U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-31979

Array BioPharma Inc.

(Exact Name of Registrant as Specified in Its Charter)

_____________

Delaware	84-1460811
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

3200 Walnut Street, Boulder, CO	80301
(Address of Principal Executive Offices)	(Zip Code)

(303) 381-6600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

(Check one):

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

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

Yes o No x

As of April 28, 2006, the registrant had 39,059,235 shares of common stock, par value $.001 per share, outstanding.

ARRAY BIOPHARMA INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements

	Balance Sheets at March 31, 2006 and June 30, 2005 (unaudited)	3

	Statements of Operations — Three and Nine Months Ended March 31, 2006 and 2005 (unaudited)	4

	Statements of Cash Flows — Nine Months Ended March 31, 2006 and 2005 (unaudited)	5

	Notes to Condensed Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II - OTHER INFORMATION

Item 6.	Exhibits	24

SIGNATURES		25

PART I

Item 1. Financial Statements

ARRAY BIOPHARMA INC.

CONDENSED BALANCE SHEETS

(Unaudited)

ASSETS

	March 31,			June 30,
	2006			2005

Current assets
Cash and cash equivalents	$	15,750,680		$	12,429,526
Marketable securities	58,541,807			78,296,782
Restricted cash	—			1,979,678
Accounts receivable, net	1,919,974			679,609
Inventories, net	1,761,194			2,153,486
Prepaid expenses and other	2,628,820			1,025,871
Total current assets	80,602,475			96,564,952

Property, plant and equipment	64,511,236			61,516,975
Less accumulated depreciation and amortization	(36,866,939		)	(30,210,523		)
Property, plant and equipment, net	27,644,297			31,306,452

Other assets	80,246			80,246

Total assets	$	108,327,018		$	127,951,650

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable	$	4,046,123		$	3,708,656
Advance payments from collaborators - current	4,000,216			6,698,292
Accrued compensation and benefits	4,468,307			4,320,755
Deferred rent - current	466,024			341,555
Other current liabilities	1,161,998			1,061,080
Total current liabilities	14,142,668			16,130,338

Advance payments from collaborators - long term	—			937,500
Deferred rent and other liabilities	1,206,871			1,354,533
Long term debt	13,441,113			10,000,000
Other long term liabilities	421,930			113,933
Total liabilities	29,212,582			28,536,304

Stockholders’ equity
Preferred stock	—			—
Common stock	39,057			38,467
Additional paid-in capital	201,011,760			193,696,156
Accumulated other comprehensive loss	(325,471		)	(279,098		)
Accumulated deficit	(121,610,910		)	(94,040,179		)
Total stockholders’ equity	79,114,436			99,415,346

Total liabilities and stockholders’ equity	$	108,327,018		$	127,951,650

See notes to condensed financial statements

ARRAY BIOPHARMA INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
Revenue
Collaboration revenue	$	10,696,526		$	8,919,376		$	28,211,676		$	25,812,329
License and milestone revenue	1,000,000			2,636,363			6,666,669			7,648,862
Total revenue	11,696,526			11,555,739			34,878,345			33,461,191

Operating expenses (1)
Cost of revenue	10,561,060			9,572,711			29,963,646			27,829,868
Research and development for proprietary drug discovery	7,723,854			6,475,269			24,151,003			16,269,878
Selling, general and administrative expenses	3,115,331			2,315,943			9,948,846			6,991,948
Total operating expenses	21,400,245			18,363,923			64,063,495			51,091,694

Loss from operations	(9,703,719		)	(6,808,184		)	(29,185,150		)	(17,630,503		)

Interest expense	(178,777		)	—			(460,398		)	—
Interest income	695,002			573,578			2,074,817			903,552
Net loss	$	(9,187,494	)	$	(6,234,606	)	$	(27,570,731	)	$	(16,726,951	)

Basic and diluted net loss per share	$	(0.24	)	$	(0.16	)	$	(0.71	)	$	(0.51	)

Number of shares used to compute per share data	38,851,660			38,308,552			38,654,078			32,599,153

(1) Operating expenses include share-based compensation expense of $1.4 million and $4.9 million for the three and nine months ended March 31, 2006, respectively. For the three and nine months ended March 31, 2005, share-based compensation expense was $0 and $151,004, respectively. See Note 1 to the Unaudited Notes to Condensed Financial Statements.

See notes to condensed financial statements

ARRAY BIOPHARMA INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended March 31,
	2006			2005
Operating activities
Net loss	$	(27,570,731	)	$	(16,726,951	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	6,894,198			5,900,244
Share-based compensation expense	4,857,418			151,004
Changes in operating assets and liabilities	(5,251,187		)	580,337

Net cash used in operating activities	(21,070,302		)	(10,095,366		)

Investing activities
Purchases of property, plant and equipment	(3,196,713		)	(4,403,725		)
Purchases of marketable securities	(50,466,398		)	(116,000,613		)
Proceeds from sale and maturity of marketable securities	70,175,000			60,450,000
Decrease (increase) in restricted cash	1,979,678			(726,455		)

Net cash provided by (used in) investing activities	18,491,567			(60,680,793		)

Financing activities
Proceeds from sale of common stock, net of issuance costs	—			66,575,147
Proceeds from exercise of stock options and shares issued under the employee stock purchase plan	2,458,776			1,240,533
Proceeds from the issuance of long term debt	3,441,113			—

Net cash provided by financing activities	5,899,889			67,815,680

Net increase (decrease) in cash and cash equivalents	3,321,154			(2,960,479		)
Cash and cash equivalents, beginning of period	12,429,526			6,499,589

Cash and cash equivalents, end of period	$	15,750,680		$	3,539,110

Supplemental disclosure of cash flow information

Cash paid for interest was $397,302 and $0 for the nine months ended March 31, 2006 and 2005, respectively.

See notes to condensed financial statements

ARRAY BIOPHARMA INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2006

(Unaudited)

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. For further information, refer to the financial statements and footnotes thereto as of and for the year ended June 30, 2005, included in the Annual Report on Form 10-K of Array BioPharma Inc. (the “Company” or “Array”) filed on September 13, 2005, with the Securities and Exchange Commission.

Summary of Significant Accounting Policies

Cash Equivalents and Marketable Securities

Cash equivalents consist of short term, highly liquid financial instruments that are readily convertible to cash and have maturities of three months or less from the date of purchase and may consist of money market funds, taxable commercial paper, U.S. government agency obligations and corporate notes and bonds with high credit quality. Marketable securities consist of similar financial instruments with maturities of greater than three months.

At March 31, 2006 and June 30, 2005, management designated marketable securities held by the Company as available-for-sale securities for purposes of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of stockholders’ equity until their disposition. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses, declines in value judged to be other-than-temporary on securities available-for-sale and interest on securities available-for-sale are included in investment income. The cost of securities sold is based on the specific identification method.

Inventories

Inventories consist of individual chemical compounds in the form of Optimer^â building blocks available-for-sale and commercially available fine chemicals used in the Company’s proprietary drug discovery programs and research collaborations. Inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. The Company designs and produces the chemical compounds comprising its Optimer building blocks and capitalizes costs into inventory only after technological feasibility has been established. The Company reviews its chemical inventories periodically and, when required, writes down the carrying cost for non-marketability to estimated net realizable value through an appropriate reserve.

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 on contracted annual rates for full time equivalent employees working on a project. The Company’s collaboration agreements also include license and up-front fees, milestone payments upon achievement of specified research or development goals and royalties on sales of resulting products. A small portion of the Company’s revenue comes from fixed fee agreements and from sales of compounds on a per-compound basis.

Collaboration agreements typically call for a specific level of resources as measured by the number of full time equivalent scientists working a defined number of hours per year at a stated price under the agreement. The Company recognizes revenue under its collaboration agreements on a monthly basis for fees paid to the Company based on hours worked. The Company recognizes revenue from sales of Lead Generation Library and Optimer building block compounds as the compounds are shipped, as these agreements are priced on a per-compound basis and title and risk of loss passes upon shipment to the Company’s customers.

Revenue from license fees and up-front fees is non-refundable and is recognized on a straight-line basis over the expected period of the related research program. Milestone payments are non-refundable and are recognized as revenue over the expected period of the related research program. A portion of each milestone payment is recognized when the milestone is achieved based on the applicable percentage of the research term that has elapsed. 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 of early termination of programs.

In general, contract provisions include predetermined payment schedules or the submission of appropriate billing detail. Payments received in advance of performance are recorded as advance payments from collaborators until the revenue is earned.

The Company reports 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 it out-licenses, as collaboration revenue. License and milestone revenue is combined and reported separately from collaboration revenue.

Accounting for Share-Based Compensation

Effective July 1, 2005, the Company adopted the fair value method of accounting for share-based compensation arrangements in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123R, Share-Based Payment (“SFAS 123R”), using the modified prospective method of transition. Under the provisions of SFAS 123R, the estimated fair value of options granted under the Company’s Amended and Restated Stock Option and Incentive Plan (the “Option Plan”) is recognized as compensation expense over the option-vesting period. In addition, the Company’s Employee Stock Purchase Plan (the “ESPP”) is considered to be a compensatory plan under SFAS 123R as purchases are made at a discount to the market price of the Company’s common stock as reported on the first or last day of each offering period (whichever is lower). Compensation expense is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount. Using the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS 123R for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption.

Prior to July 1, 2005, the Company accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized with respect to purchases of the Company’s common stock under the ESPP or when stock options were granted with exercise prices equal to or greater than market value on the date of grant.

The Company recorded $1.4 million and $4.9 million, or $0.04 and $0.13 per share, respectively, of total share-based compensation expense for the three and nine months ended March 31, 2006 as required by the provisions of SFAS 123R, substantially all of which was related to stock options. The share-based compensation expense associated with stock options is amortized on a straight-line basis over the vesting periods of the related options. Share-based compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock purchased during each offering period and the percentage of the purchase discount. These charges had no impact on the Company’s reported cash flows. During the three-month period ended September 30, 2004, the Company recorded approximately $151,000 of stock compensation expense pursuant to APB 25 associated with the final amortization of deferred stock compensation related to the vesting of stock options that were granted prior to its initial public offering of common stock in November 2000. Share-based compensation expense is allocated among the following categories:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005

Cost of revenue	$	556,571	$	—	$	1,627,586	$	113,251
Research and development for proprietary drug discovery	286,718		—		1,019,947		—
Selling, general and administrative expenses	603,086		—		2,209,885		37,753
Total	$	1,446,375	$	—	$	4,857,418	$	151,004

Under the modified prospective method of transition under SFAS 123R, the Company is not required to restate its prior period financial statements to reflect expensing of share-based compensation under SFAS 123R. Therefore, the results for the three and nine months ended March 31, 2006 are not comparable to the same periods in the prior year.

The Company has presented pro forma disclosures of its net loss and net loss per share for the prior year periods assuming the estimated fair value of the options granted prior to July 1, 2005 is amortized to expense over the option-vesting period as presented below.

	Three Months Ended March 31, 2005			Nine Months Ended March 31, 2005

Net loss, as reported	$	(6,234,606	)	$	(16,726,951	)
Add: Share-based employee compensation expense included in reported net loss	—			151,004

Less: Total share-based employee compensation expense determined under fair value based method for all options granted	(1,874,222		)	(5,469,500		)
Pro forma net loss	$	(8,108,828	)	$	(22,045,447	)

Net loss per share:
Basic and diluted - as reported	$	(0.16	)	$	(0.51	)
Basic and diluted - pro forma	$	(0.21	)	$	(0.68	)

For purposes of disclosure in the foregoing table and for purposes of determining estimated fair value under SFAS 123R, the Company has computed the estimated fair values of all share-based compensation using the Black-Scholes option pricing model and has applied the assumptions set forth in the following table. The Company increased the estimated life of stock options granted beginning in fiscal 2006 as a result of guidance from the SEC as contained in Staff Accounting Bulletin No. 107 permitting the initial application of a “simplified” method, which is based on the average of the vesting term and the term of the option. Previously, the Company calculated the estimated life based on the expectation that options would be exercised within five years on average. The Company based its estimate of expected volatility for options granted in fiscal year 2006 on daily historical trading data of its common stock from November 17, 2000, the date of the Company’s initial public offering, through the last day of

the applicable period. For options granted in fiscal year 2005, the Company based its volatility estimate under the same method as fiscal year 2006, using the period from November 1, 2001 through the last day of the applicable period.

	Average Risk-Free Interest Rate		Dividend Yield		Volatility Factor		Weighted-Average Option Life (Years)
First nine months of Fiscal Year 2006	4.40	%	0	%	75.1	%	6.37
First nine months of Fiscal Year 2005	3.70	%	0	%	78.7	%	5

The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of its employee stock options or common stock purchased under the ESPP. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which may result in changes to these assumptions and methodologies, and which could materially impact the Company’s fair value determination.

Summary Details for Plan Share Options

	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in millions)
Outstanding Balance, June 30, 2005	6,634,541		$	6.46
Granted	1,888,400		6.55
Exercised	(506,609	)	4.04
Forfeited or expired	(343,189	)	7.47
Outstanding Balance, March 31, 2006	7,673,143		6.59		6.8	$	21.2

Exercisable shares as of March 31, 2006	4,444,042		6.53		5.5	$	13.2

The weighted-average, grant-date fair value of options granted during the nine-month period ended March 31, 2006 was $4.69 based on using the Black-Scholes option pricing model on the date of grant. The total intrinsic value of options exercised during the nine-month period ended March 31, 2006 was $2.2 million and represents the difference between the exercise price of the option and the closing market price of the Company's common stock on the dates exercised.

A summary of the status of the Company invested shares as of March 31, 2006, and changes during the nine-month period then ended is presented below.

Unvested Shares Issued Under the Plan

	Nonvested Shares		Weighted- Average Grant-Date Fair Value
Unvested Balance, June 30, 2005	2,649,739		$	4.88
Granted	1,888,400		4.69
Vested	(1,060,590	)	5.32
Forfeited	(248,448	)	4.84
Unvested Balance, March 31, 2006	3,229,101		4.63

Unrecognized Share-Based Compensation Expense

As of March 31, 2006, there was $10.5 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan. This expense is expected to be recognized over a weighted-average period of 2.0 years as follows:

	(in thousands)
Fiscal Year 2006 - remaining period	$	1,255
Fiscal Year 2007	3,662
Fiscal Year 2008	2,886
Fiscal Year 2009	1,825
Fiscal Year 2010	863
	$	10,491

Comprehensive Loss

A reconciliation of net loss to comprehensive loss is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005

Net loss	$	(9,187,494	)	$	(6,234,606	)	$	(27,570,731	)	$	(16,726,951	)
Change in unrealized gain (loss) on marketable securities	51,741			(297,849		)	(46,373		)	(259,251		)
Total comprehensive loss	$	(9,135,753	)	$	(6,532,455	)	$	(27,617,104	)	$	(16,986,202	)

Net Loss Per Share

Basic and diluted net loss per share has been computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. The Company has excluded the effects of outstanding stock options from the calculation of diluted net loss per share because all such securities are anti-dilutive for all periods presented. The number of common share equivalents relating to these stock options excluded from the diluted loss per share calculations for the three and nine months ended March 31, 2006 were 1,510,048 shares and 1,498,492 shares, respectively. For the three and nine months ended March 31, 2005 the number of common share equivalents were 1,794,648 shares and 1,758,561 shares, respectively.

Reclassifications

Certain reclassifications have been made to the prior year’s amounts to conform to the current year’s presentation. These reclassifications had no impact on the reported results of operations.

Use of Management’s Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2: Cash, Cash Equivalents and Marketable Securities

Cash, cash equivalents and marketable securities classified as available-for-sale and restricted cash as of March 31, 2006 and June 30, 2005 consist of the following:

	March 31,		June 30,
	2006		2005
Cash and cash equivalents:
Cash	$	625,106	$	440,958
Money market fund	15,125,574		11,988,568
Total	$	15,750,680	$	12,429,526

Marketable securities:
Auction rate securities	$	8,518,312	$	28,553,313
Federal agency mortgage-backed securities	50,023,495		49,743,469
Total	$	58,541,807	$	78,296,782

Restricted cash:
Money market fund	$	—	$	1,979,678

Debt securities at March 31, 2006 and June 30, 2005, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations. The near-term reset dates are used as the effective maturity dates for classifying Auction rate securities.

	March 31,		June 30,
	2006		2005
Marketable securities:
Due in one year or less	$	48,051,641	$	56,147,883
Due after one year through two years	10,490,166		22,148,899
Total	$	58,541,807	$	78,296,782

The Company has included marketable securities due after one year within current assets, as these investments are available for use in current operating activities.

Note 3: Inventory Components

	March 31,			June 30,
	2006			2005

Fine chemicals	$	2,998,085		$	2,884,541
Optimer building blocks	2,079,545			2,186,260
Total inventories at cost	5,077,630			5,070,801
Less reserves	(3,316,436		)	(2,917,315		)
Total inventories, net	$	1,761,194		$	2,153,486

Note 4: Long Term Debt

On June 28, 2005, the Company entered into a Loan and Security Agreement (“Loan and Security Agreement”) with Comerica Bank. The Loan and Security Agreement provides for a term loan, equipment advances and a revolving line of credit, all of which are secured by a security interest in the Company’s assets, other than its intellectual property. The full $10 million term loan was advanced to the Company on June 30, 2005, and currently has an interest rate of 6.0% per annum and a maturity date of June 28, 2010. Up to $5 million in equipment advances are available to the Company from time to time through December 28, 2006 to finance the purchase of equipment, capitalized software and tenant improvements. As of March 31, 2006, the Company has received $3.4 million of equipment advances, which currently have an interest rate of 6.0% per annum and a maturity date of June 28, 2010. A revolving line of credit in the amount of $2 million supports outstanding standby letters of credit that have been issued in relation to the Company’s facilities leases. These standby letters of credit expire on June 28, 2008.

Interest on the loans is payable in monthly installments, with a balloon payment of $13.4 million due in June 2010, based on current amounts outstanding as of March 31, 2006. The agreement contains certain covenants that restrict the Company’s ability to, among other things, sell certain assets, engage in a merger or change in control transaction, incur debt, pay cash dividends and make investments. The agreement also requires the Company to maintain certain minimum balances in an interest earning Comerica money market account when the Company’s total cash, cash equivalents and marketable securities, including those invested at the Bank, is below $40 million.

Based on the outstanding debt balances and interest rates in effect as of March 31, 2006, the aggregate future minimum interest payments of the Loan and Security Agreement are $202,000 for the remainder of fiscal 2006, $806,000 in each of fiscal years 2007, 2008, 2009 and 2010 with $13.4 million of principal payable in 2010.

Note 5: Stock Compensation Plans

Stock Options

In September 2000, the Company’s Board of Directors approved the Amended and Restated Stock Option and Incentive Plan (the “Option Plan”), which is the successor equity incentive plan to the Company’s 1998 Stock Option Plan (the “1998 Plan”), initially adopted by the Board of Directors in July 1998. Upon the closing of the Company’s initial public offering, the Option Plan became effective and no additional grants were made under the 1998 Plan. A total of 14.6 million shares of common stock have been reserved for issuance under the Option Plan to eligible employees, consultants and directors of the Company. Of these shares, 4.8 million were authorized pursuant to the provision under the Option Plan which provides for the reservation of additional authorized shares on any given day in an amount equal to the difference between: (i) 25% of the Company’s issued and outstanding shares of common stock, on a fully diluted and as-converted basis and (ii) the number of outstanding shares relating to awards under the Option Plan plus the number of shares available for future grants of awards under the Option Plan on that date. As of March 31, 2006, there were 4.0 million shares available for future grant under the Option Plan.

The Option Plan provides for awards of both nonstatutory stock options and incentive stock options 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 the Company’s common stock. A total of 11,978,370 shares of common stock may be issued as incentive stock options as of January 1, 2006.

The Option Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted and to determine whether and to what extent stock options and other stock incentive awards are to be granted, the number of shares of common stock to be covered by each award, the vesting schedule of stock options, generally straight-line over a period of four years, and all other terms and conditions of each award.

Employee Stock Purchase Plan

During fiscal year 2001, the Company adopted an Employee Stock Purchase Plan (the “ESPP”), authorizing the issuance of 800,000 shares of its common stock pursuant to purchase rights granted to eligible employees of the Company. During fiscal 2003, stockholders approved an increase of 400,000 shares for a total of 1.2 million authorized shares for issuance under the ESPP. The ESPP provides a means by which employees purchase common stock of the Company through payroll deductions of up to 15% of their base compensation. The Compensation Committee determines the length and duration of the periods during which payroll deductions will be accumulated to purchase shares of common stock. This period is known as the offering period. Within a single offering period, the Company permits periodic purchases of stock, known as purchase periods. During the first six months of fiscal 2006, the offering periods were six-month periods and the purchase periods were three-month periods. Effective January 1, 2006, the offering periods begin January 1 and end December 31. However, if the stock price on July 1 is lower than the stock price on January 1, then the 12-month offering period would terminate and the purchase rights under that offering period would roll forward into a new six-month offering period that would begin July 1 and end December 31. The Compensation Committee may modify the duration of the offering periods and the purchase periods again in the future. At the end of the purchase period during a calendar year, the Company uses accumulated payroll deductions to purchase, on behalf of participating employees, shares of common stock at a price equal to the lower of 85% of the market value of a share of common stock (i) at the beginning of the offering period or (ii) at the end of the purchase period. Generally, all employees, including executive officers, who work at least 20 hours per week and five months per year, may participate in the ESPP. Employees who are deemed to own greater than 5% of the combined voting power of all classes of stock of the Company are not eligible for participation in the ESPP. For the three and nine months ended March 31, 2006 total shares issued under the ESPP were 0 and 108,588, respectively. As of March 31, 2006, there were 49,975 shares available for future issuance under the ESPP. On December 9, 2005, the Company’s Board of Directors approved an additional 450,000 shares of common stock for issuance under the ESPP, subject to stockholder approval.

Note 6: Operating Leases

Amendments to Lease Agreements. On August 5, 2005, December 2, 2005, December 22, 2005, February 3, 2006, and March 1, 2006, the Company amended two existing Lease Agreements (the “Prior Lease Agreements”) for two buildings totaling approximately 75,000 square feet that the Company occupies in Longmont, Colorado under the terms of Addendum Numbers 4 through 8 to the Prior Lease Agreements (the “Amendments”). Under the Amendments, the Company exercised options to expand its leased space by up to an additional 80,000 square feet in four adjacent buildings and extended the lease terms under the Prior Lease Agreements for currently occupied buildings to May 31, 2013.

The Company has the right to purchase each of the leased buildings, including the expansion space. The Amendments provide for monthly lease payments along with 3% annual increases. In addition, the Company has options to extend the term of the lease for three additional consecutive terms of five years each.

Note 7: Segment, Geographic and Concentration Information

All operations of the Company are considered to be in one operating segment and, accordingly, no segment disclosures have been presented. The physical location of the Company’s property, plant and equipment is within the United States. The following table details revenue from customers by geographic area based on the country in which collaborators are located or the destination where compounds from the Company’s inventories are shipped.

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005

United States	$	8,454,699	$	7,358,523	$	23,233,424	$	21,220,043
Europe	1,401,658		3,148,867		7,464,244		9,553,873
Japan	1,840,169		1,048,349		4,180,677		2,687,275
Total revenue	$	11,696,526	$	11,555,739	$	34,878,345	$	33,461,191

Approximately 93% and 95%, respectively, of the revenue generated from Europe during the three and nine months ended March 31, 2006 is related to the Company’s collaboration and licensing agreement with AstraZeneca AB, located in Sweden. During the three and nine months ended March 31, 2005, revenue from AstraZeneca represented 97% of the revenue generated from Europe. For the three and nine months ended March 31, 2006, revenue generated primarily from two Japanese customers represented 16% and 12%, respectively, of total revenue. No other individual international country exceeded 10% of the Company’s revenue for any of the above periods.

During the three months ended March 31, 2006, revenue from four of the Company’s customers represented approximately 33%, 28%, 11%, and 10% of total revenue, while four of the Company’s customers represented approximately 26%, 26%, 11%, and 10% of total revenue for the comparative period in fiscal 2005. For the nine-month period ended March 31, 2006, revenue from three of the Company’s customers represented approximately 33%, 23%, and 20% of total revenue, while three of the Company’s customers represented approximately 28%, 28%, and 11% of total revenue for the comparative period in fiscal 2005.

Note 8: Recent Accounting Pronouncements

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005 with early adoption permitted. The Company does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140 (“SFAS 155”), to simplify and make more consistent the accounting for certain financial instruments. SFAS 155 amends Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS 155 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No. 125), to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with early adoption permitted. The Company believes that the adoption of this statement will have no impact on its financial condition or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 realizing new revenue streams and obtaining future collaboration agreements that include milestone and/or royalty payments, the success of our internal proprietary drug discovery activities, the expected level of our investment in proprietary research and our future headcount and capital expenditure requirements. These statements involve significant risks and uncertainties, including those discussed below and those described more fully in other reports filed by Array BioPharma with the Securities and Exchange Commission. Because these statements reflect our current expectations concerning future events, our actual results could differ materially from those anticipated in these forward-looking statements. The factors that could cause actual results to differ from our expectations include, but are not limited to, our ability to achieve and maintain profitability, the extent to which the pharmaceutical and biotechnology industries are willing to in-license drug candidates for their product pipelines and to collaborate with and fund third parties on their drug discovery activities, our ability to out-license our proprietary candidates on favorable terms, our ability to continue to fund and successfully progress internal research efforts and to create effective, commercially viable drugs, risks associated with our dependence on our collaborators for the clinical development and commercialization of our out-licensed drug candidates, the ability of our collaborators and of Array to meet objectives, including clinical trials, tied to milestones and royalties, our ability to attract and retain experienced scientists and management, and the risk factors contained in the Annual Report on Form 10-K filed by Array with the Securities and Exchange Commission (“SEC”) on September 13, 2005. We are providing this information as of the date of this report. We undertake no duty to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements or of anticipated or unanticipated events that alter any assumptions underlying such 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 report.

Overview

Array BioPharma is a biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule drugs to treat life threatening and debilitating diseases. Our proprietary drug development pipeline is primarily focused on the treatment of cancer and inflammatory disease and includes clinical candidates that are designed to regulate therapeutically important targets. In addition, leading pharmaceutical and biotechnology companies collaborate with Array to discover and develop drug candidates across a broad range of therapeutic areas.

We have identified multiple drug candidates in our own proprietary programs and in collaborations with other drug companies. We intend to progress our proprietary drug programs internally through clinical testing and continue to evaluate select programs for out-licensing opportunities with pharmaceutical and biotechnology partners.

We have built our drug development pipeline, and our discovery and development capabilities, primarily through cash flow from collaborations and through sales of our equity securities. Through March 31, 2006, we have recognized $183.8 million in collaboration revenue, and we have received $18.2 million in up-front payments and $8.7 million in milestone payments from our collaborators and out-licensing partners. Under our existing collaboration agreements, we have the potential to earn over $200.0 million in additional milestone payments if we achieve all of the drug discovery objectives under these agreements, as well as royalties on any resulting product sales from 15 different programs.

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 March 31, 2006, we had an accumulated deficit of $121.6 million.

Revenue. We generate revenue through the out-licensing of select proprietary drug discovery programs for license and up-front fees, research funding based on the number of full-time equivalents contractually assigned to the program, and research and development milestone payments. We also have the potential to generate revenue from royalties on future product sales. Four programs have been out-licensed to date to AstraZeneca, Genentech, Inc. and Amgen Inc., and we have received up-front license fees of $18.2 million in total for these programs.

We also generate revenue through collaborations aimed at inventing drug candidates for our collaborators. We receive research funding based on the number of full-time equivalent employees contractually assigned to a program, plus related research expenses. Under certain of these agreements, we are entitled to receive additional payments based on the achievement of research milestones, drug development milestones and/or royalty payments based on sales of products created as a result of these collaborations.

We sell our Optimer^â building blocks, which are the starting materials used to create more complex chemical compounds in the drug discovery process, on a per-compound basis without any restrictions on use. In addition, we have licensed our Lead Generation Libraries, which are a collection of structurally related chemical compounds that may have the potential of becoming drug candidates, on a non-exclusive basis to our collaborators for their internal research purposes. We are no longer developing new Lead Generation Libraries other than for our proprietary research and expect future revenue from sales of compounds in our Lead Generation Libraries to be insignificant.

We report 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, as collaboration revenue. License and milestone revenue is combined and reported separately from collaboration revenue.

Revenue recognition. We recognize revenue from fees under our collaboration agreements on a monthly basis as work is performed. Per-compound revenue is recognized as compounds are shipped. Revenue from license fees and up-front fees is recognized on a straight-line basis over the expected period of the related research program. Payments received in advance of performance are recorded as advance payments from collaborators until the revenue is earned. Milestone payments are non-refundable and are recognized as revenue over the expected period of the related research program. A portion of each milestone payment is recognized when the milestone is achieved based on the applicable percentage of the research term that has elapsed. 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 of early termination of programs.

Customer concentration. Our top 20 collaborators contributed approximately 99% of our total revenue for the first nine months of fiscal 2006, and our current top three collaborators, Genentech, InterMune, Inc. and AstraZeneca, accounted for 33%, 23%, and 20%, respectively, of our total revenue. During the same period of fiscal year 2005, AstraZeneca, Genentech, and Eli Lilly and Company accounted for 28%, 28%, and 11%, respectively, of our total revenue. In general, our collaborators may terminate their collaboration agreements with us on 30 to 90 days’ prior notice.

International Revenue. International revenue represented 33% of our total revenue during the first nine months of fiscal year 2006, down from 43% for the same period in the prior year. Our international revenue is primarily attributable to European and Japanese collaborations. International revenue decreased in the first nine months of fiscal year 2006 over the same period in the prior year due to the expiration of the research-funding period of the AstraZeneca collaboration in November 2005. This decrease was partially offset by increased revenue generated from a new Japanese research collaboration with Ono Pharmaceutical Co., Ltd. in November 2005. All of our collaboration agreements and purchase orders are denominated in United States dollars.

Cost of revenue. Cost of revenue consists mainly of compensation, associated fringe benefits and other collaboration-related costs, including research and development conducted for our collaborators, supplies, small tools, facilities, depreciation, recruiting and relocation and other direct and indirect chemical handling and laboratory support costs. Fine chemicals consumed as well as any required inventory reserve adjustments are also recorded as cost of revenue. We review the levels and values of our chemical inventories periodically and, when required, write down the carrying cost of our inventories for non-marketability to estimated net realizable value through an appropriate reserve.

Research and development expenses for proprietary drug discovery. Research and development expenses for proprietary drug discovery consists of all costs associated with our proprietary drug development pipeline, including compensation and fringe benefits, consulting and outsourced services, laboratory supplies, and allocated facility costs and depreciation. When an internal proprietary program is out-licensed, all subsequent costs of the out-licensed program are reported as cost of revenue.

Selling, general and administrative expenses. Selling, general and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of revenue or research and development expenses and include other management, business development, accounting, information technology and administration costs, including patent prosecution, recruiting and relocation, consulting and professional services, travel and meals, advertising, sales commissions, facilities, depreciation and other office expenses.

Business development. We currently license our compounds 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 license our compounds and enter into collaborations in Japan through an agent.

Future outlook. We plan to increase our investment in proprietary research to broaden our product pipeline and to further enhance our clinical and regulatory capabilities to allow us to advance drugs further in clinical development. We will consider commercializing select programs ourselves with appropriate market characteristics while continuing to evaluate out-licensing opportunities to maximize the risk-adjusted return of our proprietary programs. We also intend to evaluate opportunities to grow our product pipeline by acquiring or in-licensing later-stage clinical programs. As part of these efforts, we expect near term selling, general and administrative costs to rise in connection with increased patent and other intellectual property related costs incurred to protect and enforce our intellectual property rights in our proprietary programs. As we devote more scientists to our proprietary research, we expect fewer scientists will be assigned to revenue generating collaborations. Because of our strategy to retain other proprietary programs later in clinical development before out-licensing them or commercializing them ourselves, we may not recognize significant revenue from new out-licensing opportunities in the near term. Our statements about future events in this paragraph are subject to many risks and uncertainties, including many that are beyond our control. These risks are described in the risk factors included in our annual report on Form 10-K filed with the SEC on September 13, 2005, and in other reports we file with the SEC.

Results of Operations

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
	(in thousands)				(in thousands)
Revenue
Collaboration revenue	$	10,697	$	8,919	$	28,211	$	25,812
License and milestone revenue	1,000		2,637		6,667		7,649
Total revenue	$	11,697	$	11,556	$	34,878	$	33,461

Three and Nine Months Ended March 31, 2006 and 2005

Revenue. Collaboration revenue increased by $5.2 million and $12.2 million for the three and nine months ended March 31, 2006, respectively, over the same periods in the prior year, as a result of expanded programs with Genentech and InterMune and a new research collaboration with Ono Pharmaceutical Co., Ltd. These increases were partially offset by decreased collaboration revenue of $3.4 million and $8.2 million during the same time periods above, related to research programs that expired in fiscal 2005 with Eli Lilly and QLT Inc. In addition, revenue from our programs with AstraZeneca declined over the first half of fiscal 2006 as the research-funding period expired in November 2005. Additionally, collaboration revenue from the sale of Lead Generation Libraries decreased during the nine months ended March 31, 2006, by approximately $1.6 million due to the sale of the remainder of our Lead Generation Library compounds to a single collaborator in December 2004.

License and milestone revenue decreased by approximately $1.6 million and $982,000 during the three and nine months ended March 31, 2006, over the same periods of the prior year. This decrease was related to the previously received license fee and milestone payments from AstraZeneca and Genentech that were fully recognized in November 2005. Partially offsetting this decrease was the recognition of $2.5 million of milestone payments received from AstraZeneca during the first nine months of fiscal 2006 related to advancing ARRY-142886 into Phase Ib clinical trials and the selection of two additional clinical backup candidates.

Share-Based Compensation. Effective July 1, 2005, we adopted the fair value method of accounting for share-based compensation arrangements in accordance with FASB Statement No. 123R, Share-Based Payment — an amendment of FASB Statement No. 123 and 95 (“SFAS 123R”), using the modified prospective method of transition. Share-based compensation arrangements covered by SFAS 123R currently include stock options granted under our Amended and Restated Stock Option and Incentive Plan (the “Option Plan”) and purchases of common stock by our employees at a discount to the market price during each offering period under our Employee Stock Purchase Plan (the “ESPP”). Prior to July 1, 2005, we accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with APB 25. Under the provisions of APB 25, no compensation expense was recognized with respect to purchases of our common stock under the ESPP or when stock options were granted with exercise prices equal to or greater than market value on the date of grant and no compensation expense was recognized for purchases of shares of our common stock by employees under our ESPP. Under the modified prospective method of transition, we are not required to restate our prior period financial statements to reflect expensing of share-based compensation under SFAS 123R. Therefore, the results as of the three and nine months ended March 31, 2006 are not directly comparable to the same periods in the prior year.

As required by the provisions of SFAS 123R, we recorded $1.4 million and $4.9 million, or $0.04 and $0.13 per share, respectively, of share-based compensation expense for the three and nine months ended March 31, 2006. These amounts are allocated among cost of revenue, research and development expenses for proprietary drug discovery and selling, general and administrative expenses based on the function of the applicable employee. This charge had no impact on our reported cash flows. We used the Black-Scholes option pricing model to determine the estimated fair value of our share-based compensation arrangements.

As of March 31, 2006, there was $10.5 million of unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Option Plan. For more information about the adoption of SFAS 123R, see Note 1, Accounting for Share-Based Compensation, to the Unaudited Notes to Condensed Financial Statements and the section below entitled “Critical Accounting Policies — Share-Based Compensation”.

Cost of revenue. Cost of revenue increased by approximately 10% and 8% during the three and nine months ended March 31, 2006 over the same periods of the prior year, primarily due to the recording of approximately $557,000 and $1.6 million, respectively, of share-based compensation expense in accordance with SFAS 123R. In addition, during June 2005, we began amortizing the cost of leasehold improvements for our facility located in Boulder, Colorado over the remaining months of our initial lease term, which ends March 2008. Prior to that, all leasehold improvements were amortized over a period of 15 years, which included optional lease extension periods we were reasonably assured of exercising at that time. This change in useful life resulted in approximately $136,000 and $398,000, respectively, of additional leasehold improvement amortization to cost of revenue for the three and nine months ended March 31, 2006 compared to the same periods of the prior year.

Research and development expenses for proprietary drug discovery. Research and development expenses for proprietary drug discovery increased by approximately 19% and 48% during the three and nine months ended March 31, 2006, over the same periods of the prior year. This increase was primarily due to additional scientists and increased pharmacology studies supporting our expanded efforts to advance proprietary compounds into regulated safety testing and clinical trials. The most significant increase in costs came from outsourced pharmacology studies to support the advancement of our ErB2/EGFR, P38, Mek for inflammation, and other programs. We expect that proprietary research and development spending will continue to increase as we focus more resources on our proprietary drug discovery and development programs and advance our programs into and through clinical development. For the three and nine months ended March 31, 2006, we expensed approximately $287,000 and $1.0 million, respectively, related to share-based compensation in accordance with SFAS 123R. In addition, as described in cost of revenue above, we recorded approximately $247,000 and $747,000, respectively, of additional leasehold improvement amortization to research and development expenses for proprietary drug discovery for the three and nine months ended March 31, 2006, compared to the same periods of the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 35% and 42%, respectively, during the three and nine months ended March 31, 2006, over the same periods of the prior year. The increase was primarily the result of approximately $603,000 and $2.2 million, respectively, of share-based compensation in accordance with SFAS 123R. In addition, for the three and nine months ended March 31, 2006, compensation expense increased by approximately $75,000 and $285,000, respectively, over the same periods of the prior year.

Interest expense. During the three and nine months ended March 31, 2006, we incurred interest expense of approximately $179,000 and $460,000, respectively, associated with borrowings related to the Loan and Security Agreement that we entered into on June 28, 2005.

Interest income. Interest income increased to approximately $695,000 for the three months ended March 31, 2006 from approximately $574,000 in the same period of the prior year due to higher investment interest rates earned. For the nine months ended March 31, 2006, interest income increased to $2.1 million from approximately $904,000 in the same period of the prior year. This increase was primarily due to higher investment interest rates earned on higher average cash and investment balances with the increased balances primarily being attributable to our public offering of common stock in December 2004.

Liquidity and Capital Resources

We have historically funded our operations through revenue from our collaborations and the issuance of equity securities. As of March 31, 2006, cash, cash equivalents, restricted cash and marketable securities totaled $74.3 million compared with $92.7 million at June 30, 2005.

Net cash used in operating activities was $21.1 million and $10.1 million for the nine months ended March 31, 2006 and 2005, respectively. During the first nine months of fiscal year 2006, our net loss of $27.6 million was reduced by noncash charges of $11.8 million associated with depreciation and share-based compensation expense, partially offset by an increase in our net operating assets and liabilities, excluding cash and marketable securities, of approximately $5.3 million. Net operating assets and liabilities increased due to decreases in advance payment balances from collaborators and increased accounts receivable and prepaid expenses. Advance payments from collaborators decreased by $3.6 million due to the recognition of revenue from previously received up-front license and milestone payments. Accounts receivable increased by $1.2 million primarily due to the $1.0 million AstraZeneca milestone that was earned in March and collected in April. Prepaid expenses increased by $1.6 million due to the timing of payments for facilities rent and additional software licenses and for equipment maintenance policies.

During the nine months ended March 31, 2006, we invested $3.2 million in laboratory equipment, primarily for biology, drug metabolism and analytical research and development operations, as well as in various computer hardware and software. The net sale and maturity of marketable securities provided $19.7 million of cash. During the nine months ended March 31, 2006, previously restricted cash in the amount of $2.0 million became available for use in operations. Financing activities provided $5.9 million of cash consisting of $3.4 million from the issuance of long term debt used to finance purchases of capital equipment and approximately $2.5 million of cash resulting from the exercise of stock options under our stock option plan and purchases of stock under our employee stock purchase plan.

As of March 31, 2006, we had a $10 million term loan and $3.4 million of equipment advances outstanding under our Loan and Security Agreement, which currently bear interest at the rate of 6.0% per annum. Interest on the loans is payable in monthly installments. A balloon payment of $13.4 million is due at maturity of the loans on June 28, 2010, based on current amounts outstanding as of March 31, 2006. We also have a revolving line of credit in the amount of $2 million to support outstanding standby letters of credit that have been issued in relation to our facilities leases. These standby letters of credit will expire on June 28, 2008.

Our future capital requirements will depend on a number of factors, including the rate at which we invest in proprietary research, the growth of our collaboration business and the amount of collaboration research funding we receive, the timing of milestone and royalty payments, if any, from our collaboration and out-licensed programs, our capital spending on new facilities and equipment, expenses associated with unforeseen litigation, regulatory

changes, competition, technological developments, general economic conditions and the extent to which we acquire or invest in other businesses, products and technologies.

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

We believe that our existing cash, cash equivalents and marketable securities and anticipated cash flow from existing collaboration agreements will be sufficient to support our current operating plan for at least the next 12 months. This estimate of our future capital requirements is a forward-looking statement that is based on assumptions that may prove to be wrong and that involve substantial risks and uncertainties. Our actual future capital requirements could vary as a result of a number of factors, including:

• the progress of our research activities;

• the availability of resources for revenue generating collaborations as we devote more resources to our proprietary programs;

• our ability to enter into agreements to out-license and co-develop our proprietary drug candidates, and the timing of those agreements in each candidate’s development stage;

• the number and scope of our research programs;

• the progress of our preclinical and clinical development activities;

• the progress of the development efforts of our collaborators;

• our ability to establish and maintain current and new collaboration agreements;

• the ability of our collaborators to fund research and development programs;

• the costs involved in enforcing patent claims and other intellectual property rights;

• the decision to stay in our current facilities, or to consolidate operations in an existing or new location;

• the costs and timing of regulatory approvals; and

• the costs of establishing clinical development, business development and 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 to continue to utilize our existing cash and marketable securities resources that were primarily generated from the proceeds of our equity offerings. In addition, we may finance future cash needs through the sale of equity securities, strategic collaboration agreements and debt financing. We cannot assure that we will be successful in obtaining new or in retaining existing out-license or collaboration agreements, in securing agreements for the co-development of our proprietary drug candidates, or in receiving milestone and/or royalty payments under those agreements, that our existing cash and marketable securities resources will be adequate or that additional financing will be available when needed or that, if available, this financing will be obtained on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose, or may adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result.

Obligations and Commitments

The following table shows our contractual obligations and commitments as of March 31, 2006.

	Payments due by period
	(in thousands)
	Less than 1 year		1-3 years		4-5 years		After 5 years		Total
Operating lease obligations	$	5,049	$	5,971	$	1,637	$	6,727	$	19,384
Purchase obligations	4,881		665		113		—		5,659
Debt obligations (including interest)	807		1,613		14,449		—		16,869
Total obligations	$	10,737	$	8,249	$	16,199	$	6,727	$	41,912

We are obligated under noncancelable operating leases for our facilities and certain equipment. The original lease terms for our facilities range from seven to eight years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area and other operating costs. Equipment leases generally range from three to five years.

Due to the high cost to replace and the limited availability of laboratory facilities, we concluded that the exercise of a portion of our lease term options for at least 15 years was reasonably assured. During the last quarter of fiscal 2005, we reassessed our facility requirements and began to consider the possibility of consolidating operations in one of our existing locations, or a new location. During the first nine months of fiscal 2006, we entered into agreements to extend and expand our existing facility in Longmont, Colorado. Therefore, at that time, it was no longer reasonably assured that we would remain in our Boulder, Colorado location beyond the initial lease term, which ends in March 2008. We continue to be reasonably assured that we will exercise certain of our lease extensions and lease our current Longmont, Colorado facility for at least another 13 years. Therefore, we have included in our operating lease obligations reflected in the table above the cash to be paid for our facility leases for the remaining reasonably assured lease terms of two years for our Boulder facility and 13 years for our Longmont facility. The portion of operating lease obligations that is related to optional extension periods for our Longmont facility is $4.8 million and is included within the “after 5 years” column above. We continually evaluate the assumptions used in estimating our operating lease obligations, including assumptions regarding our facilities lease terms. Changes to our assumptions could materially impact these estimates.

Critical Accounting Policies

We believe critical accounting policies are essential to the understanding of our results of operations and require our management to make significant judgments in preparing the financial statements included in this report. Management has made estimates and assumptions based on these policies. We do not believe that materially different amounts would be reported if different assumptions were used. However, the application of these policies involves judgments and assumptions as to future events and, as a result, actual results could differ. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Revenue Recognition

We believe our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. We follow the guidance of Staff Accounting Bulletin No. 104, which requires that a series of criteria be met in order to recognize revenue related to the performance of services or the shipment of products. If these criteria are not met, the associated revenue is deferred until the criteria are met. We recognize revenue 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) collectibility is assured.

Most of our revenue is derived from designing, creating, optimizing, evaluating and developing drug candidates for our collaborators. The majority of our collaboration revenue consists of fees received based on contracted annual rates for full time equivalent employees working on a project. Our collaboration agreements also include license and up-front fees, milestone payments upon achievement of specified research or development goals and royalties on sales of resulting products. A small portion of our revenue comes from fixed fee agreements and from sales of compounds on a per-compound basis.

Our collaboration agreements typically call for a specific level of resources as measured by the number of full time equivalent scientists working a defined number of hours per year at a stated price under the agreement. We recognize revenue under our collaboration agreements on a monthly basis for fees paid to us based on hours worked. We recognize revenue from sales of Lead Generation Library and Optimer building block compounds as the compounds are shipped, as these agreements are priced on a per-compound basis and title and risk of loss passes upon shipment to our customers.

Revenue from license fees and up-front fees is non-refundable and is recognized on a straight-line basis over the expected period of the related research program. Milestone payments are non-refundable and are recognized as revenue over the expected period of the related research program. A portion of any milestone payment is recognized at the date the milestone is achieved which is determined using the applicable percentage of the research term that has elapsed at the date the milestone is achieved. 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 of early termination of programs.

Share-Based Compensation

During the first quarter of fiscal 2006, we adopted the fair value method of accounting for share-based awards using the modified-prospective method of transition as outlined in Financial Accounting Standards Board Statement No. 123R, Share-Based Payment (“SFAS 123R”). Under SFAS 123R, the estimated fair value of share-based-compensation, including stock options granted under the Option Plan and purchases of common stock by employees at a discount to market price under the ESPP, is recognized as compensation expense. The estimated fair value of stock options is expensed on a straight-line basis over the expected term of the grant. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount. Prior to July 1, 2005, we accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized with respect to purchases of common stock under the ESPP or when stock options were granted with exercise prices equal to or greater than market value on the date of grant.

Under the modified prospective method of transition that we adopted, compensation expense is recognized beginning with the effective date of adoption for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption. Under the modified prospective method of transition, we are not required to restate our prior period financial statements to reflect expensing of share-based compensation under SFAS 123R. Therefore, the results for the three and nine month periods ended March 31, 2006 are not comparable to the same periods in the prior year.

Under SFAS 123R, we use the Black-Scholes option pricing model to estimate the fair value of the share-based awards as of the grant date. The Black-Scholes model, by its design, is highly complex, and dependent upon key data inputs estimated by management. The primary data inputs with the greatest degree of judgment are the

estimated lives of the share-based awards and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two data inputs. Beginning in fiscal year 2006, we calculated the estimated life of stock options granted using a “simplified” method, which is based on the average of the vesting term and the term of the option, as a result of guidance from the SEC as contained in Staff Accounting Bulletin No. 107 permitting the initial use of this method. Previously, we calculated the estimated life based on the expectation that options would be exercised on average five years after the date of grant. We determined expected volatility for fiscal year 2006 using the historical method, which is based on the daily historical trading data of our common stock from November 2000, the date of our initial public offering, through the last day of the applicable period. For fiscal year 2005, we determined expected volatility using the same method as fiscal year 2006, using the period from November 2001 though the last day of the applicable period. Management selected the historical method primarily because we have not identified a more reliable or appropriate method to predict future volatility. See Note 1, Accounting for Share-Based Compensation, to our financial statements for more information about the adoption of SFAS 123R.

Recent Accounting Pronouncements

For a summary description of recent accounting pronouncements, see Note 8 to the Unaudited Notes to Condensed Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since a significant portion of our investments are and will be in short term marketable securities. Due to the nature and short term maturities of our short term investments, we have concluded that there is no material market risk exposure. Based on outstanding investment balances at March 31, 2006, a change of 100 basis points in interest rates would result in a change in our annual interest income of approximately $737,000.

We are also impacted by adverse changes in interest rates relating to variable-rate borrowings under our credit facility. We pay interest on advances under our loan agreement at one of three variable rates, which are adjusted periodically for changes in the underlying prevailing rate. Changes in prevailing interest rates will not affect the fair value of our debt, but would impact future results of operations and cash flows. At March 31, 2006, we had $13.4 million of long term debt outstanding and the interest rate on our term loan and equipment advances was 6.0%. This rate is adjusted based on changes in the bank’s prime lending rate. Assuming constant debt levels, a change of 100 basis points in our interest rate would result in a change in our annual interest expense of approximately $134,000.

Foreign currency rate fluctuations. All of our collaboration agreements and purchase orders are denominated in United States dollars. Therefore, we are not exposed to direct changes in foreign currency exchange rates.

Inflation. We do not believe that inflation has had a material impact on our business or operating results during the periods presented.

Item 4. Controls and Procedures

In connection with the closing of the general ledger and the preparation of our Form 10-Q for the quarter ended September 30, 2005, errors were identified in the adoption of Financial Accounting Standards Board Statement No. 123R, Share-Based Payment (“SFAS 123R”) and in the calculation of compensation expense under the provisions of SFAS 123R. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. Management and the Audit Committee concluded that ineffective controls relating to the adoption of this new accounting pronouncement, the entry of transactional data and the application of certain assumptions used in the calculation of estimated fair value of share-based compensation under SFAS 123R could result in a material misstatement in Array’s annual or interim financial statements that would not be prevented or detected. Consequently, management and the Audit Committee concluded that these control deficiencies constituted a material weakness. Management identified steps considered necessary to address these weaknesses, including additional training of finance personnel, additional review of transactional data,

additional oversight of the entry of data relating to transactions, a comprehensive third party review of the processes used to gather and enter transactional data and the application of such data to critical accounting practices, and certain upgrades to our option tracking software. Management believes that the compensating internal controls and remediation efforts, taken as a whole, reduces the risk of error with respect to our preparation of this quarterly report on Form 10-Q for the period ended March 31, 2006. We began implementing the above improvements during the second quarter of fiscal 2006 and will continue to test these controls through the remainder of the fiscal year. Management believes that its controls and procedures will continue to improve as a result of further implementation of these measures and the material weakness described above will be remediated by our fiscal year-end.

Other than the above mentioned improvements to the controls for accounting for share-based compensation under SFAS 123R, there has been no change in our internal control for financial reporting that occurred during the quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We evaluated, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and other senior management personnel, the effectiveness of the design and operation of our disclosure controls and procedures. Because of the existing control deficiencies described above and the insufficient number of available quarter-end periods needed to complete testing of the effectiveness of changes to our internal controls, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2006, Array’s disclosure controls and procedures were not effective to ensure that information required to be disclosed in our SEC filings is recorded, processed, summarized and reported on a timely basis.

PART II

Item 6. Exhibits

(a)		Exhibits

10.1		Addendum No. 7, dated February 3, 2006 and Addendum No. 8, dated March 1, 2006, to Lease Agreement by and between Registrant, as Tenant, and Circle Capital Longmont LLC, as Landlord.
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.

________________

Items 1 through 5 of Part II are not applicable and have been omitted.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boulder, State of Colorado.

		ARRAY BIOPHARMA INC.

Dated: May 1, 2006	By:	/s/ Robert E. Conway
		Robert E. Conway
		Chief Executive Officer

Dated: May 1, 2006	By:	/s/ R. Michael Carruthers
		R. Michael Carruthers
		Chief Financial Officer
		(Principal Financial and
		Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Array 10-Q2006 Q3 Quarterly report

Content analysis

For the quarterly period ended March 31, 2006

PART II - OTHER INFORMATION

SIGNATURES

25

Overview

Results of Operations

Liquidity and Capital Resources

Obligations and Commitments

Critical Accounting Policies

Item 4. Controls and Procedures

PART II

Item 6. Exhibits

Items 1 through 5 of Part II are not applicable and have been omitted.

SIGNATURES