The Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our expectations related to the progress and success of our internal proprietary drug discovery activities, realizing new revenue streams and obtaining future out-licensing collaboration agreements that include up-front milestone and/or royalty payments, our ability to realize up-front milestone and royalty payments under our existing or any future agreements, future research and development spending, our working capital requirements and our future headcount requirements. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "intends," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. These statements are based on current expectations and projections about our industry and assumptions made by management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition, as well as any forward-looking statements are subject to significant risks and uncertainties, including but not limited to the factors set forth under the heading "Risk Factors" in Part II, Item 1A of this Form 10-Q and Item IA of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. All forward looking statements are made as of the date hereof, and, unless required by law, we undertake no obligation to update any forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included elsewhere in this quarterly report. The terms "we," "us," "our" and similar terms refer to Array BioPharma Inc.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule drugs to treat patients afflicted with cancer, inflammatory and metabolic diseases. Our proprietary drug development pipeline includes clinical candidates that are designed to regulate therapeutically important target proteins. In addition, leading pharmaceutical and biotechnology companies partner with us to discover and develop drug candidates across a broad range of therapeutic areas. The eight most advanced wholly-owned programs in our development pipeline are as follows:

1. ARRY-797, a p38 inhibitor and pan-cytokine modulator for inflammation and for pain;

2. ARRY-162, a MEK inhibitor for inflammation;

3. ARRY-543, an ErbB family (EFGR / ErbB-2) inhibitor for cancer;

4. ARRY-520, a KSP inhibitor for cancer;

5. ARRY-614, a p38/Tie 2 dual inhibitor for cancer and/or inflammation;

6. ARRY-380, an ErbB-2 inhibitor for cancer;

7. ARRY-403, a glucokinase inhibitor for Type II diabetes; and

8. ARRY-300, a MEK inhibitor for inflammation.

We also have a portfolio of drug discovery programs. Although our discovery efforts may result in fewer Investigational New Drug, or IND, applications due to our recent decision to scale back our discovery efforts, we believe we will continue to generate one to three Investigational New Drug, or IND, application each year over the next two years. Our discovery efforts have also generated additional early-stage drug candidates and we may choose to out-license select promising candidates through research partnerships prior to filing an IND application.

We have built our proprietary pipeline of research and development programs on an investment of approximately $288.2 million from our inception through December 31, 2008, including $23.7 million and $48.2 million for the three and six months ended December 31 2008, respectively. Over the past three fiscal years, research and development expenses have significantly increased year over year to support our clinical development efforts and were $90.3 million for fiscal 2008, compared to $57.5 million for fiscal 2007 and $33.4 million for fiscal 2006.

In light of ongoing uncertainty in the financial markets, we recently announced a plan to focus our efforts on advancing our clinical programs through proof-of-concept to maximize their value and accelerate our partnering activities. In addition, we intend to scale back resources devoted to early discovery research and further focus our development efforts on our most promising candidates. Consequently, for the remainder of fiscal 2009, we expect that quarterly research and development expenses will remain at a level similar to the three months ended December 31, 2008.

We have received a total of $336.8 million in research funding and in up-front and milestone payments from our collaboration partners through December 31, 2008. Under our existing collaboration agreements, we have the potential to earn over $1.4 billion in additional milestone payments if we achieve all the drug discovery objectives detailed in those agreements, as well as the potential to earn royalties on any resulting product sales from 20 drug development programs.

Our significant existing collaborators include:

† Genentech, Inc., which entered into a worldwide strategic collaboration agreement with us to develop two of our cancer programs. This collaboration has been expanded to include two additional cancer programs and all four programs are in preclinical development;

† Celgene Corporation, which entered into a worldwide strategic collaboration agreement with us focused on the discovery, development and commercialization of novel therapeutics in cancer and inflammation;

† AstraZeneca, PLC, which licensed three of our MEK inhibitors for cancer, including AZD6244 (ARRY-886), which is currently in multiple Phase 2 clinical trials.

Our fiscal year ends on June 30 each year. When we refer to a fiscal year or quarter, we are referring to the year in which the fiscal year ends and the quarters during that fiscal year. Therefore, fiscal 2008 refers to the fiscal year ended June 30, 2008 and the second quarter of fiscal 2009 refers to the quarter ended December 31, 2008.

Business Development and Collaborator Concentrations

We currently license or partner certain of our compounds and/or programs and enter into collaborations directly with pharmaceutical and biotechnology companies through opportunities identified by our business development group, senior management, scientists and customer referrals. In addition, we may license our compounds and enter into collaborations in Japan through an agent.

We had three collaborators that contributed greater than 10% of total revenue for each of the three and six months ended December 31, 2008 and for the six months ended December 31, 2007. There were four collaborators that contributed greater than 10% of total revenue for the three-month period ended December 31, 2007. The revenue from these collaborators as a percentage of total revenue was as follows:

                                  Three Months Ended       Six Months Ended
                                     December 31,            December 31,
                                  2008         2007        2008        2007

Genentech, Inc.                     60.5%        46.5%      63.9%       52.1%
Celgene Corporation                 18.6%        17.0%      21.3%        9.5%
VentiRx Pharmaceuticals, Inc.       16.3%        16.8%      11.3%       18.1%
Ono Pharmaceuticals Co., Ltd.           -        14.5%          -       16.1%
                                    95.4%        94.8%      96.5%       95.8%

In general, certain of our collaborators may terminate their collaboration agreements with 90 to 120 days' prior notice. Our agreement with Genentech can be terminated with 120 days' notice. Celgene may terminate its agreement with us with six months' notice.

The following table details revenue from our collaborators by region based on the country in which collaborators are located or the ship-to destination for compounds (in thousands):

                   Three Months Ended         Six Months Ended
                      December 31,              December 31,
                    2008           2007       2008        2007

North America    $       7,408    $ 7,119    $ 13,114    $ 12,446
Europe                    271          71         309         131
Asia Pacific               10       1,228          13       2,434
                 $       7,689    $ 8,418    $ 13,436    $ 15,011

All of our collaboration agreements are denominated in U.S. dollars.

We have incurred net losses since inception and expect to incur losses in the near future as we continue to invest in our proprietary drug discovery programs. As of December 31, 2008, we had an accumulated deficit of $356.9 million.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial condition and results of operations are based upon our accompanying unaudited condensed financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented.

Below is a discussion of the policies and estimates that we believe may involve a high degree of judgment and complexity.

Revenue Recognition

Most of our revenue is derived from designing, creating, optimizing, evaluating and developing drug candidates for our collaborators. Our agreements with our collaboration partners include fees based on contracted annual rates for full time equivalent employees working on a project, and may also include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of specific research or development goals, and future royalties on sales of products that result from the collaboration. A small portion of our revenue comes from sales of compounds on a per-compound basis. We report revenue for lead generation and lead optimization research, process research, the development and sale of chemical compounds and the co-development of proprietary drug candidates we out-license, as collaboration revenue. License and milestone revenue is combined and reported separately from collaboration revenue.

Arrangements that include multiple elements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"), to determine whether

the element has value to the customer on a stand-alone basis and whether reliable evidence of fair value for the delivered elements exists. Deliverables in an arrangement that do not meet the separation criteria of EITF 00-21 are treated as a single unit of accounting, generally applying applicable revenue recognition guidance for the final deliverable to the combined unit of accounting as defined in Staff Accounting Bulletin No. 104, Revenue Recognition("SAB 104"). SAB 104 in turn established four criteria, each of which must be met, in order to recognize revenue related to the performance of services or the shipment of products. Revenue is recognized when (a) persuasive evidence of an arrangement exists, (b) products are delivered or services are rendered, (c) the sales price is fixed or determinable, and (d) collectability is reasonably assured.

We recognize revenue from non-refundable up-front payments and license fees on a straight-line basis over the term of performance under the agreement, which is generally the research term specified in the agreement. These advance payments are deferred and recorded as advance payments from collaborators upon receipt, pending recognition, and are classified as a short-term or long-term liability on our balance sheet. When the performance period is not specifically identifiable from the agreement, we estimate the performance period based upon provisions contained within the agreement, such as the duration of the research term, the specific number of full time equivalent scientists working a defined number of hours per year at a stated price under the agreement, the existence or likelihood of development commitments, and other significant commitments of ours.

We determined that the performance period applicable to our agreement with Celgene Corporation is seven years ending September 2014. We determined the performance period for our collaboration and licensing agreement with VentiRx to be one year ended in March 2008. Each of these periods coincides with the research terms specified in each licensing agreement.

Under our agreement with VentiRx, we received a non-refundable cash technology access fee and shares of preferred stock valued at $1.5 million based on the price at which such preferred stock was sold to investors in a private offering. Both the technology access fee and the value of the preferred stock were recorded as advance payments from collaborators and deferred revenue, and were recognized as revenue on a straight-line basis over the estimated one-year research term. The preferred stock has been recorded in Other Long-term Assets in the accompanying Condensed Balance Sheets.

Similarly to advance payments, for agreements that provide for milestone payments, a portion of each milestone payment is recognized as revenue when the specific milestone is achieved based on the applicable percentage of the estimated research term that has elapsed to the total estimated research term.

We periodically review the expected performance periods under each of our agreements that provide for non-refundable up-front payments and license fees. To date, there has not been a significant change in an estimate or assumption of the expected period of performance that has had a material effect on the timing or amount of revenue recognized. Revenue recognition related to non-refundable license fees and up-front payments and to milestone payments could be accelerated in the event of early termination of programs.

Revenue from sales of Optimer building blocks is generally recognized as the compounds are shipped. We recognize revenue that is based on contracted annual rates for full time equivalent employees working on a project on a monthly basis as work is performed.

Cost of Revenue and Research and Development for Proprietary Drug Discovery

Cost of revenue represents research and development conducted for our collaborators and the cost of chemical compounds sold. These costs consist mainly of compensation, associated fringe benefits, share-based compensation and other collaboration-related costs, including supplies, small tools, facilities, depreciation, recruiting and relocation and other direct and indirect chemical handling and laboratory support costs. We allocate discovery costs between cost of revenue and research and development for proprietary drug discovery based upon the respective time spent on each activity by our scientists.

For collaboration agreements under which we conduct development of drug candidates and grant our partner an option to select one or more candidates for further development and commercialization, we attribute a portion of our research and development costs to cost of revenue based on the percentage of total compounds under the agreement that may be selected by the partner. For example, we granted to Celgene an option to select up to two of four drugs developed under the collaboration. Accordingly, we report costs associated with the Celgene collaboration as follows: 50% to cost of revenue, with the remaining 50% to research and development for proprietary drug discovery. For a further discussion of this transaction, see Note 6 to our audited financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2008.

Investments in Marketable Securities

Our investments include domestic public corporate debt securities, commercial paper issued by domestic public companies, obligations of U.S. federal government agencies and auction rate securities, or ARS. Investments are classified as short-term or long-term based on the nature of these securities and the availability of these securities to meet current operating requirements. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in Interest Income or Interest Expense, as appropriate, in the accompanying Condensed Financial Statements. Temporary impairments are recognized in Other Comprehensive Income
(Loss) and other-than-temporary impairments are recognized in Impairment of Marketable Securities in the accompanying Condensed Statements of Operations and Comprehensive Loss. All of our investments in marketable securities are held in our name at a limited number of financial institutions.

We have determined that our ARS are not available for use in current operations and therefore have included them within long-term marketable securities in the accompanying Condensed Balance Sheets as of December 31, 2008 and June 30, 2008. During the fiscal year ended June 30, 2008 and subsequent thereto, auctions for all ARS, amounting to seven securities with a par value of $32.9 million and a current fair value of $16.7 million were unsuccessful. We recorded an other-than-temporary impairment of $1.9 million as of June 30, 2008 on two of our ARS, primarily due to the continuous decline and magnitude of the fair value discount from par value, which is due in part to the relative weakness in the performance of the underlying trust assets. During the three months ended September 30, 2008 and December 31, 2008, we recorded additional other-than-temporary impairments of $3.9 million and $10.5 million, respectively, primarily due to the same factors. See Note 3 to our unaudited financial statements included in this quarterly report for more information about the determination of fair value of our ARS.

While we now earn a higher contractual interest rate on these ARS investments, auctions for these investments have been suspended and they are not currently liquid. In the event we need to access these funds, we will not be able to do so until auctions of these investments are successful, the original issuers retire these securities or a secondary market develops for these securities. We cannot make any assurances that any of these events will occur prior to the time we may need to access these funds or, if they do, the value we will realize on our ARS.

Accured Outsourcing Costs

Substantial portions of our preclinical studies and all of our clinical trials have been performed 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 based upon milestone achievement. We accrue expenses each month for agreements involving significant costs and that bill based on milestone achievement. For preclinical studies, accruals are based upon the estimated percentage of work completed and the contract milestones remaining. For costs of clinical study activities performed by CROs, accruals are estimated based upon the estimated work completed on each study and, for clinical trial expenses, accruals are based upon the number of patients enrolled and the expected duration of the study for which they will be enrolled. We monitor patient enrollment and related activities to the extent possible through internal reviews, correspondence with the CROs, clinical site visits, and review of contractual terms. Our estimates are highly dependant upon the timeliness and accuracy of the data provided by our CROs regarding the status of each program and total program spending. We periodically evaluate our estimates to determine if adjustments are necessary or appropriate based on information we

receive concerning changing circumstances, conditions or events that may affect such estimates. No material adjustments to preclinical study and clinical trial expenses have been recognized to date.

Income Taxes

We estimate our actual current tax expense together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and/or liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that it is more likely than not we will not recover these deferred assets, we must establish a valuation allowance against these tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance against our deferred tax assets. To the extent that we believe a valuation allowance is required, we must include and expense the tax effect of the allowance within the tax provision in our statement of operations.

Results of Operations for the Three and Six Months Ended December 31, 2008 and 2007

Revenue

Collaboration revenue consists of revenue for lead generation and lead optimization research, custom synthesis and process research, the development and sale of chemical compounds and the co-development of proprietary drug candidates we out-license. License and milestone revenue is combined and reported separately from collaboration revenue.

A summary of our revenue follows (amounts in thousands):

                      Three Months Ended      Change 2008 vs.       Six Months Ended        Change 2008 vs.
                         December 31,               2007              December 31,               2007
                       2008         2007        $          %        2008        2007          $          %

Collaboration
revenue              $   5,041     $ 5,634    $ (593)   (10.5%)    $  9,278   $ 11,255    $ (1,977)   (17.6%)
License and
milestone revenue        2,648       2,784      (136)    (4.9%)       4,158      3,756          402     10.7%
Total revenue        $   7,689     $ 8,418    $ (729)    (8.7%)    $ 13,436   $ 15,011    $ (1,575)   (10.5%)

For the three and six months ended December 31, 2008, collaboration revenue decreased by $1.2 million and $2.4 million, respectively, due primarily to the expiration of our collaboration with Ono during the fourth quarter of fiscal 2008. Collaboration revenue also decreased by $161 thousand and $200 thousand in the three and six-month periods, respectively, due to reduced activities under our collaboration with VentiRx. These declines were offset in both periods by a $600 thousand increase from our collaboration with Genentech, which was expanded in the first quarter of fiscal 2009. License and milestone revenue for the three-month period remained consistent with the prior year.

License and milestone revenue for the six-month period increased $1.4 million due to a license payment made under our collaboration with Celgene. Largely offsetting this increase was a decrease of $1.0 million in license revenue from our collaboration with VentiRx.

Cost of Revenue

Cost of revenue represents research and development conducted for our collaborators and the cost of chemical compounds sold from our inventory. These costs consist mainly of compensation, associated fringe benefits and other collaboration-related costs, including supplies, small tools, facilities, depreciation, recruiting and relocation and other direct and indirect chemical handling and laboratory support costs. Fine chemicals consumed are also recorded as cost of revenue.

A summary of our cost of revenue follows (amounts in thousands):

                          Three Months Ended      Change 2008 vs.       Six Months Ended      Change 2008 vs.
                             December 31,               2007              December 31,              2007
                           2008         2007         $         %        2008        2007         $         %

Cost of revenue          $   5,063    $  5,240    $  (177)   (3.4%)    $ 10,183   $ 10,553    $  (370)   (3.5%)
Cost of revenue as a
percentage of
total revenue                65.8%       62.2%                            75.8%      70.3%

Cost of revenue remained relatively consistent with the same period in the prior year in constant dollars for both the three and six months ended December 31, 2008 and 2007, respectively. As a percentage of revenue, cost of revenue increased from 62.2% to 65.8% and 70.3% to 75.8% for the three and six months ended December 31, 2008 and 2007, respectively. These increases were due to the decrease in license revenue from VentiRx discussed above as this revenue had no cost associated with it.

Research and Development Expenses for Proprietary Drug Discovery

Our research and development expenses for proprietary drug discovery include costs associated with our proprietary drug programs for scientific personnel, supplies, equipment, consultants, sponsored research, allocated facility costs, costs related to preclinical and clinical trials, and share-based compensation. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible.

However, many activities simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on a program basis.

The following table shows our research and development expenses by categories of costs for the periods presented (amounts in thousands):

                        Three Months Ended      Change 2008 vs.       Six Months Ended      Change 2008 vs.
                           December 31,               2007              December 31,              2007
                         2008         2007         $          %       2008        2007         $          %

Salaries, benefits
and share-based
compensation           $    9,938   $  7,935    $   2,003   25.2%    $ 19,913   $ 15,479    $   4,434   28.6%
Outsourced services
and consulting              7,882      7,171          711    9.9%      15,925     12,499        3,426   27.4%
Laboratory supplies         2,710      2,531          179    7.1%       6,004      4,572        1,432   31.3%
Facilities and
depreciation                2,619      2,481          138    5.6%       5,271      4,794          477    9.9%
Other                         560        430          130   30.2%       1,105        823          282   34.3%
Total research and
development
for proprietary
drug discovery         $   23,709   $ 20,548    $   3,161   15.4%    $ 48,218   $ 38,167    $  10,051   26.3%