the Company terminated its existingfacility leases and executed new lease agreements with a different landlord.Accordingly, the entire June 30, 2006 deferred rent balance of $1.6 million wasreversed and recorded as a reduction to the Company’s recognized rent expensefor the first quarter of fiscal 2007. Additionally, in conjunction with theassignment of facility purchase options as described in Note 10, “Commitments - Operating Leases and Purchase Obligations”, the Company received net proceeds of$32.3 million which was recorded as deferred rent and is being recognized on astraight-line basis as a reduction to rent expense over the related ten-yearterm of the new facilities leases. The current facilities leases provide for annual rent increases, and theCompany recognizes the average annual rent expense over the term of theseleases on a straight-line basis. Thecurrent portion of the deferred rent balance reflected on the Company’s balancesheet represents the amount of expected deferred rent credits to be applied asa reduction to the Company’s rent expense over the next twelve-month period.

***  Bonus Program***

The Company has implemented a cash performance-based bonus program thatcovers substantially all employees. The size of the bonus pool is determinedbased on the achievement of Company-wide goals and other performance measures approved by the Compensation Committee andthe Board of Directors, and individual bonuses are awarded based onpre-determined target bonus percentages for each employee level. Bonus accrualsare estimated throughout the fiscal year based on the probability of achievingthe Company goals. The Company reviews the actual progress made towards thesegoals under the bonus programs and adjusts the accrual accordingly at eachfiscal quarter end. Accrued compensation and 

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benefitsincludes a liability for cash bonuses of $3.9 million, $3.4 million and $2.7million at June 30, 2007, 2006, and 2005, respectively.

***  Revenue Recognition***

Most of the Company’s revenue is derived from designing, creating,optimizing, evaluating, and developing drug candidates for its collaborators.The majority of collaboration revenue consists of fees received based oncontracted annual rates for full time equivalent employees working on aproject. The Company’s collaboration agreements also include license andup-front fees, milestone payments upon achievement of specified research ordevelopment goals and royalties on sales of resulting products. A small portionof the Company’s revenue comes from fixed fee revenue and from sales ofcompounds on a per-compound basis.

Collaboration agreements typically call for a specific level of resourcesas measured by the number of full time equivalent scientists working a definednumber of hours per year at a stated price under the agreement. The Companyrecognizes revenue under its collaboration agreements on a monthly basis forfees paid to the Company based on hours worked. The Company recognizes revenuefrom sales of Lead Generation Library and Optimer building block compounds asthe compounds are shipped, as these agreements are priced on a per-compoundbasis and title and risk of loss passes upon shipment to the Company’scustomers. In general, contract provisions include predetermined payment schedulesor the submission of appropriate billing detail. Payments received in advanceof performance are recorded as advance payments from collaborators until therevenue is earned.

Revenue from license fees and up-front fees is non refundable and isrecognized on a straight-line basis over the expected period of the relatedresearch program. Milestone payments are non refundable and arerecognized as revenue over the expected period of the related research program.A portion of each milestone payment is recognized when the milestone isachieved based on the applicable percentage of the research term that haselapsed. Any balance is recognized ratably over the remaining research term. Revenue recognition related to license fees,up-front payments and milestone payments could be accelerated in the event ofearly termination of programs.

The Company reports revenue for lead generation and lead optimizationresearch, custom synthesis and process research, the development and sale ofchemical compounds and the co-development of proprietary drug candidates itout-licenses, as collaboration revenue. License and milestone revenue iscombined and reported separately from collaboration revenue.

***  Cost of Revenue***

The Company’sout-licensing and collaboration agreements provide for research funding basedon the number of full-time equivalent scientists performing research on aprogram. The Company does not bear any risk of failure for performing theseactivities and the payments are not contingent based on the success or failureof the research program. Accordingly, the Company expenses these costs whenincurred as cost of revenue.

*** Shipping and Handling Costs***

Amounts billed tocustomers for shipping and handling are reported within collaboration revenue.Costs incurred for shipping and handling of products to customers are includedin cost of revenue.

*** Research and Development Costs***

Research anddevelopment costs are expensed as incurred, and consist of direct and indirectinternal costs related to specific projects, as well as fees paid to otherentities that conduct research activities on our behalf. Substantial portionsof our preclinical studies and all of our clinical trials have been performedby third-party contract research organizations (CROs) or directly with thesites. These CROs and sites bill on a monthly basis, or based upon milestoneachievement. We accrue expenses for preclinical studies performed by ourvendors based on estimated percentage of completion over the term of theservice period and adjust our estimates as required. We accrue costs forclinical trial activities performed by others based upon the estimated amountof work completed on each study. For clinical trial expenses, the significant factorsused in estimating accruals include the number of patients enrolled and theduration for which they will be enrolled in the study. We monitor patientenrollment levels and related activities to the extent possible throughinternal reviews, correspondence with CROs and sites, and review of contractualterms.

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***Income Taxes***

TheCompany provides for income taxes using the liability method in accordance withStatement of Financial Accounting Standard No. 109 *Accounting for Income Taxes* (SFAS 109). Werecognize the amount of income taxes payable or refundable for the year as wellas deferred tax assets and liabilities. Deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearthat the differences are expected to effect current taxable income. Valuationallowances are recorded to reduce the amount of deferred tax assets when, basedupon available objective evidence including historical taxable income, theexpected reversal of temporary differences, and projections of future taxableincome, management cannot conclude it is more likely than not that some or allof the deferred tax assets will be realized. See also Note 2 – “Recently IssuedAccounting Pronouncement”.

***Net Loss Per Share***

Basic net loss pershare is computed by dividing net loss for the period by the weighted averagenumber of common shares outstanding during the period. Diluted net loss pershare reflects the additional dilution from potential issuances of commonstock, such as stock issuable pursuant to the exercise of stock options orpurchases under our Employee Stock Purchase Plan (ESPP). The treasury stockmethod is used to calculate the dilutive effect of options and ESPP shares.Potentially dilutive shares are excluded from the computation of diluted lossper share when their effect is anti-dilutive. As a result of the Company’s netlosses for the fiscal years ended June 30, 2007, 2006 and 2005, all potentiallydilutive securities were anti-dilutive and therefore have been excluded fromthe computation of diluted loss per share. The number of “in-the-money” commonstock equivalents excluded from the diluted loss per share calculations was6,531,344 shares, 1,486,695 shares and 1,701,239 shares for the fiscal yearsended June 30, 2007, 2006, and 2005, respectively.

***Accounting forShare-Based Compensation***

Effective July 1,2005, the Company adopted the fair value method of accounting for share-basedcompensation arrangements in accordance with Financial Accounting StandardsBoard (“FASB”) Statement No. 123(R),*Share-Based Payment*(“SFAS 123(R)”). In addition, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.107 *“Share-Based Payment”* (“SAB 107”), whichprovides supplemental SFAS 123(R) application guidance based on the views ofthe SEC. The Company adopted the provisions of SAB 107 in its adoption of SFAS123(R). Under the provisions of SFAS123(R), the estimated fair value of options granted under the Company’s Amendedand Restated Stock Option and Incentive Plan (the “Option Plan”) is recognizedas compensation expense over the option-vesting period. In addition, theCompany’s Employee Stock Purchase Plan (the “ESPP”) is considered to be acompensatory plan under SFAS 123(R) as purchases are made at a discount to themarket price of the Company’s common stock as reported on the first or last dayof each offering period (whichever is lower). Compensation expense isrecognized based on the estimated fair value of the common stock during eachoffering period and the percentage of the purchase discount.

The Companyadopted SFAS 123(R) using the modified prospective transition method, whichrequires prospective application of the accounting standard as of July 1, 2005,the first day of the Company’s fiscal year. Under the modified prospectivetransition method, compensation cost recognized includes: (a) compensationcost for all share-based payments granted prior to, but not yet vested as ofJuly 1, 2005, based on the grant date fair value estimated in accordance withthe original provisions of SFAS No. 123, and (b) compensation costfor all share-based payments granted beginning July 1, 2005, based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R).Prior to July 1, 2005, share-based employee compensation expense was notrecognized in the Company’s financial statements because the exercise prices ofall awarded stock option grants were either equal to or greater than the marketvalue of the underlying common stock on the grant date.

As permitted bySFAS 123, the Company reported pro forma disclosures presenting results andloss per share as if the Company had used the fair value recognition provisionsof SFAS 123 in the Notes to the Financial Statements. SFAS 123(R) requires anestimate of pre-vesting forfeitures at the time of grant, with subsequentrevisions as actual vesting becomes known, so that expense recognized reflectsan estimate of the fair value of stock option awards that will ultimately vest.As a result, stock-based compensation expense recognized in the Statements ofOperations has been reduced by expected forfeitures. In preparing the Company’spro forma disclosures provided under SFAS 123 for periods prior to the adoptionof SFAS 123(R), among other computational differences, the Company accountedfor pre-vesting forfeitures as they occurred. Because of these differences, thestock-based compensation expense recognized in the 

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Company’s Statements ofOperations under FAS 123(R), and the pro forma stock-based compensation expensedisclosed under SFAS 123 are not directly comparable.  In accordance with the modified prospectivetransition method of SFAS 123(R), results for prior comparative periods havenot been restated.

See Note 8 –“Stock Compensation Plans” for additional details regarding the impacts of theCompany’s stock based compensation plan on the Company’s financial statements.

***ComprehensiveIncome (Loss)***

TheCompany’s comprehensive income (loss) consists of net income (loss), andunrealized gains and losses on investments in available-for-sale marketablesecurities. The Company had no other sources of comprehensive income (loss) forthe fiscal years ended June 30, 2007, 2006 and 2005.

**2.  Recently Issued Accounting Pronouncement**

FinancialAccounting Standards Board Interpretation No. 48 (“FIN 48”), “*Accounting**for Uncertainty in IncomeTaxes – an interpretation of FASB Statement No. 109”*, specifies howtax benefits for uncertain tax positions are to be recognized, measured, andderecognized in financial statements; requires certain disclosures of uncertaintax matters; specifies how reserves for uncertain tax positions should beclassified on the balance sheet; and provides transition and interim-periodguidance, among other provisions. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. As of June 30, 2007 we have federal andstate net operating loss and credit carryforwards of approximately $138 millionthat may be subject to annual limitation under the Internal Revenue Code andsimilar state provisions, due to certain substantial changes in ownership. Theannual limitation may result in the expiration of net loss and creditcarryforwards before utilization. As of June 30, 2007, all of our deferred taxassets have been fully offset by a valuation allowance because the realizationof these assets is dependent on future taxable earnings. We are currentlyevaluating the effects, if any, on our results of operations and financialcondition. Because our deferred tax assets are fully offset by a valuationallowance, we do not believe the adoption of FIN 48 will have a material effecton our statements of operations or cash flows.

**3.  Investments**

The Company’sinvestments include U.S. federal government obligations and domestic publiccorporate debt securities, primarily auction rate securities. Investments areclassified as short-term or long-term based on the nature of these securitiesand the availability of these securities to meet current operatingrequirements. All of these investments are held in the name of the Company at alimited number of financial institutions. The Company has investments inmarketable securities, all of which were classified as available-for-sale atJune 30, 2007 and 2006 as follows:
| **Balances as of June 30, 2007** | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|
|                                                      |       |     |       |                  |       |                   |       |                |       |
| U.S. Government  securities                               |       | $        | 12,520     |                  | $          | —                 |       | $                   | (15        | ) | $ | 12,505 |   |
| Corporate debt  securities                                |       | 118,156  |       | —                |       | —                 |       | 118,156             |       |
|                                                      |       |     |       |                  |       |                   |       |                |       |
| Total  Investments                                        |       | $        | 130,676    |                  | $          | —                 |       | $                   | (15        | ) | $ | 130,661 |   |

 
| **Balances as of June 30, 2006** | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|
|                                                      |       |     |       |                  |       |                   |       |                |       |
| U.S. Government  securities                               |       | $        | 37,274     |                  | $          | —                 |       | $                   | (271       | ) | $ | 37,003 |   |
| Corporate debt  securities                                |       | 17,529   |       | —                |       | —                 |       | 17,529              |       |
|                                                      |       |     |       |                  |       |                   |       |                |       |
| Total  Investments                                        |       | $        | 54,803     |                  | $          | —                 |       | $                   | (271       | ) | $ | 54,532 |   |

 

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The following tablesummarizes the fair value and gross unrealized losses on our investments inmarketable securities with unrealized losses, aggregated by the type of investmentinstrument and length of time that the individual securities have been in acontinuous unrealized loss position as of June 30, 2007 and 2006:
| ** **                                                | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**           | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|
| **Balances as of June 30, 2007** | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Losses**           | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. Government  securities                               |       | $                                      | —     |                                    | $          | —              |       | $ | 10,384 |   | $ | (15 | ) | $ | 10,384 |   | $ | (15 | ) |
|                                                           |            |                                        |            |                                         |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**           | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|
| **Balances as of June 30, 2006** | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Losses**           | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. Government  securities                               |       | $                                      | 14,744     |                                    | $          | (138                | )          | $ | 21,867 |   | $ | (133 | ) | $ | 36,611 |   | $ | (271 | ) |
|                                                           |            |                                        |            |                                         |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of June 30, 2007 and2006, all of the Company’s investments were marketable securities classified asshort term, available for sale securities, and are reported at their fairvalues, including accrued interest, based upon quoted market prices as of thereporting date. If these investments are sold at a loss or experience a declinein value that is not temporary, the loss is recognized in the statement ofoperations for that period. Unrealized gains or losses that are consideredtemporary in nature are recorded as a separate component of cumulative othercomprehensive income (loss) in stockholders’ equity, net of the related taxeffect. Subsequent recoveries in the fair value, if any, are not recognized inthe statement of operations, but as a component of accumulated other comprehensiveincome (loss). The specific identification method is used to determine the costof securities disposed of, with realized gains and losses recorded in interestincome, net. During fiscal 2007, 2006 and 2005, the Company did not incursignificant realized gains or losses on disposals of marketable securities. Theunrealized loss balances on U.S. Government securities resulted primarily frominterest rate increases. Because the Company has the ability and intent to holdthese securities until a recovery of fair value, which may be at maturity, theCompany does not consider these securities to be other than temporarilyimpaired at June 30, 2007.

The Company’sinvestment policy limits the concentration of its investments in any singleinstrument to a maximum of 5% of the total portfolio, other than U.S.Government or Agencies securities, which do not have limitations. All of theCompany’s securities must be readily marketable and have high quality debtratings from either Moody’s or Standard & Poors. Investments may nothave maturities in excess of two years, and the average portfolio maturity ismaintained at one year or less.

**4.  Inventories**

Inventories arevalued at the lower of cost or market, with cost computed using standard coststhat approximate average purchase costs. Consideration is given toobsolescence, excessive levels, deterioration and other factors in evaluatingnet realizable value. Inventories consist of the following:
|                            | ** ** | **As of June 30,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Fine chemicals             |       | $                                 | 1,600      |   | $ | 1,857 |   |
| Optimer building  blocks   |       | 1,921                             |       | 2,009 |   |
| Total  inventories at cost |       | 3,521                             |       | 3,866 |   |
| Less reserves              |       | (2,031                            | )          | (2,221 | ) |
| Total inventories, net     |       | $                                 | 1,490      |   | $ | 1,645 |   |

 

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**5.  Equipment, Leasehold Improvements and OtherProperty, Net**

Equipment, leasehold improvements and other property are recorded at costand depreciated over their estimated useful lives using the straight-linemethod, and consisted of the following:
|                                                 | ** ** | ** **                          | ** ** | **As of June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **Estimated useful life** | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Laboratory  equipment                           |       | 5  years                            |       | $                                 | 35,191     |   | $ | 32,363 |   |
| Computer  hardware and software                 |       | 3  years                            |       | 8,314                             |       | 7,850 |   |
| Furniture and  fixtures                         |       | 7  years                            |       | 1,877                             |       | 1,626 |   |
| Leasehold  improvements                         |       | Shorter  of lease or 10 years       |       | 27,003                            |       | 23,979 |   |
| Equipment and  computer software in progress    |       | 3  to 5 years                       |       | 579                               |       | 321 |   |
|                                            |       |                                |       | 72,964                            |       | 66,139 |   |
| Less accumulated  depreciation and amortization |       |                                |       | (44,887                           | )          | (38,830 | ) |
|                                            |       |                                |       | $                                 | 28,077     |   | $ | 27,309 |   |

 

Depreciation and amortization expense was $6.4 million, $9.0 million and$8.0 million for the years ended June 30, 2007, 2006, and 2005, respectively.

**6.  Debt**

Our debt consists of the following:
|                           | ** ** | **As of June 30,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Term loan                 |       | $                                 | 10,000     |   | $ | 10,000 |   |
| Equipment line  of credit |       | 5,000                             |       | 4,150 |   |
| Revolving line  of credit |       | —                            |       | — |   |
| Total                     |       | $                                 | 15,000     |   | $ | 14,150 |   |

 

The Company entered into a Loan and Security Agreement (“Loan andSecurity Agreement”) with Comerica Bank (“Comerica” or “Bank”) dated June 28,2005, as amended on July 7, 2006. The Loan and Security Agreement provides fora term loan, equipment advances and a revolving line of credit, all of whichare secured by a security interest in the Company’s assets, other than itsintellectual property. The full $10 million term loan was advanced to theCompany on June 30, 2005, and currently has an interest rate of 6.5% per annumand a maturity date of June 28, 2010. Up to $5 million in equipment advanceswere available to the Company through December 28, 2006 to finance the purchaseof equipment, capitalized software and tenant improvements. As of June 30,2007, the Company has received $5.0 million of equipment advances, whichcurrently have an interest rate of 6.5% per annum and a maturity date of June28, 2010. A revolving line of credit in the amount of $6.75 million supportsoutstanding standby letters of credit that have been issued in relation to theCompany’s facilities leases. These standby letters of credit expire on August 31,2016.

The outstandingbalances under the term loan, the equipment advances and the revolving line ofcredit bear interest on a monthly basis at one of the following interest rateselected by the Company from time to time:

·                  A rate equal to 1.75% below the Prime“Base Rate” as quoted by the Bank from time to time; or

·                  A rate equal to 1.00% above theBank’s LIBOR rate, which would remain in effect during the relevant LIBOR period;or

·                  Arate equal to 1.25% above the Bank’s Cost of Funds rate, which would remain ineffect during the relevant Cost of Funds period.

Should the Companymaintain less than $10 million at the Bank at any time during any interest rateperiod, the interest rate the Company pays will be 0.50% higher than shownabove.  Interest is payable monthly onthe outstanding borrowings.

If the Company’stotal cash, cash equivalents and marketable securities, including thoseinvested at the Bank, falls below $40 million, between $30 million and $25million, or below $25 million, the minimum required balance maintained 

61

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at the Bank is $2million, $8.5 million and $17 million, respectively. If the Company’s totalcash, cash equivalents and marketable securities, including those invested atthe Bank, falls below $20 million, the loans become due.

The Loan andSecurity Agreement contains representations and warranties and affirmative andnegative covenants that are customary for credit facilities of this type. TheLoan and Security Agreement could restrict the Company’s ability to, amongother things, sell certain assets, engage in a merger or change in controltransaction, incur debt, pay cash dividends and make investments. The Loan andSecurity Agreement also contains events of default that are customary forcredit facilities of this type, including payment defaults, covenant defaults,insolvency type defaults and events of default relating to liens, judgments,material misrepresentations and the occurrence of certain material adverseevents.

**7.Common Stock and Stockholder Rights Plan**

In May 2007 we completed a public offering of seven million shares of ourcommon stock under an effective registration statement, at a price to thepublic of $13.00 per share, for gross proceeds of $91 million. We receivedapproximately $85.2 million in net proceeds after deducting underwriting feesof $5.5 million and offering expenses of approximately $300,000.

***StockholderRights Plan***

In August 2001,the Company adopted a Stockholder Rights Plan designed to ensure that theCompany’s stockholders receive fair and equal treatment in the event of anunsolicited attempt to take control of the Company and to deter coercive orunfair tactics by potential acquirers. The Stockholder Rights Plan imposes asignificant penalty upon any person or group that acquires 15% or more of theCompany’s outstanding common stock without the approval of the Company’s Boardof Directors. Under the Stockholder Rights Plan, a dividend of one PreferredStock Purchase Right was declared for each common share held of record as ofthe close of business on August 27, 2001. Each right entitles the holder topurchase 1/100th of a share of Series A Junior ParticipatingPreferred Stock for an exercise price of $70.00 per share. The rights generallywill not become exercisable unless an acquiring entity accumulates or initiatesa tender offer to purchase 15% or more of the Company’s common stock. In thatevent, each right will entitle the holder, other than the unapproved acquirerand its affiliates, to purchase upon the payment of the exercise price a numberof shares of the Company’s common stock having a value of two times theexercise price. If the Company is not the surviving entity in a merger or stockexchange, or 50% or more of the Company’s assets or earning power are sold inone or more related transactions, each right would entitle the holder thereofto purchase for the exercise price a number of shares of common stock of theacquiring company having a value of two times the exercise price. The rightsexpire on August 2, 2011.

***Other Changes***

Issuances of common stock, and the associated tax benefit (if any)related to stock options exercised by employees, are recorded as an increase tocommon stock and additional paid-in capital. Share-based compensation expenseunder FAS 123(R) is charged to additional paid-in capital as incurred. Thedifference between actual tax deductions available to the Company and theestimated tax deductions recorded upon issuance of the employee stock optionsis credited to additional paid-in capital when recognized. The Company did notrecognize any tax effects related to employee stock options during the fiscalyears ended June 30, 2007, 2006 and 2005. See Note 9 – “Income Taxes” foradditional information.

***Reserved Shares***

At June 30, 2007,****commonstock reserved for future issuance is as follows:
| Outstanding common stock  options                                                                          |   | 7,815,951  |   |
|------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| Common stock  authorized for grant under our stock option plan, subject to total authorized  share capital |   | 5,987,409  |   |
| Common stock  available for grant under the Employee Stock Purchase Plan                                   |   | 353,784    |   |
|                                                                                                       |   | 14,157,144 |   |

 

The Board ofDirectors has approved an amendment to increase the number of shares of CommonStock Array is authorized to issue from 60,000,000 to 120,000,000, subject tostockholder approval at the annual meeting of stockholders expected to be heldon November 1, 2007.

 

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**8.  Stock Compensation Plans**

### ***Stock Option Plan***

In September 2000,the Company’s Board of Directors approved the Amended and Restated Stock Optionand Incentive Plan (the “Option Plan”), which is the successor equity incentiveplan to the Company’s 1998 Stock Option Plan (the “1998 Plan”), initiallyadopted by the Board of Directors in July 1998. Upon the closing of theCompany’s initial public offering, the Option Plan became effective and noadditional grants were made under the 1998 Plan. A total of 14.6 million sharesof common stock have been reserved for issuance under the Option Plan toeligible employees, consultants and directors of the Company. In addition, theOption Plan provides for the reservation of additional authorized shares on anygiven day in an amount equal to the difference between: (i) 25% of theCompany’s issued and outstanding shares of common stock, on a fully diluted andas-converted basis and (ii) the number of outstanding shares relating to awardsunder the Option Plan plus the number of shares available for future grants ofawards under the Option Plan on that date. As of June 30, 2007, there were5,987,409 million shares authorized for future issuance under the Plan, subjectto shareholder approval.

The Option Planprovides for awards of both non statutory stock options and incentive stockoptions within the meaning of Section 422 of the Internal Revenue Code of 1986,as amended, and other incentive awards and rights to purchase shares of theCompany’s common stock.

The Option Plan isadministered by the Compensation Committee of the Board of Directors, which hasthe authority to select the individuals to whom awards will be granted, thenumber of shares, vesting exercise price and term of each option grant.Generally, our options have a four-year vesting term, an exercise price equalto the market value of the underlying shares at the grant date and a ten-yearlife from the date of grant (a five-year life for incentive stock optionsgranted to holders of more than 10% of the Company’s stock).

We have entered into employment agreements with our executive officers.Under these agreements, if a participating executive’s employment is terminatedwithout cause or upon a change in control, then the executive is entitled toaccelerated vesting of unvested stock options as provided in his agreement.

***Employee Stock Purchase Plan***

The Employee StockPurchase Plan (the “ESPP”), as amended, was adopted effective upon the closingof our initial public offering in November 2000.  The ESPP allows qualified employees (asdefined in the ESPP) to purchase shares of our common stock at a price equal tothe lower of 85% of the closing price at the beginning of the offering periodor 85% of the closing price at the end of each offering period. Effective eachJanuary 1, a new 12-month offering period begins ending on December 31 of thatyear. However, if the closing stock price on July 1 is lower than the closingstock price on the preceding January 1, then the original 12-month offeringperiod terminates and the purchase rights under the original offering periodroll forward into a new six-month offering period that begins July 1 and endson December 31.

As of June 30,2007, we had authorized a total of 1.65 million shares for issuance under theESPP, and we had 353,784 shares available for grant. Compensation expenserelated to our ESPP was $0.4 million for the fiscal year ended June 30, 2007.We issued 146,191, 108,588 and 179,905 shares of common stock during the fiscalyears ended June 30, 2007, 2006 and 2005 pursuant to the ESPP at an averageprice per share of $6.04, $5.38 and $5.78, respectively.

***ExpenseInformation under SFAS 123(R)***

Stock-basedcompensation expense recognized under SFAS 123(R) was $4.8 million ($0.12 pershare) and $6.2 million ($0.16 per share) for the fiscal years ended June 30,2007 and 2006, respectively, substantially all of which was related to stockoptions. The Company did not recognize a tax benefit from share-basedcompensation expense because the Company concluded that it is more likely thannot that the related deferred tax assets, which have been reduced by a fullvaluation allowance, will not be realized. The following table summarizesstock-based compensation expense recorded under SFAS 123(R) for the fiscalyears ended June 30, 2007 and 2006 and its allocation within the statements ofoperations:
|                             | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Cost of revenue             |       | $                                       | 1,127      |   | $ | 2,089 |   |
| Research and  development   |       | 1,748                                   |       | 1,341 |   |
| General and  administrative |       | 1,936                                   |       | 2,727 |   |
| Total                       |       | $                                       | 4,811      |   | $ | 6,157 |   |

 

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The Black-Scholesoption pricing model was used to estimate the option fair values. Beginningin fiscal year 2006, the Company estimated the expected option term (the amountof time from the grant date until the options are exercised or expire) usingthe “simplified” method as outlined in SAB 107. This method establishes an estimate of the expected term as themid-point between the vesting term and the maximum contractual term of theoption. During the fourth quarter of 2006, the Company conducted a detailedevaluation of historical unexercised employee stock options, resulting in anestimated stock option life that was directly comparable to that calculatedunder the simplified method described above. Expected volatility was estimated based upon historicalvolatility generally beginning with the date of the Company’s initial public offering inNovember 2000 through the last day of the applicable reporting periods.  As required by SFAS 123(R), stock-basedcompensation expense is recognized net of estimated pre-vesting forfeitures,which results in recognition of expense on options that are ultimately expectedto vest over the expected option term. Forfeitures were estimated using actualhistorical forfeiture experience. The fair value of employee share-basedpayment awards was estimated using the following assumptions and weightedaverage fair values:
|                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  grant-date fair value |       | $        | 7.42       |     | $          | 4.71     |       | $ | 4.92 |   |
| Risk-free  interest rate(1)             |       | 4.68     | %          | 4.56     | %          | 3.70     | %          |
| Dividend yield                          |       | 0        | %          | 0        | %          | 0        | %          |
| Volatility(2)                           |       | 69.0     | %          | 77.7     | %          | 75.5     | %          |
| Expected option term in  years          |       | 6 1/4    |       | 6 1/3    |       | 5        |       |
|                                         |            |          |            |          |            |          |            |  |  |  |

 

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| (1)    |   | Risk-free  interest rates used ranged from 4.6% - 4.7%, 4.2% - 5.0% and was 3.7% for the  fiscal years ending June 30, 2007, 2006 and 2005, respectively. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                      |
| (2)    |   | Volatility used  ranged from 66.6% - 72.7%, 74.0% - 77.9% and was 75.5% for the fiscal years  ending June 30, 2007, 2006 and 2005, respectively.          |

 

SFAS 123(R)requires tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options (“excess tax benefits”) to beclassified and reported as both an operating cash outflow and a financing cashinflow upon adoption of SFAS 123(R). As discussed in Note 9 – “Income Taxes”,as a result of the Company’s net operating losses, the excess tax benefits thatwould otherwise be available to reduce income taxes payable have the effect ofincreasing the Company’s net operating loss carryforwards. Accordingly, becausethe Company is not able to realize these excess tax benefits, such benefitshave not been recognized in the Statements of Cash Flows for the fiscal yearsended June 30, 2007 and 2006.

***GeneralShare-Based Award Information***

The followingsummarizes stock option activity under the Option Plan:

|                                         | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| Outstanding  Balance, June 30, 2004     |       | 6,278,837                  |       | $                                       | 6.19       |   |
| Granted                                 |       | 773,884                    |       | 7.72                                    |       |
| Exercised                               |       | (214,920                   | )          | 2.49                                    |       |
| Forfeited or expired                    |       | (203,260                   | )          | 7.20                                    |       |
| Outstanding Balance,  June 30, 2005     |       | 6,634,541                  |       | 6.46                                    |       |
| Granted                                 |       | 1,936,100                  |       | 6.58                                    |       |
| Exercised                               |       | (572,995                   | )          | 3.89                                    |       |
| Forfeited or expired                    |       | (402,154                   | )          | 7.40                                    |       |
| Outstanding  Balance, June 30, 2006     |       | 7,595,492                  |       | 6.63                                    |       |
| Granted                                 |       | 1,276,890                  |       | 11.18                                   |       |
| Exercised                               |       | (805,487                   | )          | 4.11                                    |       |
| Forfeited or expired                    |       | (250,944                   | )          | 9.37                                    |       |
| Outstanding  Balance, June 30, 2007     |       | 7,815,951                  |       | 7.54                                    |       |
|                                    |       |                       |       |                                    |       |
| Exercisable shares as  of June 30, 2007 |       | 4,828,253                  |       | $                                       | 7.05       |   |

 

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The total pre-taxintrinsic value, or the difference between the exercise price and the marketprice on the date of exercise, of stock options exercised during the year endedJune 30, 2007 was $6,068,100. The following table summarizes significant rangesfor options outstanding and currently exercisable as of June 30, 2007:
| ** **              | ** ** | **Stock Options Outstanding**  | ** ** | **Stock Options Exercisable**                                 | ** ** |
|-------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted-Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted-  Average  Exercise Price  per share** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted-  Average  Exercise Price  per share** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| $0.24 - 0.60            |       | 734,763                                  |       | 2.5                                                                     |       | $ | 0.53 |   | $ | 8,185,260 |   | 734,763 |   | $ | 0.53 |   | $ | 8,185,260 |   |
|  2.44 - 4.08       |       | 586,817                                  |       | 5.5                                                                     |       | 3.27 |   | 4,929,263 |   | 426,453 |   | 3.27 |   | 3,582,205 |   |
|  4.46 - 5.69       |       | 74,000                                   |       | 5.6                                                                     |       | 4.99 |   | 494,320 |   | 66,250 |   | 4.95 |   | 445,200 |   |
|  5.75 - 7.10       |       | 1,910,710                                |       | 7.9                                                                     |       | 6.53 |   | 9,821,049 |   | 588,097 |   | 6.53 |   | 3,022,819 |   |
|  7.18 - 8.48       |       | 1,482,709                                |       | 6.7                                                                     |       | 8.16 |   | 5,204,309 |   | 874,663 |   | 8.17 |   | 3,061,321 |   |
|  8.60 - 9.84       |       | 1,644,751                                |       | 5.1                                                                     |       | 9.02 |   | 4,358,590 |   | 1,510,176 |   | 9.05 |   | 3,956,661 |   |
|  10.07 - 11.29     |       | 461,000                                  |       | 4.6                                                                     |       | 10.86 |   | 373,410 |   | 460,650 |   | 10.86 |   | 373,127 |   |
|  11.67 - 12.82     |       | 695,201                                  |       | 9.7                                                                     |       | 12.57 |   | — |   | 27,001 |   | 12.36 |   | — |   |
|  12.92 - 14.28     |       | 226,000                                  |       | 6.4                                                                     |       | 13.68 |   | — |   | 140,200 |   | 13.74 |   | — |   |
|                    |       | 7,815,951                                |       | 6.3                                                                     |       | $ | 7.54 |   | $ | 33,366,201 |   | 4,828,253 |   | $ | 7.05 |   | $ | 22,626,593 |   |

 

We had 4,541,392and 3,984,802 outstanding options exercisable at an aggregate average exerciseprice of $6.63 and $5.96 per share as of June 30, 2006 and 2005, respectively.Shares authorized for grant under the Plan as of June 30, 2007 were 5,987,409,subject to shareholder approval.

The aggregateintrinsic value in the preceding table represents the total pretax intrinsicvalue for stock options with an exercise price less than the Company’s closingstock price of $11.67 as of June 29, 2007, the last trading day of the fiscalyear, that would have been received by the option holders had they exercisedtheir options as of that date. The total number of in-the-money stock optionsexercisable as of June 30, 2007 was 4,661,052.

As of June 30,2007, $12.3 million of total unrecognized compensation expense related to stockoptions is expected to be recognized over a weighted average period of 1.8years. Cash received from stock options exercised and purchases under the ESPPplan during the year ended June 30, 2007 was approximately $4.2 million.

***ProForma SFAS 123 Information***

For the fiscal yearended June 30, 2005, the Company applied the intrinsic value method ofaccounting for stock options as prescribed by APB 25. All options grantedduring the year ended June 30, 2005 had exercise prices equal to the closingmarket price of the underlying common stock on the grant date. If compensationexpense had been recognized based on the estimated fair value of each optiongranted in accordance with the provisions of SFAS 123 as amended by Statementof Financial Accounting Standards No. 148, our net loss and net loss per sharewould have been increased to the following pro forma amounts (in thousands,except per share amounts):
|                                                                                                              | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                               | ** ** |
| Net loss - as  reported                                                                                      |       | $                                      | (23,244    | ) |
| Add: Stock-based  compensation expense - as reported                                                         |       | 151                                    |       |
| Less:  Stock-based employee compensation expense determined under fair value method  for all options granted |       | (7,222                                 | )          |
| Net loss - pro  forma                                                                                        |       | $                                      | (30,315    | ) |
|                                                                                                         |       |                                   |       |
| Net loss per  share:                                                                                         |       |                                   |       |
|  Net loss per share - basic and diluted - as  reported                                                  |       | $                                      | (0.68      | ) |
|  Net loss per share - basic and diluted - pro  forma                                                    |       | $                                      | (0.89      | ) |
|                                                                                                         |       |                                   |       |
| Number of shares  used to compute per share data                                                             |       | 34,043                                 |       |

 

Proforma compensation expense under SFAS 123, among other computationaldifferences, does not consider potential 

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pre-vesting forfeitures.Because of these differences, the pro forma stock compensation expensepresented above for the prior fiscal year ended June 30, 2005 SFAS 123 and thestock compensation expense recognized during the fiscal years ended June 30,2007 and 2006 under SFAS 123(R) are not directly comparable. In accordance withthe modified prospective transition method of SFAS 123(R), the prior yearcomparative results have not been restated.

***Deferred Stock-Based Compensation***

TheCompany had deferred stock-based compensation balances related to certain stockoptions granted to employees prior to the Company’s initial public offering inNovember 2000. Stock compensation expense related to these options wasrecognized on a straight-line basis over the vesting periods of these options,which was generally four years, except for those options containingperformance-based vesting provisions. During the fiscal year ended June 30,2005 the Company recorded approximately $151,000 of stock compensation expensepursuant to APB 25 associated with thefinal amortization of deferred stock compensation related to these options.

***Fair ValueEstimates***

The Company’sdetermination of fair value of share-based payment awards on the date of grantusing an option pricing model is affected by the Company’s stock price as wellas assumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, the Company’s stock pricevolatility over the expected term of the awards, estimates of the expectedoption term including actual and projected employee stock option exercisebehaviors and estimates of pre-vesting forfeitures. Because changes in any ofthese assumptions can materially affect the estimated value, the existingvaluation models may not provide an accurate measure of the fair value of theCompany’s employee stock options. Although the fair value of employee stockoptions is determined in accordance with SFAS 123(R) and SAB 107 using anoption pricing model, that value may not be indicative of the fair valueobserved in a willing buyer/willing seller market transaction.

**9.Income Taxes**

The Company hasincurred net losses since inception and, consequently, we have not recorded anyU.S. federal or state income taxes. We have no recorded income tax provision orbenefit for the fiscal years ending June 30, 2007, 2006 and 2005.

A reconciliationof income taxes at the statutory federal income tax rate to net income taxesincluded in the accompanying statements of operations is as follows:
| ** **                                                   | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| U.S. federal  income tax expense (benefit) at statutory rate |       | 34.0                                    | %          | 34.0 | % | 34.0 | % |
| Available  research and experimentation tax credits          |       | 4.5                                     | %          | 4.0 | % | 5.1 | % |
| Stock-based  compensation                                    |       | 0.0                                     | %          | (5.3 | )% | 0.0 | % |
| Effect of other  permanent differences                       |       | (0.9                                    | )%         | 0.6 | % | 0.1 | % |
| State income  taxes, net of federal taxes                    |       | 3.0                                     | %          | 2.6 | % | 3.1 | % |
| Valuation  allowance                                         |       | (40.6                                   | )%         | (35.9 | )% | (42.3 | )% |
| Total                                                        |       | 0.0                                     | %          | 0.0 | % | 0.0 | % |

 

Deferred taxassets and liabilities reflect the net tax effects of net operating losses,credit carryforwards and temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and amounts used forincome tax purposes. The components of the Company’s deferred tax assets andliabilities are as follows:

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|                                                                       | ** ** | **As of June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                            | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Deferred tax  assets:                                                 |       |                              |       |   |   |
| Net operating loss carryforwards                                      |       | $                                 | 47,018     |   | $ | 29,543 |   |
| Research and experimentation credit carryforwards                     |       | 7,992                             |       | 5,518 |   |
| Deferred revenue                                                      |       | 29                                |       | 394 |   |
| Deferred rent                                                         |       | 11,088                            |       | 12,562 |   |
| Inventory reserve                                                     |       | 753                               |       | 823 |   |
| Accrued benefits                                                      |       | 1,960                             |       | 1,729 |   |
| Depreciation of equipment, leasehold improvements  and other property |       | 1,580                             |       | 985 |   |
| Other                                                                 |       | 1,357                             |       | 41 |   |
| Total deferred tax assets                                             |       | 71,777                            |       | 51,595 |   |
| Valuation  allowance                                                  |       | (71,777                           | )          | (51,595 | ) |
| Net deferred tax  assets                                              |       | $                                 | —     |   | $ | — |   |

 

Based upon thelevel of historical taxable loss and projections of future taxable loss overthe periods in which the deferred tax assets are deductible, managementbelieves it is more likely than not that the Company will not realize thebenefits of these deductible differences, and accordingly has established afull valuation allowance as of June 30, 2007 and 2006. The Company recordedvaluation allowances of $71.8 million and $51.6 million as of June 30, 2007 and2006, respectively, to fully reserve deferred tax assets as the realizationcriteria have not been met. Realization is dependent on upon future earnings,if any, the timing and amount of which are uncertain. In the future, shouldmanagement conclude that these deferred tax assets are, at least in part,realizable, the valuation allowance will be reduced to the extent of suchrealization and recognized as a deferred income tax benefit in the statement ofoperations, except as noted herein. Excess tax benefits from employee stockoption exercises are included in the deferred tax asset balances at June 30,2007 as a component of the Company’s net operating loss carryforwards.  The entire balance is offset by a valuationallowance.  As a result of SFAS 123(R),the deferred tax asset balances at June 30, 2007 do not include excess taxbenefits from stock option exercises of approximately $4.2 million.  Equity will be increased if and when suchexcess tax benefits are ultimately realized.

For tax purposes,in fiscal year 2006, the Company recognized approximately $32 million as ataxable gain and created a deferred tax asset from the facilities purchaseoptions that it assigned to a third-party. See Note 10 — “Commitments - Operating Leases and Purchase Obligations” for a furtherdescription of these transactions.

At June 30, 2007,the Company has available net operating loss carryforwards of approximately $138million, which expire in the years 2018 through 2027, and federal research andexperimentation credit carryforwards of $8 million, which expire in the years2019 through 2027.

The Tax Reform Actof 1986 contains provisions that limit the utilization of net operating lossand tax credit carryforwards if there has been a “change of ownership” asdescribed in Section 382 of the Internal Revenue Code. Such a change ofownership may limit the Company’s utilization of its net operating loss and taxcredit carryforwards, and could be triggered by subsequent sales of securitiesby the Company or its stockholders.

**10.  Commitments - Operating Leases and Purchase Obligations**

The Company leasesfacilities and equipment under various non-cancelable operating leases thatexpire through 2016. In addition to minimum lease payments, the Company iscontractually obligated under certain of its lease agreements to pay certainoperating expenses during the term of the leases, such as maintenance, taxesand insurance. As of June 30, 2007, future minimum rental commitments, byfiscal year and in the aggregate, for the Company’s operating leases are asfollows:

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| Fiscal Year Ending June 30, | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| 2008                                            |       | $          | 7,256      |   |
| 2009                                            |       | 7,311      |       |
| 2010                                            |       | 7,427      |       |
| 2011                                            |       | 7,535      |       |
| 2012                                            |       | 7,679      |       |
| Thereafter                                      |       | 32,585     |       |
| Total minimum lease payments                    |       | $          | 69,793     |   |

 

Rent expense underthese agreements, net of deferred credits, was $3.2 million, $4.7 million and$5.6 million for the years ended June 30, 2007, 2006, and 2005, respectively.Deferred rent credits recognized for the years ended June 30, 2007 and 2006were approximately $4.0 million and $353,000, respectively, while deferred rentcharges were approximately $515,000 for the year ended June 30, 2005.

***Assignmentand Facility Lease Agreements***

On June 22, 2006,the Company entered into a series of agreements involving the assignment toBioMed Reality L.P. (“BioMed”) of options it acquired to purchase thefacilities that it occupied in Boulder and Longmont, Colorado and thesubsequent lease of those facilities from BioMed. Pursuant to an AssignmentAgreement dated June 22, 2006 between Array and BioMed (the “AssignmentAgreement”), BioMed agreed to purchase these facilities in both Boulder andLongmont.

As part of thetransaction, the Company entered into an Option Agreement on June 22, 2006pursuant to which it acquired an option to purchase the Boulder facility.Pursuant to the Assignment Agreement, the Company assigned this option topurchase the Boulder facility as well as the right to purchase the Longmontfacility which was exercised on June 22, 2006. The Company also entered into anAbsolute Triple Net Lease dated June 22, 2006 that has a term of 10 yearscommencing April 1, 2008 but only if the purchase of the Boulder facility byBioMed failed to consummate.

On July 7, 2006,BioMed purchased the Boulder facility and the Company’s obligation under theAbsolute Triple Net Lease terminated along with its obligation under anexisting Sublease for the Boulder facility. On July 7, 2006, the Companyentered into a 10-year lease agreement with BioMed for the Boulder facilitywith total obligations under the lease amounting to $52.0 million over thelease term.

On August 9, 2006,BioMed purchased the Longmont facility and the Company’s obligation under itsexisting lease agreement dated February 28, 2000, as amended, for the Longmontfacility terminated. On August 9, 2006 the Company entered into a 10-year leaseagreement with BioMed for the Longmont facility with total obligations underthe lease amounting to $24.2 million over the lease term.

At June 30, 2007,the Company had outstanding purchase obligations totaling $9.8 million,primarily for outsourced pharmacology services, laboratory equipment, chemicalsand supplies.

**11.***** Customer andGeographic Information***

All operations of the Company are considered to be in one operatingsegment and, accordingly, no segment disclosures have been presented. Thephysical location of all of the Company’s equipment, leasehold improvements andother fixed assets is within the United States. The following table detailsrevenue from customers by geographic area based on the country in whichcollaborators are located or the ship-to destination for compounds.

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|                         | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| North America           |       | $                                       | 25,693     |   | $ | 30,969 |   | $ | 29,162 |   |
| Europe                  |       | 5,365                                   |       | 7,653 |   | 12,681 |   |
| Japan and  Asia-Pacific |       | 5,912                                   |       | 6,381 |   | 3,662 |   |
| Total revenue           |       | $                                       | 36,970     |   | $ | 45,003 |   | $ | 45,505 |   |

 

Approximately 93%,93% and 97% of the revenue generated from sales to Europe during the yearsended June 30, 2007, 2006, and 2005, respectively, is related to the Company’scollaboration and licensing agreement with AstraZeneca PLC, located in Sweden.The decline in revenue associated with the AstraZeneca agreement is due to theexpiration of the research funded portion of the collaboration during fiscal2006.  Revenue recognized from thisagreement during fiscal 2007 was due to the recognition of two milestonepayments totaling $5.0 million for advancing ARRY-886 into Phase 2 clinicaltrials and the advancement of ARRY-704 into Phase 1 clinical trials.  For the years ended June 30, 2007 and June30, 2006, revenue from Japanese collaborations exceeded 10% of the Company’srevenue. No other individual international country exceeded 10% of the Company’srevenue for the periods presented.

During fiscal year2007, revenue from Genentech, InterMune, AstraZeneca and Ono accounted for 42%,21%, 14% and 13%, respectively, of the Company’s total revenue. During fiscalyear 2006, revenue from Genentech, InterMune and AstraZeneca, accounted for35%, 24% and 16%, respectively, of the Company’s total revenue. During fiscal year 2005 these samethree collaborators accounted for 28%, 10% and 27%, respectively, of theCompany’s total revenue.

**12.Employee Savings Plan**

The Company has a401(k) plan that allows participants to contribute from 1% to 60% of theirsalary, subject to eligibility requirements and annual IRS limits. The Companymatches up to 4% of employee contributions on a discretionary basis asdetermined by the Company’s Board of Directors. During fiscal year 2007, 2006,and 2005, the Company paid matching contributions of approximately $1.0million, $932,000 and $780,000, respectively. Company contributions are fullyvested after four years of employment.

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**13.  Selected Quarterly Financial Data (Unaudited)**

The tables belowsummarize the Company’s unaudited quarterly operating results for fiscal years2007 and 2006.
|                                             | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|---------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| **Fiscal  year ended June 30, 2007**        | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Total revenue                               |       | $                    | 11,026     |                 | $          | 7,558                |       | $                    | 10,380     |   | $ | 8,006 |   |
| Research and  development                   |       | 10,853               |       | 14,785               |       | 15,738               |       | 16,088               |       |
| Total operating  expenses                   |       | 20,089               |       | 24,286               |       | 25,172               |       | 26,497               |       |
| Net loss                                    |       | (8,231               | )          | (15,872              | )          | (14,089              | )          | (17,250              | )          |
|                                        |       |                 |       |                 |       |                 |       |                 |       |
| Net loss per  share - basic and diluted (1) |       | (0.21                | )          | (0.40                | )          | (0.35                | )          | (0.40                | )          |
|                                        |       |                 |       |                 |       |                 |       |                 |       |
| **Fiscal  year ended June 30, 2006**        | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Total revenue                               |       | $                    | 11,242     |                 | $          | 11,940               |       | $                    | 11,697     |   | $ | 10,124 |   |
| Research and  development                   |       | 8,625                |       | 7,802                |       | 7,724                |       | 9,231                |       |
| Total operating  expenses                   |       | 21,469               |       | 21,194               |       | 21,400               |       | 22,719               |       |
| Net loss                                    |       | (9,672               | )          | (8,711               | )          | (9,187               | )          | (12,044              | )          |
|                                        |       |                 |       |                 |       |                 |       |                 |       |
| Net loss per  share - basic and diluted (1) |       | (0.25                | )          | (0.23                | )          | (0.24                | )          | (0.30                | )          |

 

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(1) Net loss per share iscalculated independently for each of the quarters presented. Therefore, the sumof the quarterly net loss per share will not necessarily equal the total forthe full fiscal year.

**14.  Valuation and Qualifying Accounts**
|                                                  | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  (Reductions)  Charged to  Operations** | ** ** | **Write-offs** | ** ** | **Balance at  End of  Period** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| **Allowance  for doubtful accounts**             | ** ** | ** **                                     | ** ** | ** **                                               | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Year Ended:                                      |       |                                           |       |                                                     |       |           |       |                                     |       |
| June 30, 2007                                    |       | $                                              | 10         |                                                     | $          | —         |       | $                                        | —     |   | $ | 10 |   |
| June 30, 2006                                    |       | 57                                             |       | (47                                                      | )          | —         |       | 10                                       |       |
| June 30, 2005                                    |       | 55                                             |       | 2                                                        |       | —         |       | 57                                       |       |
|                                             |       |                                           |       |                                                     |       |           |       |                                     |       |
| **Inventory  obsolescence reserve**              | ** ** | ** **                                     | ** ** | ** **                                               | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Year Ended:                                      |       |                                           |       |                                                     |       |           |       |                                     |       |
| June 30, 2007                                    |       | $                                              | 2,221      |                                                     | $          | 368            |       | $                                        | (558       | ) | $ | 2,031 |   |
| June 30, 2006                                    |       | 2,917                                          |       | 551                                                      |       | (1,247         | )          | 2,221                                    |       |
| June 30, 2005                                    |       | 6,628                                          |       | 717                                                      |       | (4,428         | )          | 2,917                                    |       |
|                                             |       |                                           |       |                                                     |       |           |       |                                     |       |
| **Valuation  allowance for deferred tax assets** | ** ** | ** **                                     | ** ** | ** **                                               | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Year Ended:                                      |       |                                           |       |                                                     |       |           |       |                                     |       |
| June 30, 2007                                    |       | $                                              | 51,595     |                                                     | $          | 20,182         |       | $                                        | —     |   | $ | 71,777 |   |
| June 30, 2006                                    |       | 37,133                                         |       | 14,462                                                   |       | —         |       | 51,595                                   |       |
| June 30, 2005                                    |       | 27,002                                         |       | 10,131                                                   |       | —         |       | 37,133                                   |       |

 

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

None.

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**ITEM9A. CONTROLS AND PROCEDURES**

***Effectiveness of Disclosure Controls and Procedures***

As of the end of theperiod covered by this Annual Report on Form 10-K, under the supervision of ourChief Executive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Actof 1934. Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 (1) isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms, and (2) is accumulatedand communicated to our management, including our Chief Executive Officer andour Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure. Our disclosure controls and procedures are designed toprovide reasonable assurance that such information is accumulated andcommunicated to our management. Our disclosure controls and procedures includecomponents of our internal control over financial reporting. Management’sassessment of the effectiveness of our internal control over financialreporting is expressed at the level of reasonable assurance because a controlsystem, no matter how well designed and operated, can provide only reasonable,but not absolute, assurance that the control system’s objectives will be met.

***Management’s Annual Report on Internal Control overFinancial Reporting***

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of theSecurities Exchange Act of 1934. Our internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Ourinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of our assets; (ii) provide reasonable assurance thattransactions are recorded to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are made only in accordance with authorizations ofour management and directors; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on our financialstatements.

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore eventhose systems determined to be effective can provide only reasonable assurancewith respect to financial statement preparation and presentation. Because ofits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Management assessed theeffectiveness of our internal control over financial reporting as of June 30,2007. In making this assessment, management used the criteria set forth inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).

Based on its assessmentof internal control over financial reporting, management has concluded that, asof June 30, 2007, our internal control over financial reporting was effectiveto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.

KPMGLLP, our independent registered public accounting firm, has issued anattestation report on our management’s assessment of the effectiveness of ourinternal control over financial reporting as of June 30, 2007, as stated intheir report, which appears at the end of Item 9B of this Annual Report onForm 10-K.

***Changesin Internal Control over Financial Reporting***

There have been no changes in our internal control over financial reportingidentified in connection with the evaluation required by Rule 13a-15(d) of theExchange Act that occurred during our last fiscal quarter that have materiallyaffected, 

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orare reasonably likely to material affect, our internal control over financial reporting.

**ITEM 9B. OTHER INFORMATION**

Not applicable

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

The Board of Directors and Stockholders

Array BioPharma Inc.:

Wehave audited management’s assessment, included in the accompanying Management’sAnnual Report on Internal Control over Financial Reporting, that ArrayBioPharma Inc. (the Company) maintained effective internal control overfinancial reporting as of June 30, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Array BioPharma Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, andtesting and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Array BioPharmaInc. maintained effective internalcontrol over financial reporting as of June 30, 2007, is fairly stated, in allmaterial respects, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Also, in our opinion, Array BioPharma Inc. maintained, inall material respects, effective internal control over financial reporting asof June 30, 2007, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheets of ArrayBioPharma Inc. as of June 30, 2007 and 2006, and the related statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for each of the years in the three-year period  ended June 30, 2007, and our report dated September12, 2007 expressed an unqualified opinion on those financial statements.
|                    |   | /s/    |   | KPMG LLP |
|--------------------|--------|--------|--------|----------|
| Boulder, Colorado  |   |   |   |     |
| September 12, 2007 |   |   |   |     |

 

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**PART III**

###### **ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

The informationrequired by this item is incorporated by reference from the information underthe captions “Proposal 1-Election of Directors,” “Executive Officers” and “Section16(a) Beneficial Ownership Reporting Compliance” contained in the ProxyStatement of Array BioPharma Inc. relating to the annual meeting ofstockholders to be held on November 1, 2007.

**Codeof Ethics**

Wehave adopted a Code of Business Conduct that applies to all of our directors,officers and employees, including our principal executive officer, principalfinancial officer and principal accounting officer. The Code of BusinessConduct is posted under the Investor Relations portion of our website atwww.arraybiopharma.com.

Weintend to satisfy the disclosure requirement of Form 8-K regarding amendmentsto or waivers from a provision of our Code of Business Conduct by posting suchinformation on our website at www.arraybiopharma.com and, to the extentrequired by the Nasdaq Stock Market, by filing a current report on Form 8-Kwith the SEC, disclosing such information.

**ITEM 11. EXECUTIVECOMPENSATION**

The informationrequired by this item is incorporated by reference from the information underthe caption “Executive Compensation” contained in the Proxy Statement of ArrayBioPharma Inc. relating to the annual meeting of stockholders to be held onNovember 1, 2007.

###### **ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

The informationrequired by this item is incorporated by reference from the information underthe caption “Principal Stockholders” contained in the Proxy Statement of ArrayBioPharma Inc. relating to the annual meeting of stockholders to be held onNovember 1, 2007.

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

The following table provides information as of June 30, 2007 aboutthe shares of common stock that may be issued upon the exercise of options,warrants and rights under our existing equity compensation plans, which includethe Amended and Restated Array BioPharma Inc. Stock Option and IncentivePlan and the Array BioPharma Inc. Employee Stock Purchase Plan. 
| **Plan Category**                                                               | ** ** | **(a)  Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **(b)  Weighted-  Average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **(c)  Number of securities  remaining available  for future issuance  under equity  compensation plans  excluding securities  reflected in  column (a)** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                 |       |                                                                                                                                     |       |                                                                                                       |       |                                                                                                                                                                                                        |       |
| Equity  compensation plans approved by stockholders:                                 |       |                                                                                                                                     |       |                                                                                                       |       |                                                                                                                                                                                                        |       |
|  Amended and Restated Array BioPharma Inc.  Stock Option and Incentive Plan (1) |       | 7,815,951                                                                                                                                |       | $                                                                                                          | 7.54       |                                                                                                                                                                                                        | 5,987,409  |   |
|  Array BioPharma Inc. Employee Stock Purchase  Plan                             |       | —                                                                                                                                   |       | —                                                                                                     |       | 353,784                                                                                                                                                                                                     |       |
| Equity  compensation plans not approved by stockholders                              |       | —                                                                                                                                   |       | —                                                                                                     |       | —                                                                                                                                                                                                      |       |
| Total                                                                                |       | 7,815,951                                                                                                                                |       | $                                                                                                          | 7.54       |                                                                                                                                                                                                        | 6,341,193  |   |

 

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(1)          The shares available forissuance under the Amended and Restated Array BioPharma Inc. Stock Option andIncentive Plan (the “Plan”) is increased automatically by an amount equal tothe difference between (a) 25% of our issued and outstanding shares of capitalstock (on a fully diluted, as converted basis), and (b) the sum of the sharesrelating to outstanding option grants plus the shares available for futuregrants under the Plan. The Board of Directors has approved an amendment toincrease the number of shares of Common Stock Array is authorized to issue from60,000,000 to 120,000,000, subject to stockholder approval at the annualmeeting of stockholders expected to be held on November 1, 2007.

###### **ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The informationrequired by this item is incorporated by reference from the information underthe caption “Certain Relationships and Transactions” contained in the ProxyStatement of Array BioPharma Inc. relating to the annual meeting ofstockholders to be held on November 1, 2007.

###### **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The informationrequired by this item is incorporated by reference from the information underthe caption “Fees Billed by the Principal Accountant” contained in the ProxyStatement of Array BioPharma Inc. relating to the annual meeting ofstockholders to be held on November 1, 2007.

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**PART IV**

###### **ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

(a)                   Thefollowing documents are filed as part of this Report on Form 10-K:

1. *FinancialStatements*. The following financial statements of Array BioPharmaInc. and the Report of Independent Registered Public Accounting Firm are filedas part of this Form 10-K: 
| Report of Independent  Registered Public Accounting Firm                                                                         |   |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Balance Sheets  as of June 30, 2007 and 2006                                                                                     |   |   |
| Statements of  Operations for the fiscal years ended June 30, 2007, 2006 and 2005                                                |   |   |
| Statements of Stockholders’ Equity and Comprehensive  Income (Loss) for the fiscal years ended June 30, 2007, 2006 and 2005 |   |   |
| Statements of  Cash Flows for the fiscal years ended June 30, 2007, 2006 and 2005                                           |   |   |
| Notes to Financial  Statements                                                                                                   |   |   |

 

2. *FinancialStatement Schedule*. Schedules have been omitted as the requiredinformation is either not required, not applicable, or otherwise included inthe Financial Statements and notes thereto in Item 8 above.

3. *Exhibits*.The exhibits listed on the accompanying index to exhibits immediately followingthe signature page are filed as part of, or incorporated by reference into,this Form 10-K.

(b)                  *Exhibits*. See Item 15(a)(3) above.

(c)      *FinancialStatement Schedules*. See Item 15(a)(2) above.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized, in the City of Boulder, State ofColorado.
|                            | ARRAY BIOPHARMA INC.      |
|----------------------------|---------------------------|
| Dated: September  12, 2007 |
|                       |
|                       | By: /s/ Robert E. Conway  |   |
|                       | Robert E. Conway          |
|                       | *Chief Executive Officer* |

 

 
| SIGNATURE                   | ** ** | **TITLE**                     | ** ** | ** **         |
|-----------------------------|------------|-------------------------------|------------|--------------------|
|                        |       |                          |       |               |
| /s/ ROBERT E.  CONWAY       |       | Chief Executive Officer and   |       | September 12, 2007 |
|                        |       | Director (Principal Executive |       |               |
| Robert E. Conway            |       | Officer)                      |       |               |
|                        |       |                          |       |               |
| /s/ KYLE A.  LEFKOFF        |       | Chairman of the Board of      |       | September 12, 2007 |
|                        |       | Directors                     |       |               |
| Kyle A. Lefkoff             |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ R. MICHAEL  CARRUTHERS  |       | Chief Financial Officer       |       | September 12, 2007 |
|                        |       | (Principal Financial and      |       |               |
| R. Michael  Carruthers      |       | Accounting Officer)           |       |               |
|                        |       |                          |       |               |
| /s/ FRANCIS J.  BULLOCK     |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| Francis J.  Bullock, Ph.D.  |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ MARVIN H.  CARUTHERS    |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| Marvin H.  Caruthers, Ph.D. |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ KEVIN KOCH              |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| Kevin Koch,  Ph.D.          |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ DAVID L.  SNITMAN       |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| David L.  Snitman, Ph.D.    |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ GIL J. VAN  LUNSEN      |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| Gil J. Van  Lunsen          |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ DOUGLAS E.  WILLIAMS    |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| Douglas E.  Williams, Ph.D. |       |                          |       |               |
|                        |       |                          |       |               |
| /s/ JOHN L.  ZABRISKIE      |       | Director                      |       | September 12, 2007 |
|                        |       |                          |       |               |
| John L.  Zabriskie, Ph.D.   |       |                          |       |               |

 

77

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**EXHIBIT INDEX**
| Exhibit | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                               |
|---------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                          |
| 3.1     |       | (1)        |       | Amended and Restated Certificate of Incorporation of  Array BioPharma Inc.                                                                                                                                                                                                                                                                                               |
| 3.2     |       | (1)        |       | Amended and Restated Bylaws of Array BioPharma Inc.                                                                                                                                                                                                                                                                                                                      |
| 3.3     |       | (3)        |       | Certificate  of Designation of the Series A Junior Participating Preferred Stock                                                                                                                                                                                                                                                                                         |
| 4.1     |       | (1)        |       | Specimen certificate representing the common stock                                                                                                                                                                                                                                                                                                                       |
| 10.1    |       | (1)        |       | 1998 Stock Option Plan effective July 1, 1998, as  amended*                                                                                                                                                                                                                                                                                                              |
| 10.2    |       | (7)        |       | Amended and Restated Array BioPharma Inc. Stock  Option and Incentive Plan, as amended*                                                                                                                                                                                                                                                                                  |
|    |       |       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3    |       | (18)       |       | Form of Incentive Stock Option Agreement, as  amended*                                                                                                                                                                                                                                                                                                                   |
| 10.4    |       | (18)       |       | Form of Nonqualified Stock Option Agreement, as  amended*                                                                                                                                                                                                                                                                                                                |
| 10.5    |       | (7)        |       | Array BioPharma Inc. Employee Stock Purchase Plan,  as amended*                                                                                                                                                                                                                                                                                                          |
| 10.6    |       | (9)        |       | Amendment to Array BioPharma Inc. Employee Stock  Purchase Plan*                                                                                                                                                                                                                                                                                                         |
| 10.7    |       | (17)       |       | Amendment dated December 9, 2005 to the Array  BioPharma Inc. Employee Stock Purchase Plan*                                                                                                                                                                                                                                                                              |
| 10.8    |       | (12)       |       | Amendment to the Array BioPharma Inc. Employee Stock  Purchase Plan, as amended and restated September 12, 2002 and as amended on  April 29, 2004.*                                                                                                                                                                                                                      |
| 10.9    |       | (1)        |       | Preferred  and Common Stock Purchase Agreement between Registrant and the parties whose  signatures appear on the signature pages thereto dated May 18, 1998                                                                                                                                                                                                             |
| 10.10   |       | (1)        |       | Amendment  to Preferred and Common Stock Purchase Agreement dated August 7, 1998                                                                                                                                                                                                                                                                                         |
| 10.11   |       | (1)        |       | Series B  Preferred Stock Purchase Agreement between Registrant and the parties whose  signatures appear on the signature pages thereto dated November 16, 1999                                                                                                                                                                                                          |
| 10.12   |       | (1)        |       | Series C  Preferred Stock Purchase Agreement between Registrant and the parties whose  signatures appear on the signature pages thereto dated August 31, 2000                                                                                                                                                                                                            |
| 10.13   |       | (14)       |       | Employment Agreement by and between Registrant and  Robert E. Conway dated March 1, 2006*                                                                                                                                                                                                                                                                                |
| 10.14   |       | (6)        |       | Form of  Employment Agreement dated September 1, 2002 by and between Registrant and  each of David L. Snitman, Kevin Koch and R. Michael Carruthers. *                                                                                                                                                                                                                   |
| 10.15   |       | (5)        |       | Employment  Agreement effective as of March 2002 between Registrant and John Moore*                                                                                                                                                                                                                                                                                      |
| 10.16   |       | (16)       |       | Employment  Agreement effective as of May 14, 2007 between the Registrant and John Yates*                                                                                                                                                                                                                                                                                |
| 10.17   |       | (13)       |       | Description  of performance bonus program*                                                                                                                                                                                                                                                                                                                               |
| 10.18   |       | (1)        |       | Amended  and Restated Investor Rights Agreement between Registrant and the parties  whose signatures appear on the signature pages thereto dated November 16,  1999                                                                                                                                                                                                      |
| 10.19   |       | (1)        |       | Amendment  No. 1 to Amended and Restated Investor Rights Agreement between Registrant  and the parties whose signatures appear on the signature pages thereto dated  August 31, 2000                                                                                                                                                                                     |
| 10.20   |       | (2)        |       | Rights  Agreement, dated August 2, 2001, between the Registrant and Computershare  Trust Company, Inc., as Rights Agent                                                                                                                                                                                                                                                  |
| 10.21   |       | (1)        |       | Diversity  Library Screening Agreement between Registrant and Tularik Inc. dated June  10, 1999, as amended                                                                                                                                                                                                                                                              |
| 10.22   |       | (4)        |       | Research Agreement between Registrant and Amgen Inc.  dated as of November 1, 2001                                                                                                                                                                                                                                                                                       |
| 10.23   |       | (3)        |       | Lead  Generation Collaboration Agreement by and between Registrant and Takeda  Chemical Industries, Ltd., dated July 18, 2001                                                                                                                                                                                                                                            |
| 10.24   |       | (8)        |       | Collaboration  and License Agreement by and between Registrant and AstraZeneca AB, dated  December 18, 2003                                                                                                                                                                                                                                                              |
| 10.25   |       | (8)        |       | Collaboration  and License Agreement by and between Registrant and Genentech, Inc., dated December  22, 2003                                                                                                                                                                                                                                                             |
| 10.26   |       | (12)       |       | Amendment No. 2, dated October 1, 2005, to the  Collaboration and License Agreement by and between Registrant and Genentech,  Inc.                                                                                                                                                                                                                                       |
| 10.27   |       | (10)       |       | Amended and Restated Deferred Compensation Plan of  Array BioPharma Inc. dated December 20, 2004*                                                                                                                                                                                                                                                                        |
| 10.28   |       | (12)       |       | First Amendment to the Amended and Restated Deferred  Compensation Plan of Array BioPharma Inc. *                                                                                                                                                                                                                                                                        |
| 10.29   |       | (11)       |       | Drug  Discovery Collaboration Agreement by and between Registrant and InterMune,  Inc., dated September 13, 2002 along with Amendment No. 1 dated May 8, 2003,  Amendment No. 2 dated January 7, 2004, Amendment No. 3 dated September 10,  2004, Amendment No. 4 dated December 7, 2004, Amendment No. 4A dated March  10, 2005 and Amendment No. 5 dated June 30, 2005 |
| 10.30   |       | (18)       |       | Amendment  No. 6 dated February 3, 2006 to the Drug Discovery Collaboration Agreement by  and between Registrant and InterMune, Inc., dated September 13, 2002                                                                                                                                                                                                           |
| 10.31   |       | (18)       |       | Amendment  No. 7 dated June 28, 2006 to the Drug Discovery Collaboration Agreement by and  between Registrant and InterMune, Inc., dated September 13, 2002                                                                                                                                                                                                              |

 

 

78

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| Exhibit | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                          |
|---------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                     |
| 10.32   |       | (12)       |       | Drug Discovery Agreement by and between Registrant  and Ono Pharmaceutical Co., Ltd., dated November 1, 2005.                                                                                       |
| 10.33   |       | (11)       |       | Loan and Security agreement by and between  Registrant and Comerica Bank dated June 28, 2005                                                                                                        |
| 10.34   |       | (12)       |       | First Amendment to Loan and Security agreement by  and between Registrant and Comerica Bank dated December 19, 2005.                                                                                |
| 10.35   |       | (15)       |       | Second Amendment  to Loan and Security Agreement between the Registrant and Comerica Bank dated  July 7, 2006                                                                                       |
| 10.36   |       | (18)       |       | Option Agreement dated June 22, 2006 by and between  Registrant, as Optionee, and 3200 Walnut LL, LLC                                                                                               |
| 10.37   |       | (18)       |       | Assignment of Boulder Option Agreement dated June  22, 2006 by and between Registrant, as Assignor, and BioMed Realty, L.P.                                                                         |
| 10.38   |       | (18)       |       | Assignment Agreement dated June 22, 2006 by and  between Registrant, as Assignor, and BioMed Realty, L.P.                                                                                           |
| 10.39   |       | (15)       |       | Facilities  Lease and Assignment dated July 7, 2006 between the Registrant and BioMed  Realty L.P.                                                                                                  |
|    |       |       |       |                                                                                                                                                                                                |
| 10.40   |       | (15)       |       | Facilities  Lease and Assignment dated August 9, 2006 between the Registrant and BioMed  Realty L.P                                                                                                 |
| 10.41   |       | (15)       |       | Exercise of Option to Extend Funding of Research  FTEs dated August 31, 2006 to the Drug Discovery Collaboration Agreement by  and between Registrant and InterMune, Inc., dated September 13, 2002 |
| 10.42   |       | (15)       |       | Agreement of Purchase and Sale agreement between  Registrant, as Purchaser, and Circle Capital Longmont LLC, as Seller, dated  August 9, 2006                                                       |
| 10.43   |       | (15)       |       | Assignment of Longmont Purchase Agreement between  Registrant, as Assignor, BMR-Trade Centre Avenue LLC. as Assignee and Circle  Capital Longmont LLC, as Seller, dated August 9, 2006              |
|    |       |       |       |                                                                                                                                                                                                |
| 23.1    |       |       |       | Consent of KPMG LLP, Independent Registered Public  Accounting Firm                                                                                                                                 |
|    |       |       |       |                                                                                                                                                                                                |
| 31.1    |       |       |       | Certification of Robert E. Conway pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                        |
| 31.2    |       |       |       | Certification of R. Michael Carruthers pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                   |
| 32.0    |       |       |       | Certifications of Robert E. Conway and R. Michael  Carruthers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |

 

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(1)          Incorporated herein byreference to the Registrant’s registration statement on Form S-1 (File No.333-45922)

(2)          Incorporated herein byreference to the Current Report on Form 8-K as of August 3, 2001(File No.000-31979)

(3)          Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2001 (File No. 000-31979)

(4)          Incorporated herein byreference to the Current Report on Form 8-K/A as of February 6, 2002 (File No.000-31979)

(5)          Incorporated herein byreference to the Annual Report on Form 10-K for the fiscal year ended June 30,2002 (File No. 000-31979)

(6)          Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2002 (File No. 000-31979)

(7)          Incorporated herein byreference to the Registrant’s definitive proxy statement on Schedule 14A datedOctober 1, 2002, with respect to the annual meeting of stockholders held onOctober 31, 2002

(8)          Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedDecember 31, 2003 (File No. 000-31979)

(9)          Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2004 (File No. 000-31979)

(10)    Incorporated herein byreference to the Current Report on Form 8-K as of December 20, 2004 (File No.000-31979)

(11)    Incorporated herein by referenceto the Annual Report on Form 10-K for the fiscal year ended June 30, 2005 (FileNo. 000-31979)

(12)    Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedDecember 31, 2005 (File No. 000-31979)

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(13)    Incorporated herein byreference to the Current Report on Form 8-K as of  November 2, 2006 (File No. 000-31979)

(14)    Incorporated herein byreference to the Current Report on Form 8-K as of March 1, 2006 (File No.000-31979)

(15)    Incorporated herein byreference to the Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2006 (File No. 000-31979)

(16)    Incorporated herein byreference to the Current Report on Form 8-K as of May 15, 2007 (File No.000-31979)

(17)    Incorporated herein byreference to the Registrant’s definitive proxy statement on Schedule 14A datedOctober 5, 2006, with respect to the annual meeting of stockholders held onNovember 2, 2006

(18)    Incorporated herein byreference to the Registrant’s Annual Report on Form 10-K for the fiscal yearended June 30, 2006 (File No. 000-31979)

* Management contract orcompensatory plan.

**Confidential treatmentof redacted portions has been applied for.

 

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