ARRAY BIOPHARMA INC, S-1/A, 2000-11-16

ARRAY BIOPHARMA INC
S-1/A, 2000-11-16
MEDICAL LABORATORIES

Previous: STRATEGIC PARTNERS INC, SB-2, EX-27, 2000-11-16

Next: ARRAY BIOPHARMA INC, S-1/A, EX-1.1, 2000-11-16

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 2000

REGISTRATION NO. 333-45922
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
ARRAY BIOPHARMA INC.

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 54171 84-1460811
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

---------------------
1885 33RD STREET
BOULDER, CO 80301
(303) 381-6600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------------
ROBERT E. CONWAY, CHIEF EXECUTIVE OFFICER
ARRAY BIOPHARMA INC.
1885 33RD STREET
BOULDER, CO 80301
(303) 381-6600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to

<TABLE>
<S> <C>
ALAN L. DYE CHARLES K. RUCK
CHRISTOPHER D. OZEROFF R. SCOTT SHEAN
HOGAN & HARTSON L.L.P. LATHAM & WATKINS
1800 BROADWAY, SUITE 200 650 TOWN CENTER DRIVE, 20TH FLOOR
BOULDER, CO 80302 COSTA MESA, CA 92626
(720) 406-5300 (714) 540-1235
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value............. $62,100,000 $16,395
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.

(2) Registration fee was previously paid.
---------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY.

Subject to completion, dated November 16, 2000

PROSPECTUS

6,000,000 Shares

[Array BioPharma Logo]

Common Stock

--------------------------------------------------------------------------------

This is our initial public offering of shares of common stock. We are offering
6,000,000 shares.

We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "ARRY." We expect the public offering price to
be between $8.00 and $9.00 per share.

INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7.

<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Array BioPharma Inc. ........................... $ $
</TABLE>

We have granted the underwriters a 30-day option to purchase up to 800,000
additional shares of common stock, and two of our stockholders have granted the
underwriters a 30-day option to purchase up to 100,000 additional shares of
their common stock, on the same terms and conditions as set forth above, solely
to cover over-allotments, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 2000.

--------------------------------------------------------------------------------

LEHMAN BROTHERS DEUTSCHE BANC ALEX. BROWN

LEGG MASON WOOD WALKER
INCORPORATED

, 2000
<PAGE> 3

[Inside front cover graphic depicts Array's logo and the statement "We
Accelerate Drug Discovery Through Innovations in Chemistry."]

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements and Industry Data........ 15
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 29
Management............................ 49
Related Party Transactions............ 59
Principal and Selling Stockholders.... 61
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 73
Experts............................... 73
Where You Can Find More Information... 73
About this Prospectus................. 73
Index To Financial Statements......... F-1
</TABLE>

Until , 2000 (25 days after commencement of this offering), all
dealers selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.

i
<PAGE> 5

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and the financial statements and notes to those statements appearing
elsewhere in this prospectus.

ARRAY BIOPHARMA

Array BioPharma is a discovery research company creating drug candidates
through innovations in chemistry. Our experienced scientists provide premium
products and services to create, evaluate and optimize potential drug candidates
in collaboration with pharmaceutical and biotechnology companies. We believe our
information-based approach improves the efficiency of the drug discovery process
and increases the quality of potential drug candidates. In addition, we apply
these capabilities internally for our own drug discovery programs.

The drug industry is experiencing revolutionary change fueled by genomics,
which is the study of all genes, and by the tremendous progress in the
biological understanding of disease. Historically, a key bottleneck in the
development of new drugs has been the identification by biologists of the
proteins that may cause disease. However, recent advances in genomics and
biology have resulted in the identification of thousands of new disease-related
proteins. As a result, we believe the drug research and development bottleneck
is shifting to the discovery by chemists of safe and effective new drugs to
treat the diseases caused by these proteins.

Chemists create drugs known as small molecule drugs used to treat these
disease-related proteins. We estimate that 90% of the revenue in 1999 generated
by the 200 top selling drugs worldwide was attributable to small molecule drugs
created through the application of chemistry. Small changes in chemistry design
can differentiate the ability of drugs to effectively treat disease and
therefore determine their potential success or failure in the marketplace.

Despite recent advances in technology, the process of discovering new drugs
remains slow, expensive and risky. To address these inefficiencies, it is
critical to apply high quality chemistry and predictive information technology
early in the discovery process to identify and eliminate inferior drug
candidates and to design safe and effective new drugs.

We provide a broad range of premium drug discovery products and services to
bridge the gap between the discovery of disease-related proteins and the testing
of drug candidates in animals and humans, including:

- The starting materials, which we call our Optimer building blocks, used
to create the chemical compounds that may become potential drug
candidates;

- The creation and sale of collections of chemical compounds, which we call
our Diversity Library, that have the potential to become drug candidates
through further refinement;

- The optimization of potential drug candidates to maximize their
effectiveness in treating disease; and

- The design and refinement of the manufacturing process required to
produce large quantities of drug candidates for testing in animals and
humans.

We believe our information-driven technology platform enables our
scientists to make better decisions throughout the drug discovery process and
thereby create higher quality drugs more quickly and less expensively. Our
technology platform includes:

- Proprietary software and predictive databases that facilitate drug
discovery;

- Proprietary technologies that enable our scientists to perform high-speed
chemical synthesis;

- Analytical and computational technologies to determine and predict the
three-dimensional structure of disease-related proteins and drug
candidates; and

1
<PAGE> 6

- Technology to test and rapidly screen those compounds with the greatest
potential to effectively treat a particular disease.

Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products, services and
technologies. Key elements of our strategy are to:

- Provide an integrated chemistry solution to drug discovery and become the
partner of choice for pharmaceutical and biotechnology companies;

- Combine state-of-the-art technology with innovative chemistry to
accelerate drug discovery;

- Create our own drug candidates for partnering with pharmaceutical and
biotechnology companies;

- Increase our scientific resources by continuing to attract world-class
scientists; and

- Expand our capabilities through acquisitions and internal development.

Our achievements to date include:

- Creating our own potential drug candidates and entering into a research
and license agreement with Amgen Inc. providing for the development and
possible commercialization of one of these potential drug candidates;

- Entering into collaboration agreements with pharmaceutical companies such
as Eli Lilly and Company and Merck & Co., Inc.;

- Entering into collaboration agreements with biotechnology companies such
as Celltech Chiroscience Ltd., through its subsidiary Darwin Discovery
Limited, ICOS Corporation and Tularik Inc.;

- Discovering a drug candidate suitable for human testing with our first
collaboration partner, ICOS;

- Creating a technology platform to identify new drug candidates from
genomic information; and

- Growing our staff since our inception in 1998 to 124 full-time employees
as of October 31, 2000, including 92 scientists, of whom 87 are chemists,
54 have Ph.D.'s and 47 have large pharmaceutical company experience.

We intend to grow revenue and achieve profitability through fee-for-service
revenue and product sales while sharing in the success we aim to create for our
collaborators. To maximize the value we capture, we intend to allocate our
scientific resources to:

- Build upon our foundation of fee-for-service business with leading
pharmaceutical and biotechnology companies;

- Leverage our drug discovery products and services through sales to
multiple customers;

- Initiate additional collaborations with leading pharmaceutical and
biotechnology companies that include fee-for-service revenue plus
milestone and/or royalty payments; and

- Generate our own potential drug candidates for partnering with
pharmaceutical and biotechnology companies under terms that include
licensing fees, fee-for-service revenue and milestone and/or royalty
payments.

We have assembled a scientific team with experience in both the
pharmaceutical and biotechnology industries. At our inception, we had the
distinct advantage of recruiting 20 former Amgen scientists, who had previously
been recruited from large pharmaceutical companies. This nucleus afforded us a
critical mass of experienced chemists, which we believe has been a competitive
advantage in recruiting additional scientists.

We have a limited operating history and may not be successful in executing
our business strategy due to a number of risks, as described in "Risk Factors."
Since our inception in 1998, we have incurred operating
2
<PAGE> 7

and net losses and negative cash flows. As of September 30, 2000, we had an
accumulated deficit of $12.6 million and had net losses of $4.3 million and $5.1
million for the fiscal years ended June 30, 1999 and 2000, respectively, and
$3.1 million for the three-month period ended September 30, 2000. In addition,
the drug research and development industry is highly competitive. Our
competitors include pharmaceutical and biotechnology companies, chemistry
outsourcing companies and others, many of which have greater resources.

We incorporated in Delaware in February 1998 under the name Array BioPharma
Inc. Our principal executive offices are located at 1885 33rd Street, Boulder,
Colorado 80301, and our telephone number is 303-381-6600. You can visit us on
the World Wide Web at www.arraybiopharma.com. Information contained on our Web
site does not constitute any part of this prospectus.

"Array BioPharma," the Array BioPharma logo, "Array BioPharma The Discovery
Research Company," "The Discovery Research Company," "Optimer" and "Radical" are
trademarks of Array BioPharma Inc. Other trademarks and trade names appearing in
this prospectus are the property of their holders.

3
<PAGE> 8

THE OFFERING

Common stock offered
by us.................... 6,000,000 shares

Common stock to be
outstanding after the
offering................. 21,466,922 shares

Use of proceeds............ We currently intend to use the net proceeds of this
offering to fund our operations, including
continued development and manufacturing of existing
products as well as research and development of
additional products and services, hire additional
personnel and expand our facilities. We may also
use a portion of the proceeds to acquire or invest
in new products or technologies, pay down
indebtedness or acquire complementary businesses.
As of October 31, 2000, we had approximately $5.9
million of outstanding indebtedness. We intend to
use the balance of the net proceeds for general
corporate purposes, including working capital
requirements. See the section entitled "Use of
Proceeds" for more information.

Proposed Nasdaq National
Market symbol............ ARRY

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of October 31, 2000. This number
excludes:

- 3,266,016 shares of common stock underlying options outstanding as of
October 31, 2000, at a weighted-average exercise price of $0.64 per
share, of which 301,504 were exercisable;

- 110,750 shares of common stock, assuming the automatic conversion of our
preferred stock, underlying warrants to purchase preferred stock
outstanding as of October 31, 2000, at a weighted-average exercise price
of $3.15 per share;

- 2,682,094 shares of common stock that will be available for issuance
under our stock option plan following this offering; and

- 800,000 shares of common stock that will be available for purchase under
our employee stock purchase plan following this offering.

ASSUMPTIONS IN THIS PROSPECTUS

Unless we indicate otherwise, all information in this prospectus assumes:

- the automatic conversion of our Series A preferred stock, Series B
preferred stock and Series C preferred stock, on a one-to-one basis, into
11,501,666 shares of our common stock upon the closing of this offering;

- the filing of our amended and restated certificate of incorporation that
provides for, among other things, an increase in the number of our
authorized shares of common stock from 20,225,000 to 60,000,000 to be
effected concurrently with this offering;

- no exercise by the underwriters of their over-allotment option to
purchase up to 800,000 additional shares of common stock from us and up
to 100,000 shares of common stock from two of our stockholders; and

- no exercise by any of our security holders of any outstanding options or
warrants prior to the closing of this offering.

4
<PAGE> 9

SUMMARY FINANCIAL DATA

The following tables summarize our financial data, which we derived from
our historical financial statements and related notes for the following periods:

- our statements of operations data from February 6, 1998 (inception) to
June 30, 1998, for the twelve-month periods ended June 30, 1999 and 2000,
and for the three-month periods ended September 30, 1999 and 2000; and

- our balance sheet data at June 30, 1999 and 2000, and at September 30,
2000.

The pro forma net loss per share data gives effect to the automatic
conversion of all of our outstanding preferred stock upon the closing of this
offering. The pro forma as adjusted balance sheet data at September 30, 2000
reflects the conversion of all of our outstanding preferred stock into common
stock upon the closing of this offering and our receipt of the estimated net
proceeds from the sale of 6,000,000 shares of our common stock in this offering
at an assumed initial public offering price of $8.50 per share, after deducting
the estimated underwriting discount and offering expenses. The cost of revenue,
research and development expenses, and selling, general and administrative
expenses data below includes compensation related to stock option grants.

You should read the summary financial data for the periods indicated
together with our audited financial statements and related notes and other
financial information, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all of which we have included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 6,
1998 THREE MONTHS ENDED
(INCEPTION) TO YEARS ENDED JUNE 30, SEPTEMBER 30,
JUNE 30, ---------------------- ----------------------
1998 1999 2000 1999 2000
-------------- --------- ---------- --------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Collaboration service revenue...... $ -- $ 992 $ 4,629 $ 730 $ 2,110
Product revenue.................... -- 512 2,145 620 651
------- --------- ---------- --------- ----------
Total revenue...................... -- 1,504 6,774 1,350 2,761
Cost of revenue*................... -- 1,033 4,445 817 2,408
------- --------- ---------- --------- ----------
Gross profit....................... -- 471 2,329 533 353
Research and development
expenses*........................ -- 3,301 3,963 696 1,702
Selling, general and administrative
expenses*........................ 62 1,522 3,470 439 1,694
------- --------- ---------- --------- ----------
Total operating expenses........... 62 4,823 7,433 1,135 3,396
------- --------- ---------- --------- ----------
Loss from operations............... (62) (4,352) (5,104) (602) (3,043)
Interest expense................... -- (136) (384) (84) (173)
Interest income.................... 13 181 356 25 130
------- --------- ---------- --------- ----------
Net loss........................... (49) (4,307) (5,132) (661) (3,086)
Deemed dividend related to
beneficial conversion feature of
preferred stock.................. -- -- -- -- (5,000)
------- --------- ---------- --------- ----------
Net loss applicable to common
stockholders..................... $ (49) $ (4,307) $ (5,132) $ (661) $ (8,086)
======= ========= ========== ========= ==========
Basic and diluted net loss per
share applicable to common
stockholders..................... $ (0.06) $ (1.48) $ (1.68) $ (0.22) $ (2.17)
======= ========= ========== ========= ==========
Shares used in computing basic and
diluted net loss per share....... 863,964 2,918,367 3,063,439 2,968,575 3,718,550
======= ========= ========== ========= ==========
</TABLE>

5
<PAGE> 10

* Includes compensation related to stock option grants:
Cost of revenue.................. $ 43 $ 210
Research and development
expenses...................... 35 140
Selling, general and
administrative expenses....... 1,040 357
---------- ----------
Total.................... $ 1,118 $ 707
========== ==========
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
AS OF JUNE 30, -------------------------
---------------- PRO FORMA
1999 2000 ACTUAL AS ADJUSTED
------ ------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets.................................. $4,005 $ 8,548 $14,180 $60,710
Property, plant and equipment, net.................... 2,872 6,911 10,236 10,236
Total assets.......................................... 7,125 15,823 24,787 71,317
Total current liabilities............................. 2,744 6,338 6,634 6,634
Long-term debt, less current portion.................. 1,824 2,833 3,620 3,620
Total stockholders' equity............................ 2,557 6,652 14,533 61,063
</TABLE>

6
<PAGE> 11

RISK FACTORS

Any investment in shares of our common stock is risky. You should carefully
consider the following risks below before making a decision to buy our common
stock. Additional risks and uncertainties not presently known to us, or that we
currently consider immaterial also could harm our business. If any of the
following risks actually occurs, our business could be harmed. In that case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.

RISKS RELATED TO OUR BUSINESS

WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.

We are at an early stage of executing our business plan, and we have a
limited history of offering our drug discovery products and services. We have
incurred operating and net losses and negative cash flows from operations since
our inception. As of September 30, 2000, we had an accumulated deficit of $12.6
million. We had net losses of $4.3 million and $5.1 million for the fiscal years
ended June 30, 1999 and 2000, respectively, and $3.1 million for the three-month
period ended September 30, 2000. We may continue to incur operating and net
losses and negative cash flows from operations, due in part to anticipated
increases in expenses for research and product development, acquisitions of
complementary businesses and technologies and expansion of our personnel and our
business development capabilities. We may not be able to achieve or maintain
profitability. Moreover, if we do achieve profitability, the level of any
profitability cannot be predicted and may vary significantly from quarter to
quarter.

OUR BUSINESS IS DEPENDENT UPON THE EXTENT TO WHICH THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES USE THIRD-PARTY ASSISTANCE WITH ONE OR MORE ASPECTS OF
THEIR DRUG DISCOVERY PROCESS.

We are highly dependent on the outsourcing of drug discovery activities by
the pharmaceutical and biotechnology industries and on their willingness to
spend significant funds on research and development. Our products and services
include aspects of the drug discovery process that pharmaceutical and
biotechnology companies have traditionally performed internally. The willingness
of these companies to expand or continue their outsourcing of drug discovery
activities and their research and development expenditures is based on several
factors, such as their ability to hire and retain qualified chemists, the
resources available for purchasing drug discovery services, the spending
priorities among various types of research activities and their policies
regarding expenditures during recessionary periods. Any decrease in the trend to
outsource drug discovery services or in drug research and development
expenditures by pharmaceutical and biotechnology companies could cause our
revenue to decline. In addition, our ability to convince these companies to use
our drug discovery products and services, rather than develop them internally,
will depend on many factors, including our ability to:

- develop drug discovery technologies that will result in the
identification of higher quality drug candidates;

- perform contracted services in a timely fashion, with acceptable quality
and at an acceptable cost; and

- design, create and manufacture sufficient quantities of our chemical
compounds for our customers and collaborators.

The importance of these factors varies from company to company and,
although we believe we are currently meeting them for our customers, we may be
unable to meet all or any of them for some of our customers, and even if we are
able to meet them, these companies may still decide to perform these activities
internally.

WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE EXPERIENCED SCIENTISTS AND
MANAGEMENT WE NEED TO COMPETE IN THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY.

We are a small company with 124 full-time employees as of October 31, 2000,
and our future success depends on our ability to attract, retain and motivate
highly skilled scientists and management, including business development
personnel. Our ability to maintain, expand or renew existing engagements with
our customers, enter into new engagements, and provide additional services to
our existing customers depends on

7
<PAGE> 12

our ability to hire and retain scientists with the skills necessary to keep pace
with continuing changes in drug discovery technologies. Competition for
experienced scientists is intense. We compete with pharmaceutical and
biotechnology companies, including our customers and collaborators, medicinal
chemistry outsourcing companies, contract research companies, and academic and
research institutions to recruit scientists. Our inability to hire additional
qualified personnel may also require an increase in the workload for both
existing and new personnel. We may not be successful in attracting new
scientists or management or in retaining or motivating our existing personnel.
The shortage of experienced scientists, and other factors, may lead to increased
recruiting, relocation and compensation costs for such scientists, which may
exceed our expectations. These increased costs may reduce our profit margins or
make hiring new scientists impracticable.

Our future success also depends on the personal efforts and abilities of
the principal members of our senior management and scientific staff to provide
strategic direction, manage our operations and maintain a cohesive and stable
environment. In particular, we rely on the services of Robert E. Conway, our
Chief Executive Officer; Dr. Kevin Koch, our President and Chief Science
Officer; Dr. David L. Snitman, our Chief Operating Officer and Vice President,
Business Development; Dr. Anthony D. Piscopio, our Vice President, Chemistry and
Director of Process Chemistry; Michael Carruthers, our Chief Financial Officer;
Dr. John A. Josey, our Senior Director of High-Speed Synthesis; Dr. Laurence
Burgess, our Senior Director of Medicinal Chemistry and Lead Optimization and
Dr. Joanna K. Money, our Director of Business Development. Although we have
employment agreements with each of the above personnel, we do not have
employment agreements with all of our key personnel, and the employment
agreements we do have allow the employees to terminate them upon 30 days' prior
notice. If we cannot attract and retain scientists and management, we will not
be able to continue to provide or expand our drug discovery service offerings.

BECAUSE WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
REVENUE, IF WE LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS, OUR REVENUE MAY
SIGNIFICANTLY DECREASE AND OUR RESULTS OF OPERATIONS MAY BE HARMED.

A relatively small number of customers account for a significant portion of
our revenue. During the three months ended September 30, 2000, revenue from ICOS
Corporation and Eli Lilly and Company represented approximately 36% and 26% of
our total revenue, respectively. Our contract with ICOS Corporation terminates
in July 2002, and our contract with Eli Lilly and Company terminates in March
2005, or earlier upon payment of a termination fee. During the fiscal year ended
June 30, 2000, revenue from ICOS Corporation, Celltech Chiroscience, through its
subsidiary, Darwin Discovery Limited, and Merck & Co., Inc. represented
approximately 48%, 11% and 10% of our total revenue, respectively. Our contract
with Darwin Discovery Limited expires in April 2001 and our contracts with Merck
& Co., Inc. expire in December 2003 and May 2004. We expect that revenue from a
limited number of customers will account for a large portion of our revenue in
future quarters. In general, our customers may terminate their contracts with us
upon 30 to 90 days' notice for a number of reasons or, in some cases, for no
reason. In addition, some of our major customers can determine the amount of
products delivered and services performed under these contracts. As a result, if
any one of our major customers cancels, declines to renew or reduces the scope
of its contract with us, our revenue may decrease.

WE MAY NOT SUCCESSFULLY ENTER INTO ADDITIONAL COLLABORATIONS THAT ALLOW US TO
PARTICIPATE IN THE FUTURE SUCCESS OF OUR PROPRIETARY DRUG CANDIDATES THROUGH
MILESTONE AND/OR ROYALTY PAYMENTS, AND WE MAY NEVER RECEIVE ANY MILESTONE AND/OR
ROYALTY PAYMENTS UNDER OUR CURRENT OR ANY FUTURE COLLABORATIONS.

One of our business strategies is to create our own proprietary drug
candidates and to then enter into collaborations for the development of these
drug candidates that will allow us to earn milestone and/or royalty payments. To
date, we have entered into one such collaboration agreement that provides for
milestone payments but have not yet begun providing services under this
agreement. Our proprietary drug discovery program is in its early stage
development and is unproven. Although we have expended, and continue to expend,
time and money on internal research and development programs, we may be
unsuccessful in creating valuable proprietary drug candidates that would enable
us to form additional collaborations and receive

8
<PAGE> 13

milestone and/or royalty payments. Only two of our current agreements provide
for milestone payments, one provides for licensing fees and none provides for
royalty payments.

Even if we are able to negotiate additional collaborations, the use of our
services or technologies may not result in the discovery of potential drug
candidates that will be safe or effective and we may never receive any milestone
or royalty payments. Our receipt of any future milestone or royalty payments
under our current or any future collaborations depends on many factors,
including whether our collaborators want to continue to pursue a potential drug
candidate and the ultimate commercial success of the drug. Development and
commercialization of potential drug candidates depend not only on the
achievement of research objectives by us and our collaborators, but also on each
collaborator's financial, competitive, marketing and strategic considerations
and regulation in the United States and other countries. Pharmaceutical products
our collaborators develop will require lengthy and costly testing in animals and
humans and regulatory approval by governmental agencies prior to
commercialization. These agencies may not approve the products for
commercialization despite the substantial time and resources required to obtain
approvals and comply with appropriate statutes and regulations. If unforeseen
complications arise in the development or commercialization of the potential
drug candidates by our collaborators, we may not realize milestone or royalty
payments as expected. We have not received any milestone or royalty payments
since our inception.

WE MAY FAIL TO EXPAND CUSTOMER RELATIONSHIPS THROUGH INTEGRATION OF PRODUCTS AND
SERVICES.

One of our business strategies is to expand our existing customer
relationships across the full spectrum of our drug discovery capabilities. The
number of large pharmaceutical and biotechnology companies that could
potentially use our products and services is limited. As a result, we must
expand our existing customer relationships in order to maximize our potential
revenue. However, we may not be able to expand these existing relationships. We
currently provide our products and services to 120 companies, and only 13 of
them have chosen to purchase additional products and services from us to date.

WE MAY NOT BE ABLE TO ACCELERATE THE DRUG DISCOVERY PROCESS.

One of our business strategies is to accelerate the drug discovery process
by identifying potential drug candidates. We have never identified a drug
candidate that has been developed into a commercial drug. It is uncertain
whether we will be able to make the drug discovery process more efficient or
make higher quality drug candidates. Our ability to accelerate the drug
discovery process depends on many factors, including the performance and
decision-making capabilities of our scientists. Although we have created an
information-driven technology platform which we believe enables our scientists
to make better decisions, our scientists may not make correct decisions or
develop viable drug candidates.

OUR SUCCESS WILL DEPEND ON OUR ABILITY TO GROW AND TO MANAGE OUR GROWTH.

We began operations in 1998 and are at an early stage of our development.
We have experienced and expect to continue to experience growth in the number of
our employees and the scope of our operating and financial systems. For example,
we have sold our services and products primarily through the efforts of our
senior management and scientists and through customer referrals. One of our
business strategies is to attract and retain additional business development
personnel and to expand our business development activities. Growth in our
operations has placed and is expected to place a significant strain on our
operational, human and financial resources. Our ability to compete effectively
will depend, in large part, on our ability to hire, train and assimilate
additional management and professional, scientific and technical personnel, and
our ability to expand, improve and effectively use our operating, management,
business development and financial systems to accommodate our expanded
operations. The physical expansion of our facilities to accommodate future
growth may lead to significant costs and may divert management and business
development resources. If we fail to effectively anticipate, implement or manage
the changes required to sustain our growth, we may not be able to compete
successfully.

9
<PAGE> 14

WE MAY NOT BE ABLE TO MEET THE DELIVERY AND PERFORMANCE REQUIREMENTS SET FORTH
IN OUR CUSTOMER CONTRACTS.

In order to maintain our current customer relationships and to meet the
performance and delivery requirements in our customer contracts, we must be able
to provide products and services at appropriate levels and with acceptable
quality and at an acceptable cost. Our ability to deliver the products and
provide the services we offer to our customers is limited by many factors,
including the difficulty of the chemistry associated with our products and
services, the lack of predictability in the scientific process and the shortage
of qualified scientific personnel. In particular, a large portion of our revenue
depends on producing collections of chemical compounds, and our current
commitments to provide these compounds to our customers exceeds the current rate
at which we are producing them. Some of our customers can influence when we
deliver products and perform services under their contracts, which could
increase our current contractual commitments to provide chemical compounds even
further. Unless we are able to increase our current rate of compound synthesis,
we will fail to meet our existing contractual commitments, which may result in
delayed or lost revenue, loss of customers or failure to expand our existing
relationships.

OUR QUARTERLY OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY.

Sales of our drug research and development products and services, including
our Diversity Library, can typically involve significant technical evaluation
and/or commitment of capital by our customers. Accordingly, the sales cycles
associated with these products and services are lengthy and subject to a number
of significant risks, including customers' budgetary constraints and internal
acceptance reviews. In addition, some of our customers can influence when we
deliver products and perform services under their contracts with us. Due to
these lengthy and unpredictable sales cycles and the ability of our customers to
influence our delivery of products and performance of services, our operating
results could fluctuate significantly from quarter to quarter. In addition, we
expect to continue to experience significant fluctuations in quarterly operating
results due to factors such as general and industry specific economic conditions
that may affect the research and development expenditures of pharmaceutical and
biotechnology companies.

Due to the possibility of fluctuations in our revenue and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price could decline.

OUR DEVELOPMENT, TESTING AND MANUFACTURE OF POTENTIAL DRUG CANDIDATES MAY EXPOSE
US TO POTENTIAL LIABILITY AND LOSSES FROM PRODUCT LIABILITY LAWSUITS.

We develop, test and manufacture the precursors to pharmaceutical products
intended generally for use in humans. Our drug discovery activities that result
in the future manufacture and sale of drugs by our collaborators expose us to
the risk of liability for personal injury or death to persons using these drugs.
We may be required to pay substantial damages or incur defense costs in
connection with any of these product liability claims, or we may lose revenue
from expected royalty or milestone payments if the commercialization of a drug
is limited or ceases as a result of such claims. We have product liability
insurance that contains customary exclusions and provides coverage up to $2.0
million per occurrence and in the aggregate, which we believe is customary in
our industry. However, our product liability insurance does not cover every type
of product liability claim that we may face or loss we may incur, and may not
adequately compensate us for the entire amount of covered claims or losses or
for the harm to our business reputation. We may be unable to acquire or maintain
additional or maintain our current insurance at acceptable costs or at all.

IF OUR USE OF CHEMICAL AND HAZARDOUS MATERIALS VIOLATES APPLICABLE LAWS OR
REGULATIONS OR CAUSES PERSONAL INJURY, WE MAY BE LIABLE FOR DAMAGES.

Our drug discovery activities, including the analysis and synthesis of
chemical compounds, involve the controlled use of chemicals, including
flammable, combustible, toxic and radioactive materials, that are potentially
hazardous if misused. Our use, storage, handling and disposal of these materials
is subject to

10
<PAGE> 15

federal, state and local laws and regulations, including the Resource
Conservation and Recovery Act, the Occupational Safety and Health Act and local
fire codes, and regulations promulgated by the Department of Transportation, the
Drug Enforcement Agency, the Department of Energy, the Colorado Department of
Public Health and Environment and the Colorado Department of Human Services,
Alcohol and Drug Abuse Division. We may incur significant costs to comply with
these laws and regulations in the future. In addition, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be liable for any damages that
result, and any such liability could exceed our resources and disrupt our
business.

OUR OPERATIONS COULD BE INTERRUPTED BY DAMAGE TO OUR SPECIALIZED LABORATORY
FACILITIES.

Our operations are dependent upon the continued use of our highly
specialized laboratories and equipment in Boulder, Colorado and Longmont,
Colorado. Catastrophic events, such as fires or explosions, caused by our
chemical synthesis and other drug discovery activities could damage our
laboratories, equipment or inventories of chemical compounds and may materially
interrupt our business. We employ safety precautions in our laboratory
activities in order to reduce the likelihood of the occurrence of these
catastrophic events, however, we cannot eliminate the chance that such an event
will occur altogether. The availability of laboratory space in these areas is
extremely limited, and rebuilding our facilities could be time consuming and
result in substantial delays in providing products and services to our
customers. We maintain business interruption insurance to cover lost revenue
caused by such occurrences. However, this insurance would not compensate us for
the loss of opportunity and potential harm to customer relations that our
inability to meet our customers' needs in a timely manner could create.

OUR CUSTOMERS MAY RESTRICT OUR USE OF SCIENTIFIC INFORMATION.

Our ability to improve the efficiency of the drug discovery services we
provide by, among other things, developing an effective database designed to
predict how chemical compounds interact with a targeted disease-related protein,
depends in part on our generation and use of information that is not proprietary
to our customers and that we derive from performing these services. However, our
customers may not allow us to use this information with other customers, such as
the general interaction between types of chemistries and types of drug targets
that we generate when performing drug discovery services for them. Without the
ability to use this information, we may not be able to develop a database, which
may limit our ability to improve the efficiency of the drug discovery services
we provide.

RISKS RELATED TO OPERATING IN OUR INDUSTRY

THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY IS HIGHLY COMPETITIVE, AND WE COMPETE
WITH SOME COMPANIES THAT OFFER A BROADER RANGE OF PRODUCTS AND SERVICES AND HAVE
BETTER ACCESS TO RESOURCES THAN WE DO.

The pharmaceutical and biotechnology industries are characterized by rapid
and continuous technological innovation. We compete with companies in the United
States and abroad that are engaged in the development and production of
chemistry discovery products and services. Our major competitors are medicinal
chemistry outsourcing companies, including Albany Molecular Research Inc.,
ArQule, Inc., Discovery Partners Inc., MediChem Life Sciences, Inc. and Oxford
Asymmetry International plc, and drug discovery companies, including
3-Dimensional Pharmaceuticals, Inc., BioCryst Pharmaceuticals, Inc., Texas
Biotechnology Corporation and Vertex Pharmaceuticals Incorporated. Some of our
competitors offer a broader range of products and services and have greater
access to financial, technical, scientific, business development, recruiting and
other resources than we do. Their access to greater resources may allow them to
develop processes or technologies, such as databases and molecular modeling
tools that predict how effectively compounds will treat a targeted disease, that
render our technologies obsolete or uneconomical. We anticipate that we will
face increased competition in the future as new companies enter the market and
advanced technologies become available.

11
<PAGE> 16

THE CONCENTRATION OF THE PHARMACEUTICAL INDUSTRY AND ANY FURTHER CONSOLIDATION
COULD REDUCE THE NUMBER OF OUR POTENTIAL CUSTOMERS.

We believe there are a limited number of large pharmaceutical companies and
these companies represent a significant portion of the market for our products
and services. The number of our potential customers could decline even further
through consolidation among or growth of these companies. If the number of our
potential customers declines even further, they may be able to negotiate price
discounts or other terms for our products and services that are unfavorable to
us.

THE INTELLECTUAL PROPERTY RIGHTS WE RELY ON TO PROTECT THE TECHNOLOGY UNDERLYING
OUR PRODUCTS AND TECHNIQUES MAY BE INADEQUATE TO PREVENT THIRD PARTIES FROM
USING OUR TECHNOLOGY OR DEVELOPING COMPETING PRODUCTS AND SERVICES OR TO PROTECT
OUR INTERESTS IN OUR PROPRIETARY DRUG CANDIDATES.

Our success will depend in part on our ability to protect patents or
maintain the secrecy of proprietary processes and other technologies we develop
for the testing and synthesis of chemical compounds in the drug discovery
process. In addition, one of our business strategies is to develop our own
proprietary drug candidates and enter into collaborations with pharmaceutical
and biotechnology companies for the development of these drug candidates. In
order to protect our rights to our proprietary drug candidates, we must obtain
and maintain the intellectual property rights to such drug candidates.

Although we have seven United States patent applications on file, including
three provisional applications, we have not received any patents. We have
engaged in limited patent prosecution in foreign countries. Any patents that we
may own or license in the future may not afford meaningful protection for our
technology and products. Our efforts to enforce and maintain our intellectual
property rights may not be successful and may result in substantial costs and
diversion of management time. In addition, others may challenge patents we may
obtain in the future and, as a result, these patents could be narrowed,
invalidated or rendered unenforceable or we may be forced to stop using the
technology covered by these patents or to license the technology from third
parties. In addition, current and future patent applications on which we depend
may not result in the issuance of patents in the United States or foreign
countries. Even if our rights are valid, enforceable and broad in scope,
competitors may develop products based on similar technology that is not covered
by our patents.

In addition to patent protection, we also rely on copyright and trademark
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of our trade secrets and proprietary information, we require our
employees, consultants and advisors to execute confidentiality and proprietary
information agreements. However, these agreements may not provide us with
adequate protection against improper use or disclosure of confidential
information and there may not be adequate remedies in the event of unauthorized
use or disclosure. Furthermore, like many companies in our industry, we may from
time to time hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities we conduct. In some
situations, our confidentiality and proprietary information agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Although we require our employees and consultants to maintain the
confidentiality of all confidential information of previous employers, we or
these individuals may be subject to allegations of trade secret misappropriation
or other similar claims as a result of their prior affiliations. Finally, others
may independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets. Our failure to
protect our proprietary information and techniques may inhibit or limit our
ability to exclude certain competitors from the market and execute our business
strategies.

THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY HAS A HISTORY OF PATENT AND OTHER
INTELLECTUAL PROPERTY LITIGATION, AND WE MAY BE INVOLVED IN COSTLY INTELLECTUAL
PROPERTY LAWSUITS.

The drug research and development industry has a history of patent and
other intellectual property litigation, and these lawsuits will likely continue.
Because we produce and provide many different products

12
<PAGE> 17

and services in this industry, we face potential patent infringement suits by
companies that control patents for similar products and services or other suits
alleging infringement of their intellectual property rights. In order to protect
or enforce our intellectual property rights, we may have to initiate legal
proceedings against third parties. Legal proceedings relating to intellectual
property would be expensive, take significant time and divert management's
attention from other business concerns, whether we win or lose. The cost of such
litigation could affect our profitability. Further, if we do not prevail in an
infringement lawsuit brought against us, we might have to pay substantial
damages, including treble damages, and we could be required to stop the
infringing activity or obtain a license to use the patented technology.

RISKS RELATED TO THE OFFERING

OUR STOCK PRICE WILL LIKELY BE VOLATILE, AND YOUR INVESTMENT COULD DECLINE IN
VALUE.

The trading price of our common stock is likely to be volatile and subject
to wide fluctuations in price in response to various factors, including:

- actual or anticipated variations in quarterly operating results;

- introductions or announcements of technological innovations or new
products or services by us, our collaborators or our competitors;

- disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to patent our technologies;

- changes in financial estimates by securities analysts;

- conditions or trends in the pharmaceutical and biotechnology industries;

- additions or departures of key personnel;

- the loss of a significant customer or collaborator;

- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;

- regulatory developments in the United States and abroad;

- public concern as to the efficacy of new drug discovery techniques; and

- economic and political factors.

In addition, the stock market in general, and the market for life sciences
companies in particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate to operating
performance. These broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in potential liabilities,
substantial costs and the diversion of management's attention and resources,
regardless of whether we win or lose.

THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.

Prior to this offering, there has been no public market for our common
stock. An active, liquid trading market for our common stock may not develop or
be maintained following this offering. As a result, you may not be able to sell
your shares quickly or at the market price. The initial public offering price
will be determined by negotiation between us and representatives of the
underwriters based upon a number of factors and may not be indicative of prices
that will prevail in the trading market. The market price of our common stock
may decline below the initial public offering price, and you may not be able to
resell your shares at or above the initial offering price. Please see
"Underwriting" below for a discussion of the factors to be considered in
determining the initial public offering price.
13
<PAGE> 18

IF WE NEED BUT ARE UNABLE TO OBTAIN ADDITIONAL FUNDING TO SUPPORT OUR
OPERATIONS, WE WOULD HAVE TO REDUCE OR CEASE OPERATIONS.

We have historically financed our operations primarily through the sale of
our securities and borrowings under our credit facilities. The amount of cash we
used in our operating activities for fiscal year 1999 and fiscal year 2000, was
$3.5 million and $1.3 million, respectively, and the amount of cash we used in
our operating activities for the three months ended September 30, 2000 was $3.4
million. Although we anticipate that we will use more cash in our operating
activities in future periods, we believe that our existing cash, cash
equivalents and marketable securities and anticipated cash flow from existing
collaboration agreements together with the proceeds of this public offering will
be sufficient to support our current operating plan for at least the next 12
months. However, our current operating plan could change as a result of many
factors, and we could require additional funding sooner than anticipated.

To the extent that the cash from our future operating activities is
insufficient to meet future capital requirements, we will have to raise
additional funds to continue the development of our products and services. We
may not be able to raise funds on favorable terms, if at all. To the extent that
we raise additional capital through the sale of equity or convertible debt
securities, the issuance of those securities would result in dilution to our
stockholders. Moreover, incurring debt financing could result in a substantial
portion of our operating cash flow being dedicated to the payment of principal
and interest on such indebtedness, could render us more vulnerable to
competitive pressures and economic downturns and could impose restrictions on
our operations. If adequate funds are not available, we may be required to
curtail operations significantly or to obtain funds through other arrangements
on unattractive terms.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock. There will be 21,466,922 shares of common stock
outstanding immediately after this offering, or 22,266,922 shares if the
underwriters exercise their over-allotment option in full, based on the number
of shares outstanding at October 31, 2000. All of the shares sold in this
offering will be freely transferable without restriction or further registration
under the Securities Act of 1933, except for any shares purchased by our
executive officers, directors, principal stockholders and certain related
parties.

Assuming the underwriters do not exercise their overallotment option, the
remaining 15,466,922 shares will be eligible for sale in the public market as
follows: 486,226 shares after 90 days from the date of this prospectus;
13,284,629 shares after 180 days from the date of this prospectus; and 1,696,067
shares at various times after 180 days from the date of this prospectus. Please
see "Shares Eligible for Future Sale" for additional information.

After this offering, we intend to register approximately 6,748,110 shares
of common stock that are reserved for issuance upon exercise of options granted
or reserved for grant under our stock option plan and our employee stock
purchase plan. Once we register these shares, stockholders can sell them in the
public market upon issuance, subject to restrictions under the securities laws.
The number of shares we have reserved for issuance under our stock option plan
may increase based on our issued and outstanding shares of common stock, and we
may register such additional shares in the future. In addition, some of our
existing stockholders will be entitled to register their shares of common stock
after this offering. Please see "Description of Capital Stock -- Registration
Rights."

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING AND MAY EXPERIENCE ADDITIONAL DILUTION IN THE FUTURE.

You will pay a price per share that substantially exceeds the per share
value of our tangible assets after subtracting our total liabilities. As a
result, if we were to distribute our net tangible assets to our stockholders
immediately following this offering, you would receive less than the amount you
paid for your shares. In

14
<PAGE> 19

addition, assuming an offering price of $8.50 per share, purchasers of our
common stock in this offering will have contributed approximately 66% of the
aggregate price paid by all purchasers of our stock, but will own only
approximately 28% of our common stock outstanding after the offering based on
the number of shares outstanding as of September 30, 2000. If the holders of
outstanding options or warrants exercise those options or warrants at prices
below the initial public offering price, you will incur further dilution. We may
also acquire other companies or technologies or finance strategic alliances by
issuing equity, which may result in additional dilution to our stockholders.
Please see "Dilution" for additional information.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE US.

Our certificate of incorporation and bylaws contain provisions that could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
We are also subject to provisions of Delaware law that could delay, deter or
prevent a change in control. Please see "Description of Capital
Stock -- Anti-Takeover Provisions" for additional information.

OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A LARGE
PERCENTAGE OF OUR VOTING COMMON STOCK AND COULD LIMIT NEW STOCKHOLDERS FROM
INFLUENCING CORPORATE DECISIONS.

Immediately after this offering, our executive officers, directors, current
principal stockholders and their respective affiliates will beneficially own
approximately 63% of our outstanding common stock based on their ownership as of
October 31, 2000. These stockholders, if acting together, would be able to
control substantially all matters requiring approval by our stockholders,
including mergers, sales of assets, the election of all directors and approval
of other significant corporate transactions in a manner with which you may not
agree or that may not be in the best interest of other stockholders.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements. We use words like
"believe," "intend," "expect," "may," "will," "should," "plan," "project,"
"contemplate," "anticipate" and similar expressions to identify these
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about the growth of our business, our
financial performance and the development of our industry. Because these
statements reflect our current views concerning future events, these forward-
looking statements involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including the risks described in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.

Information regarding market and industry statistics contained in the
"Prospectus Summary" and "Business" sections of this prospectus is included
based on information available to us that we believe is accurate. It is
generally based on academic and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed or
included data from all sources and cannot assure you of the accuracy of the data
we have included.

15
<PAGE> 20

USE OF PROCEEDS

We estimate our net proceeds from the sale of 6,000,000 shares of common
stock in this offering will be approximately $46,530,000, or approximately
$52,854,000 if the underwriters exercise their over-allotment option in full,
based on an assumed initial public offering price of $8.50 per share, after
deducting the estimated underwriting discount and offering expenses.

We currently intend to use the net proceeds to fund our operations,
including continued development and manufacturing of existing products as well
as research and development of additional products and services, hire additional
personnel and expand our facilities to be able to meet the growing needs of our
business. We also may use a portion of the net proceeds to acquire or invest in
new products or technologies, pay down our indebtedness or acquire complementary
businesses. As of October 31, 2000, we had approximately $5.9 million of
outstanding indebtedness, which is described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." We intend to use the balance of the net proceeds for general
corporate purposes, including working capital requirements. Our management may
spend the proceeds from this offering in ways that the stockholders may not deem
desirable.

Pending the application of the net proceeds towards one of the above uses,
we intend to invest the net proceeds in investment-grade, interest-bearing
securities. We cannot predict whether the investment of the proceeds will yield
a favorable return.

The foregoing represents our current intentions based upon our present
plans and business condition. Our management will have broad discretion in the
application of the net proceeds from this offering, and the occurrence of
unforeseen events or changed business conditions could result in the application
of the net proceeds from this offering in a manner other than as described in
this prospectus.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and
we do not intend to pay any cash dividends in the foreseeable future. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and to fund future growth.

16
<PAGE> 21

CAPITALIZATION

The following table sets forth our total long-term debt, including current
portion, and capitalization as of September 30, 2000 presented:

- on an actual basis;

- on a pro forma basis to give effect to the automatic conversion of our
Series A preferred stock, Series B preferred stock and Series C preferred
stock into shares of our common stock upon the closing of this offering
on a one-to-one basis, as if these events had occurred as of September
30, 2000; and

- on a pro forma as adjusted basis to give effect to the sale of 6,000,000
shares of our common stock at an assumed initial public offering price of
$8.50 per share, after deducting the estimated underwriting discount and
offering expenses.

The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
----------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term debt, including current portion................... $ 6,036 $ 6,036 $ 6,036
-------- -------- --------
Stockholders' equity:
Preferred stock, par value $0.001 per share; 11,825,000
shares
authorized actual and pro forma and 10,000,000 shares
authorized pro forma as adjusted
Series A convertible preferred stock; 6,635,000 shares
issued
and outstanding actual and no shares issued and
outstanding
pro forma and pro forma as adjusted.................. 7 -- --
Series B convertible preferred stock; 3,199,999 shares
issued
and outstanding actual and no shares issued and
outstanding
pro forma and pro forma as adjusted.................. 3 -- --
Series C convertible preferred stock; 1,666,667 shares
issued and outstanding actual and no shares issued
and outstanding pro forma and pro forma as
adjusted............................................. 1 -- --
-------- -------- --------
Total preferred stock............................. 11 -- --
-------- -------- --------
Common stock, par value $0.001 per share; 20,225,000 shares
authorized actual and pro forma and 60,000,000 shares
authorized pro forma as adjusted; 3,902,666 shares issued
and outstanding actual, 15,404,332 shares issued and
outstanding pro forma and 21,404,332 shares issued and
outstanding pro forma as adjusted......................... 4 15 21
Additional paid-in capital.................................. 37,418 37,418 83,942
Accumulated deficit......................................... (12,575) (12,575) (12,575)
Notes receivable for common stock -- (related party)........ (399) (399) (399)
Deferred compensation....................................... (9,926) (9,926) (9,926)
-------- -------- --------
Total stockholders' equity........................ 14,533 14,533 61,063
-------- -------- --------
Total capitalization.............................. $ 20,569 $ 20,569 $ 67,099
======== ======== ========
</TABLE>

The above table does not reflect the following:

- 3,118,754 shares of common stock underlying options outstanding as of
September 30, 2000 at a weighted-average exercise price of $0.47 per
share;

- 110,750 shares of common stock, assuming the automatic conversion of our
preferred stock, underlying warrants to purchase preferred stock
outstanding as of September 30, 2000 at a weighted-average exercise price
of $3.15 per share; and

- 729,446 shares of common stock available for issuance or future grants
under our stock option plan as of September 30, 2000.

17
<PAGE> 22

DILUTION

As of September 30, 2000, our pro forma net tangible book value was $14.5
million, or $0.94 per share of common stock. Our pro forma net tangible book
value per share represents our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding on that date and
assumes the conversion of all outstanding shares of our preferred stock, which
convert automatically into shares of common stock on a one-for-one basis upon
the closing of this offering. Without taking into account any other changes in
our pro forma net tangible book value per share after September 30, 2000, other
than to give effect to the sale of the 6,000,000 shares of common stock offered
by this prospectus at an assumed initial public offering price of $8.50 per
share, after deducting the estimated underwriting discount and offering
expenses, our pro forma as adjusted net tangible book value as of September 30,
2000 would have been $61.0 million, or $2.85 per share. This represents an
immediate increase in pro forma as adjusted net tangible book value to existing
stockholders of $1.91 per share and an immediate dilution to new investors who
purchase shares of common stock in this offering of $5.65 per share. Dilution
equals the difference between the amount per share paid by new investors who
purchase shares of common stock in this offering and the pro forma as adjusted
net tangible book value per share upon the closing of this offering. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $8.50
Pro forma net tangible book value per share as of
September 30, 2000..................................... $0.94
Increase per share attributable to new investors.......... 1.91
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.85
-----
Dilution in pro forma net tangible book value per share to
new investors............................................. $5.65
=====
</TABLE>

The following table illustrates, on a pro forma as adjusted basis, as of
September 30, 2000, the differences between the number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid to us (1) by existing stockholders, and (2) by the new investors who
purchase shares of common stock in this offering at the assumed initial public
offering price of $8.50 per share, before deducting the estimated underwriting
discount and offering expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 15,404,332 72% $25,695,661 34% $1.67
New investors............................ 6,000,000 28 51,000,000 66 8.50
---------- ------- ----------- -------
Total.......................... 21,404,332 100% $76,695,661 100%
========== ======= =========== =======
</TABLE>

The discussion and table assume:

- the automatic conversion of our Series A preferred stock, Series B
preferred stock and Series C preferred stock on a one-to-one basis into
11,501,666 shares of our common stock;

- no exercise of options outstanding under our stock option plan as of
September 30, 2000;

- no exercise by any of our security holders of any outstanding warrants.

As of September 30, 2000, there were options outstanding to purchase a
total of 3,118,754 shares of common stock at a weighted-average price of $0.47
per share. As of the same date, there were warrants to purchase a total of
110,750 shares of common stock, assuming the automatic conversion of our Series
A and Series B preferred stock, at a weighted-average exercise price of $3.15
per share. There will be further dilution to new investors who purchase shares
of common stock in this offering to the extent any of our options or warrants
are exercised.

18
<PAGE> 23

SELECTED FINANCIAL DATA

We derived the statements of operations data for the years ended June 30,
1999 and 2000 and the period from February 6, 1998 (inception) to June 30, 1998,
and the balance sheet data as of June 30, 1999 and 2000 from the audited
financial statements in this prospectus. Those financial statements were audited
by Ernst & Young LLP, independent auditors. We derived the balance sheet data as
of June 30, 1998 from audited financial statements that are not included in this
prospectus. The selected financial data presented below as of September 30, 2000
and for the three months ended September 30, 1999 and 2000 have been derived
from our unaudited financial statements, which are included elsewhere in this
prospectus and, in our opinion, reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of our financial
position and results of operations. Operating results for the three months ended
September 30, 2000 are not necessarily indicative of results that may be
expected for any other interim period or for the year ending June 30, 2001.
Historical results are not necessarily indicative of the results to be expected
for any interim period or for the year as a whole.

The pro forma net loss per share data gives effect to the automatic
conversion of all of our outstanding preferred stock upon the closing of this
offering. The cost of revenue, research and development expenses, and selling,
general and administrative expenses data below includes compensation related to
stock option grants.

19
<PAGE> 24

<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
------------------------------ SEPTEMBER 30,
1998 1999 2000 2000
-------- -------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities..................................... $ 2,608 $ 2,186 $ 5,784 $ 10,360
Other current assets............................. 192 1,819 2,764 3,820
Property, plant and equipment, net............... 6 2,872 6,911 10,236
Other assets..................................... 4 248 364 371
-------- -------- -------- --------
Total assets................................... $ 2,810 $ 7,125 $ 15,823 $ 24,787
======== ======== ======== ========
Total current liabilities........................ $ 57 $ 2,744 $ 6,338 $ 6,634
Long-term debt, less current portion............. -- 1,824 2,833 3,620
Total stockholders' equity....................... 2,753 2,557 6,652 14,533
-------- -------- -------- --------
Total liabilities and stockholders' equity..... $ 2,810 $ 7,125 $ 15,823 $ 24,787
======== ======== ======== ========
</TABLE>

20
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This discussion
may contain forward-looking statements that involve risks and uncertainties. As
a result of many factors, such as those set forth under "Risk Factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.

OVERVIEW

We offer a broad range of products and services to pharmaceutical and
biotechnology companies to bridge the gap between the discovery of
disease-related proteins and the testing of potential drug candidates in animals
and humans. Our experienced scientists provide premium products and services to
create, evaluate and optimize potential drug candidates. In addition, we have
developed an information-driven technology platform to support our scientists in
making better decisions at each stage of the drug discovery process. We also
leverage our capabilities internally to develop proprietary drug candidates in
collaboration with our customers. We have incurred net losses since inception
and expect to incur losses in the near future as we expand our scientific staff
and continue the scale-up of our operations. To date, we have funded our
operations primarily through the issuance of equity securities, borrowings and
revenue from our collaborators. As of September 30, 2000, we had an accumulated
deficit of $12.6 million.

We generate revenue by researching, designing and synthesizing medicinally
relevant chemical compounds through the products and services we offer to our
collaborators. We report product and service revenue separately. We report cost
of goods sold and cost of revenue from services as one line item titled cost of
revenue in our statement of operations. Although our current cost accounting
system has the functional capacity to segregate these costs, we have not yet
implemented such functionality, primarily because these costs are derived from
similar processes including research, design and synthesis activities. We
anticipate further implementing the cost segregation functionality of our cost
accounting system during fiscal year 2001.

Our products include our Diversity Library and our Optimer building blocks.
Our Diversity Library is a collection of structurally-related chemical compounds
that may have the potential to become drug candidates. We sell compounds from
our Diversity Library to our customers with a non-exclusive license restricting
use of these compounds to internal research, and we retain all other rights to
them, which permits us to sell the same compounds to other customers. We sell
our Optimer building blocks, which are the starting materials used to create
more complex chemical compounds in the drug discovery process, without any
restrictions on use.

Our services include lead optimization, custom synthesis, lead generation
and process research and development. We collaborate with our customers in lead
optimization to refine and optimize potential drug candidates. We also design,
synthesize and sell libraries of chemical compounds or single compounds to our
customers on a custom basis, and sell them with either an exclusive or
non-exclusive license to use the compounds. In addition, we provide lead
generation services, including screening compound libraries to discover
potential drug candidates for our collaborators. Finally, we assist customers in
process research and development, which involves developing the processes, and
synthesizing for delivery, larger quantities of chemical compounds required for
clinical testing.

In general, we sell our compounds, including our Optimer building blocks
and Diversity Library, on a per-compound basis, although some of our contracts
allow our customers to obtain exclusive rights to particular compounds upon the
payment of additional fees. We are typically paid for our services under our
collaboration agreements based on the number of full-time equivalent employees
contractually assigned to a project, at an annual full-time equivalent price,
plus certain expenses. Custom collections of chemical compounds we create and
custom chemical synthesis we perform under our service agreements are typically
charged on a per-delivered compound basis, plus a charge for research and
development. In addition, two of our collaboration agreements provide for
additional payments upon our achievement of certain milestones and one of our
collaboration agreements provides for license fees. Our future agreements may
also provide

21
<PAGE> 26

royalties. We have not yet generated any license fees or milestone or royalty
payments. In general, our collaborators may terminate our collaboration
agreements with them on 30 to 90 days' prior notice. During the three months
ended September 30, 2000, ICOS Corporation, and Eli Lilly and Company accounted
for 36% and 26%, respectively, of our total revenue. During fiscal year 2000,
ICOS Corporation, Celltech Chiroscience Ltd., through its subsidiary Darwin
Discovery Limited, and Merck & Co., Inc. accounted for 48%, 11% and 10%,
respectively, of our total revenue. We will seek to generate revenue from new
collaboration agreements that will reduce our concentration of revenue.

We generally recognize revenue upon shipment of our products or upon
performance under our collaboration agreements. Revenue from our full-time
equivalent collaboration service agreements is recognized on a monthly or per
diem basis as work is performed. Revenue from our development, fixed-fee and
fee-per-compound collaboration service agreements is recognized either on a
percentage of completion basis or as compounds are shipped. Revenue from license
fees will be recognized over the term of the particular license. Revenue from up
front fees will be recognized over the expected term of the particular
collaboration agreement.

Cost of revenue consists mainly of compensation, associated fringe benefits
and other product or service-related costs, including recruiting and relocation,
fine chemicals, supplies, small tools, facilities, depreciation and other direct
and indirect chemical handling and laboratory support costs, excluding any costs
related to research and development.

Research and development expenses consist of the same type of scientific
expenditures that comprise cost of revenue, except that the expenses are related
to the development of our early-stage intellectual property and products where
we have not yet proven technological feasibility. Costs of routine or
production-related activities are charged to cost of revenue.

Selling, general and administrative expenses consist mainly of compensation
and associated fringe benefits and other management, business development,
accounting, information technology and administration costs, including
consulting and professional services, travel and meals, advertising, sales
commissions, facilities, depreciation and other office expenses.

We currently sell our products and services directly to pharmaceutical and
biotechnology companies through our senior management and scientists and through
customer referrals. In addition, we sell our products and services in Japan
through an agent. International revenue represented 8% and 9% of our total
revenue during fiscal years 1999 and 2000, respectively. The majority of our
international revenue was attributed to European sales, and the remaining was
attributed to sales in Japan. All of our collaboration agreements and purchase
orders are denominated in United States dollars.

We intend to grow our revenue with existing customers and to realize new
revenue streams through collaborations with a diversified group of
pharmaceutical and biotechnology companies. In addition, we expect to enter into
contracts that allow us to participate in the success of potential drug
candidates with our collaborators through milestone and/or royalty payments and
to participate in the success of our proprietary potential drug candidates
through a combination of licensing fees, milestone and/or royalty payments. We
expect our growth to require significant ongoing investment in facilities,
scientific personnel and business development resources.

STOCK COMPENSATION

During fiscal year 2000 and the three months ended September 30, 2000, we
recorded deferred stock compensation totaling $11.7 million. We recorded
compensation expense related to stock option grants of approximately $1.1
million for fiscal year 2000 and approximately $707,000 for the three months
ended September 30, 2000. At September 30, 2000, we had a total of $9.9 million
of remaining deferred stock compensation to be amortized. Assuming the
consummation of this offering, we expect to amortize deferred stock compensation
recorded through September 30, 2000 as follows: $3.8 million during the
remainder of fiscal year 2001; $2.2 million in fiscal year 2002; $2.0 million in
fiscal year 2003; $1.9 million in fiscal year 2004; and $64,000 in fiscal year
2005. Of the $4.4 million in deferred compensation we expect to amortize in
fiscal year 2001, $2.0 million is directly attributable to unvested options that
will be accelerated and exercisable upon the closing of this offering. We expect
to record additional deferred compensation for

22
<PAGE> 27

options granted after September 30, 2000. To date, we have granted our employees
stock options as annual incentive bonus awards. Any future annual incentive
bonus awards may include a partial cash component in addition to stock-based
compensation. You should read Note 5 of the notes to our financial statements
included elsewhere in this prospectus for additional information.

DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK

On August 31, 2000, we issued 1,666,667 shares of our Series C preferred
stock, which is convertible on a one-to-one basis into shares of common stock,
at $6.00 per share to investors resulting in gross proceeds of $10.0 million.
Subsequent to the commencement of the initial public offering process, we
reevaluated the fair value of our Series C preferred stock as of August 31, 2000
and determined it to be $9.00 per share. Accordingly, the incremental fair value
of $5.0 million, or $3.00 per share, is deemed to be the equivalent of a
dividend on the Series C preferred. We recorded the deemed dividend at the date
of issuance by offsetting charges and credits to preferred stock, without any
effect on total stockholders' equity. The preferred stock dividend increases the
loss applicable to common stockholders in the calculation of basic net loss per
share for fiscal year 2001 and all related interim periods.

RESULTS OF OPERATIONS

The following table presents our results of operations for the nine
quarters in the period ending September 30, 2000. This information has been
compiled from our unaudited interim financial statements. Our unaudited
financial statements have been prepared on the same basis as our audited
financial statements. All adjustments, consisting only of normal recurring
accruals considered necessary for a fair presentation, have been included. The
cost of revenue, research and development expenses, and selling, general and
administrative expenses data in the following table includes compensation
related to stock option grants. The results of operations for any quarter are
not necessarily indicative of the results of operations for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Collaboration service revenue................ $ -- $ -- $ 313 $ 678 $ 730
Product revenue.............................. -- 39 149 324 620
------- ------- ------- ------- ------
Total revenue................................ -- 39 462 1,002 1,350
Cost of revenue*............................. 11 23 328 671 817
------- ------- ------- ------- ------
Gross profit................................. (11) 16 134 331 533
Research and development expenses*........... 778 751 962 810 696
Selling, general and administrative
expenses*.................................. 206 462 354 500 439
------- ------- ------- ------- ------
Total operating expenses..................... 984 1,213 1,316 1,310 1,135
Loss from operations......................... (995) (1,197) (1,182) (979) (602)
------- ------- ------- ------- ------
Interest expense............................. -- (16) (44) (75) (84)
Interest income.............................. 58 48 36 39 25
------- ------- ------- ------- ------
Net loss............................. $ (937) $(1,165) $(1,190) $(1,015) $ (661)
======= ======= ======= ======= ======

*Includes compensation related to stock option grants:
Cost of revenue..................................................................................................
Research and development expenses................................................................................
Selling, general and administrative expenses.....................................................................
Total.........................................................................................................

<CAPTION>
THREE MONTHS ENDED,
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 2000 2000 2000
------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Collaboration service revenue................ $ 764 $ 1,212 $ 1,923 $ 2,110
Product revenue.............................. 587 613 325 651
------- ------- ------- --------
Total revenue................................ 1,351 1,825 2,248 2,761
Cost of revenue*............................. 801 1,173 1,654 2,408
------- ------- ------- --------
Gross profit................................. 550 652 594 353
Research and development expenses*........... 920 1,020 1,327 1,702
Selling, general and administrative
expenses*.................................. 1,094 888 1,049 1,694
------- ------- ------- --------
Total operating expenses..................... 2,014 1,908 2,376 3,396
Loss from operations......................... (1,464) (1,256) (1,782) (3,043)
------- ------- ------- --------
Interest expense............................. (87) (87) (126) (173)
Interest income.............................. 86 126 119 130
------- ------- ------- --------
Net loss............................. $(1,465) $(1,217) $(1,789) $ (3,086)
======= ======= ======= ========
*Includes compensation related to stock optio
Cost of revenue............................. $ -- $ 5 $ 38 $ 210
Research and development expenses........... -- 4 31 140
Selling, general and administrative expenses 355 338 347 357
------- ------- ------- --------
Total.................................... $ 355 $ 347 $ 416 $ 707
======= ======= ======= ========
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

Revenue. Total revenue increased to $2.8 million for the three months ended
September 30, 2000 from $1.4 million for the three months ended September 30,
1999. This increase in revenue was primarily a result of additional revenue
generated from sales of our lead optimization services and process chemistry
services under our collaborations with Eli Lilly and Company and ICOS
Corporation.

23
<PAGE> 28

Cost of revenue. Cost of revenue increased to $2.4 million for the three
months ended September 30, 2000 from approximately $817,000 for the three months
ended September 30, 1999, reflecting the increased cost to support our revenue
growth in the same period. The cost increases during the 2000 period were
primarily attributed to recruiting and relocating additional scientific staff
and associated salaries and benefits, and the expenditures associated with
equipping and commencing operations in our new and expanded facilities. These
and other costs are expected to continue to increase in the future to support
our growth. We expect salaries for our scientific personnel to increase in
future years at a rate in excess of general inflation because of the increased
market demand for scientists. Cost of revenue was 87% of revenue during the 2000
period, compared to 61% during the 1999 period. The increase in cost of revenue
as a percentage of revenue during the 2000 period as compared to the 1999 period
was due primarily to facility expansion costs, increased recruiting costs and
compensation related to stock option grants.

Research and development expenses. Research and development expenses
increased to $1.7 million for the three months ended September 30, 2000 from
approximately $696,000 for the three months ended September 30, 1999. The
increase in research and development expenses during the 2000 period was
primarily attributed to expanded research efforts for our Diversity Library
agreements and custom synthesis collaborations. These expanded research efforts
required the recruitment and relocation of additional scientific staff and
associated salaries and benefits, and the expenditures associated with equipping
and commencing operations in our new and expanded facilities. We plan to
increase our research and development efforts related to the discovery of
additional intellectual property, which will result in increased research and
development expenses.

Selling, general and administrative expenses. Selling, general and
administrative expenses totaled $1.7 million for the three months ended
September 30, 2000, compared to approximately $439,000 for the three months
ended September 30, 1999. The increase in selling, general and administrative
expenses during the 2000 period was primarily attributed to compensation related
to stock option grants, relocation costs, increased staffing levels and expanded
management.

Compensation related to stock option grants. Compensation expense related
to stock option grants was approximately $707,000 for the three months ended
September 30, 2000. There was no compensation expense related to stock option
grants for the three months ended September 30, 1999. The expense for the 2000
period is allocated among the following functional areas: 50% to selling,
general and administrative expenses, 30% to cost of revenue and 20% to research
and development expenses. For the three months ended September 30, 2000, we
recorded deferred stock compensation of $6.0 million.

Interest income or expense. We had net interest expense of approximately
$43,000 for the three months ended September 30, 2000, compared to net interest
expense of approximately $59,000 for the three months ended September 30, 1999.
The decrease in net interest expense for the 2000 period was primarily due to
larger interest income from our larger balances of cash, cash equivalents and
marketable securities, partially offset by increased borrowing for the 2000
period.

FISCAL YEARS ENDED JUNE 30, 2000 AND 1999

Revenue. Total revenue increased to $6.8 million in fiscal year 2000 from
$1.5 million in fiscal year 1999. The revenue increase from fiscal year 1999 to
fiscal year 2000 was primarily a result of a full year of operations in fiscal
year 2000 versus a partial year of operations in fiscal year 1999. Sales
increased in all products and services offered, and most significantly in lead
optimization services, process chemistry services and sales of products from our
Diversity Library.

Cost of revenue. Cost of revenue increased to $4.4 million in fiscal year
2000 from $1.0 million in fiscal year 1999, reflecting the increased cost to
support our revenue growth in the same period. The cost increases in fiscal year
2000 were primarily attributed to recruiting and relocating additional
scientific staff and associated salaries and benefits, and the expenditures
associated with equipping and commencing operations in our new and expanded
facilities. Cost of revenue was 66% of revenue in fiscal year 2000, compared to
69% in fiscal year 1999. The reduction in cost of revenue as a percentage of
revenue in 2000 as compared to 1999 was due primarily to a larger revenue base
against which to apply certain fixed costs.
24
<PAGE> 29

Research and development expenses. Research and development expenses
increased to $4.0 million in fiscal year 2000 from $3.3 million in fiscal year
1999. The increase in research and development expenses in fiscal year 2000 was
primarily attributed to expanded research efforts for our Diversity Library and
custom synthesis collaborations. These expanded research efforts required the
recruitment and relocation of additional scientific staff and associated
salaries and benefits, and the expenditures associated with equipping and
commencing operations in our new and expanded facilities.

Selling, general and administrative expenses. Selling, general and
administrative expenses totaled $3.5 million in fiscal year 2000, compared to
$1.5 million in fiscal year 1999. The increase in selling, general and
administrative expenses in fiscal year 2000 was primarily attributed to our
increased staffing levels and expanded management. The recruitment and
relocation of senior management was a significant component of our selling,
general and administrative expenses in fiscal year 2000.

Compensation related to stock option grants. Compensation expense related
to stock option grants was approximately $1.1 million in fiscal year 2000. There
was no compensation expense related to stock option grants in fiscal year 1999.
The expense for fiscal year 2000 relates primarily to the selling, general and
administrative functional area. In fiscal year 2000, we recorded deferred stock
compensation of $5.8 million.

Interest income or expense. We had net interest expense of approximately
$28,000 in fiscal year 2000, compared to net interest income of approximately
$45,000 in fiscal year 1999. The net interest expense in fiscal year 2000
compared with net interest income in fiscal year 1999 was primarily due to
increased borrowing to finance equipment purchases, offset partially by larger
interest income from our larger balances of cash, cash equivalents and
marketable securities in fiscal year 2000.

FOR THE PERIOD FROM FEBRUARY 6, 1998 (INCEPTION) TO JUNE 30, 1998

We were formed in February 1998, but we did not begin incurring costs until
May 1998. Our operations in May and June of 1998 consisted primarily of
obtaining equity financing, leasing facilities, hiring personnel and travelling
to prospective customer locations. A comparison of this period to operations
data from fiscal year 1999 would not be meaningful.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations principally with $25.3 million of private
equity financing and $7.9 million in short-term and long-term debt and equipment
financing arrangements. Equity investments came from a common stock offering and
a series of three preferred stock offerings that occurred from May 1998 through
August 2000.

Between May 19, 1998 and January 15, 1999, we issued 6,635,000 shares of
our Series A preferred stock resulting in gross proceeds of $6.6 million and
2,913,367 shares of our common stock resulting in gross proceeds of $685,000. On
November 16, 1999, we issued 3,199,999 shares of our Series B preferred stock
resulting in gross proceeds of $8.0 million. On August 31, 2000, we issued
1,666,667 shares of our Series C preferred stock resulting in gross proceeds of
$10.0 million.

In May 1998, we loaned an aggregate of $350,000 to three of our founders to
purchase shares of our common stock. These loans are secured by pledges of
certain shares of common stock owned by these founders, bear interest at a rate
of 6.0% per annum and, in the case of two of the founders who are employees, are
due on the earlier of September 1, 2002 or the date the founder's employment
with us is terminated. In the case of the third founder, who is not an employee,
the note is due on May 18, 2002. As of September 30, 2000, approximately
$399,000 in principal and accrued interest remained outstanding under these
loans. See "Related Party Transactions" included elsewhere in this prospectus.

In November 1998 and February 1999, we drew down the entirety of a $1.5
million loan from Silicon Valley Bank for the acquisition of equipment pursuant
to a Loan and Security Agreement dated as of October 9, 1998. The notes
reflecting this loan are payable in monthly installments with a final payment of
8.0% of the initial loan draw due at maturity, mature 42 months from the date of
the initial funding under the loan and bear interest at a rate equal to the
yield to maturity of the 42-month United States Treasury note as
25
<PAGE> 30

of the funding date, plus 3.0%. As of September 30, 2000, approximately $814,000
in principal and accrued interest remained outstanding under these notes. In
addition, on October 9, 1998, we issued a warrant to Silicon Valley Bank in
connection with this loan to purchase 40,000 shares of our Series A preferred
stock at an exercise price of $1.00 per share, subject to certain adjustments.

In February 1999, we entered into a Master Note and Security Agreement with
Leasing Technologies International, Inc. for a $1.5 million secured installment
loan to finance our acquisition of equipment. We drew down the entire loan
during the following 13 months. The notes reflecting this loan are payable in
monthly installments with a final payment of 8.0% of the initial funding due at
maturity, mature 42 months from the date of the initial funding and bear
interest at a rate averaging approximately 11.9%. As of September 30, 2000,
approximately $1.3 million in principal and accrued interest remained
outstanding under this loan. In addition, on March 30, 1999, we issued a warrant
to Leasing Technologies International, Inc. in connection with this loan to
purchase 13,750 shares of our Series A preferred stock at an exercise price of
$3.00 per share, subject to certain adjustments.

In April 1999, we drew down the entirety of a $500,000 loan from Silicon
Valley Bank for the acquisition of equipment pursuant to a Loan and Security
Agreement dated as of March 26, 1999. The notes reflecting this loan are payable
in monthly installments with a final payment of 8.0% of the initial loan draw
due at maturity, mature 42 months from the date of the initial funding under the
loan and bear interest at a rate equal to the yield to maturity of the 42-month
United States Treasury note as of the funding date, plus 3.0%. The notes do not
have a prepayment option. As of September 30, 2000, approximately $317,000 in
principal and interest remained outstanding under these notes. In addition, on
March 31, 1999, we issued a warrant to Silicon Valley Bank in connection with
this loan to purchase 7,000 shares of our Series B preferred stock at an
exercise price of $2.50 per share, subject to certain adjustments.

In May 2000, we entered into a Loan and Security Agreement with Silicon
Valley Bank for a $4.0 million line of credit permitting advances over a
one-year period to finance the acquisition of equipment. Each advance plus
interest must be paid in monthly installments within 36 months of the date of
such advance. Interest accrues on outstanding amounts at a rate of 1.25% over
Silicon Valley Bank's prime rate, which may be reduced based on our financial
performance. We may prepay the line of credit upon paying an early termination
fee. As of September 30, 2000, approximately $3.6 million was outstanding. In
addition, we issued Silicon Valley Bank a warrant to purchase 50,000 shares of
our Series B preferred stock at an exercise price of $5.00 per share, subject to
certain adjustments.

In October 2000, we entered into a Research and License Agreement with
Amgen Inc. for the development and possible commercialization of one of our
proprietary drug candidates. This agreement provides for an up-front fee of $1.8
million payable by Amgen in November 2000.

As of September 30, 2000, cash, cash equivalents and marketable securities
totaled $10.4 million compared to $5.8 million at June 30, 2000. Net cash used
in operating activities was $3.4 million for the three months ending September
30, 2000. Our net loss for the same period of $3.1 million was partially offset
by non-cash charges of $1.2 million, and our working capital increased by $1.5
million to account for most of the remainder of net cash used in operations.
Working capital increased due to capitalized costs of this initial public
offering and increases in inventory and accounts receivable. Accounts payable
and advances from customers also declined. The increase in these operating
assets reflects the continued expansion of our business during the 2000 period.

During the three months ending September 30, 2000, we invested in capital
equipment and leasehold improvements totaling $3.8 million. Financing activities
provided $11.7 million consisting of $10.0 million from the sale of our Series C
preferred stock, $269,000 from option exercises and $2.0 million from borrowings
under our equipment loans, less the repayment of $529,000.

As of June 30, 2000, cash, cash equivalents and marketable securities
totaled $5.8 million, compared to $2.2 million at June 30, 1999. Net cash used
in operating activities was $1.3 million for fiscal year 2000. Our net loss of
$5.1 million was offset by non-cash charges of $2.1 million and a reduction in
working capital of $1.7 million. Working capital decreased due to increased
accounts payable, and advances from customers

26
<PAGE> 31

which exceeded the increases in accounts receivable and inventories. The
increase in these operating assets and liabilities reflect the expansion of our
business during fiscal year 2000.

In fiscal year 2000, we invested in capital equipment and leasehold
improvements totaling $5.0 million. Financing activities provided $10.1 million
consisting of $8.0 million from the sale of our Series B preferred stock and
$2.9 million from borrowings under our equipment loans, less the repayment of
$871,000.

Our future capital requirements will depend on a number of factors,
including our success in increasing sales of both existing and new products and
services, expenses associated with unforeseen litigation, regulatory changes,
competition, technological developments and potential future merger and
acquisition activity. We believe that our existing cash, cash equivalents and
marketable securities and anticipated cash flow from existing collaboration
agreements together with the net proceeds of this public offerings will be
sufficient to support our current operating plan for at least the next 12
months. We have based this estimate on assumptions that may prove to be wrong.
Our forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary as a result of a number
of factors. Our future capital requirements will depend on many factors,
including:

- the progress of our research activities;

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

- the costs and timing of regulatory approvals; and

- the costs of establishing business development and distribution
capabilities.

Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least several years, we expect to finance future cash needs
through the sale of equity securities, strategic collaboration agreements and
debt financing as well as interest income earned on cash balances. We cannot
assure you that additional financing or collaboration agreements 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
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.

At June 30, 2000, we had federal and Colorado income tax net operating loss
carryforwards for income tax purposes of approximately $8.4 million, which will
expire beginning in 2018 and continuing through 2020. We have provided a 100%
valuation allowance against the related deferred tax assets as realization of
such tax benefits is not assured.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Short-term investments. 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 maturity of our short-term investments, we have concluded
that there is no material market risk exposure.

27
<PAGE> 32

Foreign currency rate fluctuations. We have not taken any action to reduce
our exposure to changes in foreign currency exchange rates, such as options or
futures contracts, with respect to transactions with our worldwide customers.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be recognized
at fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date until fiscal years beginning after June 15, 2000. We have not engaged in
hedging activities or invested in derivative instruments.

In December 1999, the Securities and Exchange Commission issued SAB 101,
Revenue Recognition, which provides guidance on the recognition, presentation
and disclosure on revenue in financial statements filed with the Securities and
Exchange Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that our current revenue recognition policy is
in compliance with SAB 101.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB 25 ("FIN 44"). This interpretation
clarifies (1) the definition of employee for purposes of applying APB 25, (2)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(3) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (4) the accounting for an exchange
of stock compensation awards in a business combination. This interpretation is
effective July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 did not impact our
financial statements.

28
<PAGE> 33

BUSINESS

OVERVIEW OF ARRAY'S BUSINESS

Array BioPharma is a discovery research company creating drug candidates
through innovations in chemistry. Our experienced scientists provide premium
products and services to create, evaluate and optimize potential drug candidates
in collaboration with pharmaceutical and biotechnology companies. We believe our
information-based approach improves the efficiency of the drug discovery process
and increases the quality of potential drug candidates. We also apply these
capabilities internally for our own drug discovery programs.

The drug industry is experiencing revolutionary change fueled by genomics,
which is the study of all genes, and by the tremendous progress in the
biological understanding of disease. We believe the drug research and
development bottleneck is shifting from the discovery by biologists of proteins
that may cause disease, known as targets, to the creation by chemists of safe
and effective new drugs for these targets. We provide a broad range of premium
drug discovery products and services to bridge the gap between the discovery of
targets and the testing of drug candidates in animals and humans. We believe
that our integrated approach to drug discovery combined with our
information-driven technology platform will enable both our collaborators and
our internal discovery teams to create higher quality drugs and to do so more
quickly and less expensively.

Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products, services and
technologies. Our achievements to date include:

- Entering into collaboration agreements with pharmaceutical companies such
as Eli Lilly and Company and Merck & Co., Inc.;

- Entering into collaboration agreements with biotechnology companies such
as Celltech Chiroscience Ltd., through its subsidiary Darwin Discovery
Limited, ICOS Corporation and Tularik Inc.;

- Discovering a drug candidate suitable for human testing with our first
collaboration partner, ICOS;

- Creating a technology platform to identify new drug candidates from
genomic information; and

We intend to grow revenue and achieve profitability while sharing in the
success we aim to create for our collaborators. We intend to maximize the value
we capture by focusing our scientific resources on our proprietary drug
discovery programs and collaborations that utilize our full breadth of products
and services and that enable us to participate in the success of the potential
drug candidates we create.

Our company was founded in 1998 in Boulder, Colorado by four Ph.D.
chemists. Our early employees included 20 former Amgen scientists who had
previously been recruited from large pharmaceutical companies. The founders were
able to obtain venture capital financing, lease part of Amgen's former research
facilities and begin operations in May 1998.

DRUG RESEARCH AND DEVELOPMENT

Drug research and development is the process of creating drugs for the
treatment of human disease. The drug research process aims to generate safe and
effective drug candidates, while the drug development process involves the
testing of these drug candidates for safety and efficacy in animals and humans.
The role of biology in drug research is primarily focused on the early stages of
drug research, including understanding

29
<PAGE> 34

the mechanism of diseases and identifying potential drug targets for therapeutic
intervention. The role of chemistry in drug research is the actual creation of
safe and effective drug candidates to address these targets.

Drug Characteristics

Drug characteristics are the criteria that measure the effectiveness of a
drug in treating a particular disease. These characteristics include:

- Potency, which is the amount of a drug required to effectively treat the
disease; the greater the potency, the smaller the required dose and
therefore the smaller the likelihood of harmful side effects;

- Selectivity, which is the extent to which a drug interacts only with the
disease-causing target; the greater the selectivity, the lower the
probability of harmful side effects;

- Toxicity, which is the presence and significance of any harmful side
effects;

- Metabolism, which is how rapidly the drug works and how long it stays
effective; and

- Formulation, which is how the drug is administered to patients, for
example, orally or by injection.

Drugs created by chemists are generally small in molecular weight relative
to targets and are known as small molecule drugs. Small molecule drugs are
generally administered orally and remain the preferred treatment for most
diseases. They are particularly appropriate for the treatment of chronic
diseases requiring the daily administration of medications over many years.
Revenue from the 200 top selling drugs in 1999 comprised 41% of the $337 billion
worldwide drug market. We estimate that 90% of the revenue in 1999 for these top
200 drugs was attributable to small molecule drugs created through the
application of chemistry.

Drug Research and Development Process

Currently, the process of researching and developing a safe and effective
drug is slow and expensive and has a high failure rate. This process is
estimated to take an average of 12 years and to have a risk adjusted cost of
$500 million per drug. This long and costly process is due largely to the
inability of science to predict which of a virtually infinite number of possible
small molecule drugs will prove to be safe and effective. We believe that
improved decision making by chemists early in drug discovery can improve the
success rate of, and lower the cost and time required for, the development of
safe and effective drugs.

The following is a more detailed description of the drug research and
development process, which includes:

- Target discovery, including target identification and validation;

- Drug discovery, including lead generation, lead optimization, and process
research and development;

- Pre-clinical development, which involves testing a potential drug
candidate for safety and efficacy in animals; and

- Clinical development, which involves testing a drug candidate for safety
and efficacy in humans.

30
<PAGE> 35

[GRAPHIC DEPICTING THE DRUG RESEARCH AND DEVELOPMENT PROCESS]

Target Discovery

The mapping and sequencing of the human genome, which is the set of all
human genes, has identified large numbers of genes that encode the chemical
information for cells to produce proteins. These proteins determine human
physiology, and some cause disease. These disease-related proteins are potential
targets for therapeutic intervention with a drug. Biologists identify the
targets against which chemists create drugs. Organizations that develop new
drugs, principally pharmaceutical and biotechnology companies, are advancing
many of these newly identified potential drug targets into drug discovery. Many
of these potential drug targets have not yet been validated, meaning that their
roles in causing disease are imperfectly understood.

Drug Discovery

LEAD GENERATION

Lead generation is the process of identifying hits, which are chemical
compounds that interact with a potential drug target with sufficient potency and
selectivity to warrant further testing and refinement as possible drug
candidates. These potential drug candidates are called leads.

Assay development and compound screening. Once biologists identify a
potential drug target, biochemists must develop tests, called assays, to
evaluate, or screen, potential drug compounds against these targets for their
therapeutic value. Depending on the target and what is understood about its
biology, biologists develop many types of primary assays conducted in test
tubes, called in vitro assays, to measure the relative potency and specificity
of interaction of a potential drug compound with a target. Biochemists further
evaluate the drug characteristics of compounds by creating more complex
secondary assays that are both in vitro and conducted in animals, known as in
vivo. A typical screening campaign for a given target entails screening small
amounts of thousands of chemical compounds from collections of chemical
compounds known as libraries.

Compound libraries. Chemists design compound libraries to provide a
starting point to identify leads in the drug discovery process and to better
understand the biochemistry and therapeutic relevance of targets. A
well-designed library increases the likelihood of finding a hit that is suitable
for optimization of its drug

31
<PAGE> 36

characteristics. Screening of low quality libraries often produces either
numerous false hits or hits that are not suitable for optimization, creating a
bottleneck in secondary screening and downstream chemistry. Therefore, we
believe high quality libraries should produce better candidates at a lower cost.

Libraries can consist of newly synthesized compounds or of historical
collections of synthetic compounds or natural products. It is estimated that
over 10(60), or virtually an infinite number, of possible chemical structures
are of an appropriate size and contain the right elements to be potential drugs.
Since it would be impossible to create or screen even a small fraction of this
universe of possible compounds, the choice of which compounds to synthesize is
critical and is based on several factors, including ease of synthesis, desired
drug characteristics and chemical properties. A high quality library for drug
discovery will contain compounds of high purity and have valuable drug
characteristics, from which chemists can rapidly optimize hits to generate
leads. At the same time, the design of a high quality library should maximize
the differences between compounds, also known as diversity, so that each
compound provides important information about its potential as a drug candidate
against a specific target. Furthermore, high quality libraries should not
contain compounds with metabolic or toxic liabilities or compounds that may
interact nonspecifically with many different targets.

Compound synthesis. Compound synthesis is the process by which chemists use
a small set of commercially available starting materials called building blocks
to create new compounds. Compound synthesis is accomplished by adding building
blocks to a core chemical structure, called a scaffold, through a chemical
reaction, either one reaction at a time or in a parallel fashion using
technology known as automated high-speed synthesis. Chemists determine which
compounds to prepare and try to choose a method that will minimize the number of
steps and the time required for synthesis. Compound synthesis often involves
multiple separate chemical steps. While new technologies have increased
productivity, the synthesis of compounds with desirable drug characteristics
remains a rate-limiting step in the drug discovery process.

LEAD OPTIMIZATION

Lead optimization is the complex, multi-step process of refining the
chemical structure of a hit to improve its drug characteristics, with the goal
of producing a pre-clinical drug candidate. The process of lead optimization
typically falls between two extremes known as empirical lead optimization and
rational drug design. Empirical lead optimization emphasizes screening large
numbers of compounds, often generated through combinatorial chemistry, to
optimize leads. Combinatorial chemistry relates to the mechanics of mixing and
matching different building blocks, in combination with a scaffold, to create a
library that may or may not be designed to have optimal drug characteristics and
maximum diversity. Combinatorial chemistry typically creates libraries using
automated high-speed synthesis. Rational drug design, in contrast, optimizes
leads through the detailed analysis of the three-dimensional structure of the
target and of the chemical structure required for a potential drug compound to
interact with that target. We believe a combination of these two approaches, one
that optimizes leads through a continuous, multi-step process based on knowledge
gained at each stage, generally results in higher quality potential drug
candidates at lower cost than either approach by itself.

Hits to quality leads. By definition, a quality lead can be readily
optimized into a potential drug candidate. At the initiation of a drug discovery
project, goals defining the desired drug characteristics, or candidate criteria,
are established. Medicinal chemistry involves the design, selection and
synthesis of compounds to achieve these specified drug characteristics. Any hits
obtained from screening against targets are evaluated relative to these
candidate criteria. Typically, one or more hits are evaluated in secondary
assays, and a set of structurally-related compounds, called analogs, are
synthesized and screened as well. Chemists determine which hits or analogs to
optimize based on a combination of their potential drug characteristics, ease of
synthesis and structure-activity relationship, or SAR. SAR is quantitative
information that correlates changes in chemical structure to biological data
generated from screening assays. The ability of chemists to make informed
decisions as to which changes in structure will optimize a hit's valuable drug
characteristics is based mostly on experience and is a key parameter for
productivity in drug discovery.

32
<PAGE> 37

This optimization process can be accomplished by an empirical, linear
approach where each analog is evaluated to determine its drug characteristics
and, based upon this analysis, an additional analog is synthesized.
Alternatively, a rational, parallel approach can be used to simultaneously
create multiple analogs, called focused libraries. These focused libraries can
be screened against targets to generate a matrix of SAR information, resulting
in accelerated optimization.

Leads to pre-clinical candidates. A pre-clinical candidate is a lead that
has been optimized to meet particular drug candidate criteria and that is ready
for toxicity testing. Chemists utilize SAR information, derived from focused
libraries, complex secondary assays, and other technologies, including x-ray
crystallography and molecular modeling, to engineer hits with desired drug
characteristics into leads. Complex secondary assays, such as those using human
tissues and animal models, can help define the potential of drugs to be safe and
effective in humans. Technologies that help improve the prediction of clinical
success include x-ray crystallography, which can determine the exact
three-dimensional structure of potential drug compounds bound to targets, and
molecular modeling, a computational method that helps chemists to design more
potent and selective compounds. In addition, chemists can use databases
correlating chemical structure to biology, generally referred to as
chemoinformatics, to help predict SAR to optimize desired drug characteristics.
While historically performed in a linear process, chemists now refine drug
characteristics in parallel at every point in the lead optimization process,
even in library creation. Ultimately, the experience, intuition and synthetic
skills of medicinal chemists are still the determining factors in creating a
successful drug candidate.

PROCESS RESEARCH AND DEVELOPMENT

The compounds chemists create for screening in lead generation and lead
optimization are typically synthesized in relatively small, milligram
quantities. The synthetic process to make compounds for screening typically uses
a parallel synthesis approach to explore drug characteristics, rather than to
optimize ease of synthesis. Before a drug candidate can be taken into
pre-clinical and clinical trials, kilogram quantities must be synthesized. The
goal of process research is to improve the ease with which compounds can be
synthesized in these larger quantities, typically by minimizing the number of
synthetic steps, and to determine how to reduce the time and cost of production.
Process development refers to the production scale-up and further refinement
required for clinical trials and commercial manufacturing.

Pre-Clinical Development

For regulatory purposes, a potential drug candidate must undergo extensive
in vitro and in vivo studies to predict human drug safety, including toxicity
over a wide range of doses and how the drug is metabolized. The objective of
pre-clinical testing is to obtain results that will enable the pre-clinical drug
candidate to be approved for human testing by the Food and Drug Administration,
or FDA, through an Investigational New Drug, or IND, application.

Clinical Development

Clinical trials, or human tests of a potential drug candidate to determine
safety and efficacy, are typically conducted in three sequential phases,
although the phases may overlap. A successful clinical trial will result in the
filing of a New Drug Application, or NDA, with the FDA to grant permission to
market the drug in the United States. Similarly, clinical trials must be
conducted and regulatory approvals secured before a drug can be marketed in
other countries.

THE OPPORTUNITY

The drug industry. In 1999, worldwide drug sales increased 10.7% to an
estimated $337 billion. Pharmaceutical companies in particular are under
increasing pressure to introduce novel drugs to grow revenue. It is estimated
that research and development spending over the last 20 years has increased
approximately five fold, growing from nearly 12% of pharmaceutical company
revenue in 1980 to an

33
<PAGE> 38

estimated 20% in 2000. Despite this increase in research spending, the FDA
approved only 36 new drugs in 1999, compared with 22 new drugs in 1989.

Problems with current drug discovery and development. Despite all of the
recent technological advances in genomics, biology and chemistry, drug research
and development remains slow, expensive and risky. Currently, fewer than 1% of
all drug discovery programs yield marketable drugs. The drug industry faces
multiple challenges in reducing the cost and time of drug discovery and
development. These include the early identification and elimination of
unsuccessful potential drug candidates and increasing the success rate at each
stage of the drug development process.

Capitalizing on the genomics revolution. The drug research and development
process is experiencing a fundamental change fueled by the revolution in
genomics and the tremendous progress in the biological understanding of disease.
The success of publicly and privately funded genomics initiatives, including the
Human Genome Project, in sequencing the entire human genome heralds a new era in
drug research and development. Heavy investment in the technologies to work out
the biological understanding of gene function is widely expected to result in a
dramatic increase in the number of potential drug targets. All of the human
therapeutic drugs on the market today are directed at approximately 500 targets.
The genomics revolution is projected to expand the number of potential
therapeutic targets to between 5,000 and 10,000.

The importance of chemistry. We believe the bottleneck in drug research and
development is shifting from the identification and validation of new targets to
the creation of safe and effective new drugs for these targets. During the next
decade, we believe the significant investment in genomics and biology will give
rise to a dramatic increase in investment in discovery chemistry.

The chemical make-up of a drug is the key determinant of its safety and
efficacy. Modifications in chemical structure can differentiate drugs and
determine their success or failure in the marketplace. A good example of the
importance of chemistry is the rapid growth of the cholesterol-lowering drug
made by Pfizer, called Lipitor. While on the market for only three years,
Lipitor matched the sales in the first half of 2000 of Zocor, the prior market
leader which has been sold by Merck for 12 years. During this six-month period,
sales of Lipitor grew 43% compared to Zocor's 19%. While the biological target,
and therefore the mechanism of action, for Lipitor and Zocor are identical,
small changes in chemistry resulted in Lipitor's improved efficacy and greater
market acceptance.

While targets are generally used as tools for screening potential drug
candidates, chemistry is necessary to create the actual drug provided to a
patient. Therefore, while the ultimate value of intellectual property associated
with newly identified targets is currently unknown, the value of intellectual
property associated with drugs has proven to be significant.

Pharmaceutical industry challenges. The demand for new and improved drugs
coupled with the emerging potential of new targets have created a shortage of
qualified chemistry resources. Some pharmaceutical companies have revealed plans
to significantly increase their internal discovery chemistry capacity over the
next five years. However, we believe there will be a continuing shortage of
qualified chemists to fill these positions. To the extent that they cannot hire
qualified chemists, these companies must substantially increase the productivity
of their internal chemistry departments, outsource these activities or otherwise
acquire additional discovery capabilities. In fact, many pharmaceutical
companies are augmenting their internal chemistry research capacities by
outsourcing to discovery research companies.

Biotechnology industry challenges. Many biotechnology companies are
increasing their focus on creating drugs against their proprietary targets.
Historically, they have partnered with pharmaceutical companies to create small
molecule drugs. These arrangements have often resulted in biotechnology
companies relinquishing much of the economic value of their potential drug
candidates. Accordingly, several biotechnology companies have announced their
intention to develop an internal discovery chemistry capability. However, they
face barriers in the form of the scale required to justify creating internal
chemistry discovery capabilities, hiring and effectively integrating capable
chemists and the significant investment necessary to create chemistry
laboratories.

34
<PAGE> 39

THE ARRAY SOLUTION

We address the discovery chemistry bottleneck by offering a broad range of
products and services to bridge the gap between target discovery and
pre-clinical and clinical development of a potential drug candidate. We are a
discovery research company run by experienced chemists. We offer our products
and services both individually and on a fully-integrated basis. We provide lead
generation and optimization products, including building blocks and compound
libraries, on both a custom and nonexclusive basis. We also provide a broad
spectrum of drug discovery services, including lead generation, lead
optimization and process research and development. Furthermore, we are
leveraging our internal capabilities to create our own potential drug
candidates, which we plan to optimize, develop and commercialize in
collaboration with pharmaceutical and biotechnology companies.

We have developed an information-driven technology platform that we believe
enables our scientists to make better decisions at each step of the drug
discovery process. Our organizational structure emphasizes large,
multi-disciplinary teams to improve problem solving, which we believe
streamlines the drug discovery process. We believe that our integrated approach
to drug discovery will enable both our collaborators and our internal discovery
teams to create higher quality drugs and to do so more quickly and less
expensively.

We have assembled a scientific team with experience in both the
pharmaceutical and biotechnology industries. We had the distinct advantage of
recruiting 20 former Amgen scientists at our inception. This nucleus afforded us
a critical mass of experienced chemists, which we believe has proven to be a
competitive advantage in recruiting additional scientists. As of October 31,
2000, after over two years in operation, we had 124 full-time employees,
including 92 scientists. Of our scientists, 87 are chemists, 54 have Ph.D.'s and
47 have large pharmaceutical company experience.

STRATEGY

Our objective is to become the leading creator of high quality potential
drug candidates by providing premium discovery chemistry products and services.
Our strategies to achieve this objective are as follows:

Provide an integrated chemistry solution to drug discovery. We provide a
broad range of premium drug discovery products and services to bridge the gap
between target discovery and pre-clinical testing. In addition to selling our
chemistry products and services individually, we seek to expand our existing
customer relationships across the full spectrum of our drug discovery
capabilities. We further intend to enhance the value we provide by entering into
new collaborations that leverage our integrated capabilities. Because of the
breadth and quality of our products and services, we expect to become the
discovery chemistry partner of choice for pharmaceutical and biotechnology
companies.

Combine state-of-the-art technology with innovative chemistry to accelerate
drug discovery. We intend to provide premium discovery chemistry to create drugs
more efficiently in collaboration with the leading pharmaceutical and
biotechnology companies and for our internal drug discovery programs. Central to
this strategy are our integrated approach and our proprietary information-driven
platform, which support our ability to provide premium products and services
across the entire drug discovery process. We rely on our highly qualified and
experienced chemists and our proprietary chemoinformatics tools to create the
highest quality potential drug candidates by understanding the complex
relationships between chemical structure and desirable drug characteristics. We
are committed to continuous process improvement, implementation of new
technologies, shared learning among our scientists and innovative organizational
design.

Create our own potential drug candidates. We intend to maximize the value
of our integrated drug discovery platform by creating our own potential drug
candidates. We intend to commercialize these potential drug candidates by
entering into collaborations in which we both optimize these potential drug
candidates and provide other services in exchange for licensing fees,
fee-for-service revenue and future value through milestone and/or royalty
payments.

Attract world-class scientists. We intend to grow our business by
continuing to aggressively recruit world-class scientific talent. Our success in
recruiting and retaining these scientists depends on our continued focus on
quality science and the maintenance of our culture, which emphasizes innovation
and empowerment
35
<PAGE> 40

of our chemists, and our ability to provide industry competitive salaries and
equity participation in our company.

Expand our capabilities through internal development and acquisitions. We
intend to increase our current capacity by expanding our state-of-the art
facilities. In addition, we intend to acquire additional laboratory sites both
domestically and internationally to meet our collaborators' needs and improve
access to regional scientific talent. We further intend to acquire or develop
new technologies and capabilities to expand our existing products and services.

ARRAY'S TECHNOLOGY PLATFORM

We believe we have created an organization able to make better decisions
across every aspect of the drug discovery process through the application of
predictive tools and technologies. We believe our integrated, information-driven
technology platform, as described below, will enable us to reduce the cost and
improve the efficiency of drug discovery resulting in more successful clinical
development candidates.

Biology. We have assembled an experienced team of biologists from some of
the leading biotechnology companies who are experts in protein cloning,
expression and purification. We focus this team on the creation of large
quantities of highly pure protein and protein crystals that are critical for use
in the lead generation and optimization stages of drug discovery.

Assay development and compound screening. We develop assays, format them to
run automated high-throughput screens and screen against multiple classes of
targets. High-throughput screening refers to the technology that enables
biochemists to rapidly screen thousands of chemical compounds against targets.
In addition, we have developed complex secondary assays, including those that
can help define specificity and predict metabolism. Our automated
high-throughput screening capacity can accommodate tens of thousands of
compounds per week.

High-speed synthesis automation. As a result of our focus on the creation
of quality compound libraries, we have integrated commercial and proprietary
instrumentation to create multiple platforms for the automation of high-speed
synthesis. These platforms provide us with the flexibility to synthesize
multiple classes of compounds in order to identify potential drug candidates
with desirable drug characteristics.

Structure-based drug design. Our structure-based drug design process is an
iterative method for lead identification and optimization. We integrate
high-speed synthesis, high-throughput screening and our predictive databases, as
well as x-ray crystallography and molecular modeling, to rapidly create high
quality potential drug candidates. Utilizing target proteins that we have
cloned, expressed and crystallized, our scientists determine their x-ray crystal
structure and conduct screening assays. Based on the SAR information generated,
our chemists synthesize focused libraries, which are evaluated for biological
relevance in secondary high-throughput screens. The crystal structure is then
re-determined with active hits bound to the protein. Based on what is learned
from that interaction and utilizing computer modeling, second generation focused
libraries are created to improve drug characteristics. These focused libraries
are then screened against the therapeutic target, against related family members
of the target and in predictive metabolism assays to select the potential drug
candidate with the most desirable drug characteristics.

Chemoinformatics. We are continuing to develop a customized database to
capture information generated by our scientists, which is accessible to our
entire scientific staff. This database provides our scientists with access to
this shared information, thereby facilitating experimental design, scientific
calculations, data analysis and patent filing.

We have also developed a number of specialized software programs that
facilitate the generation of high quality drug leads and their rapid
optimization into potential drug candidates. We have created proprietary
software to identify promising building blocks, to help design diverse libraries
and to evaluate potential drug candidates against the candidate criteria. These
tools, which we do not make available commercially, facilitate

36
<PAGE> 41

the drug discovery efforts of our scientists working with our collaborators, as
well as our own drug discovery efforts. These software products include:

- Radical, which identifies promising building blocks by analyzing a
database of small molecules that have entered into clinical trials and
determining which fragments of these molecules occur repeatedly in drug
candidates;

- Cracker, which is designed to eliminate drug-irrelevant building blocks
from library design; and

- Eigen, Combiner and Select, which are designed to support optimization of
chemical diversity in our libraries.

Predictive databases for human metabolism and toxicology. A majority of
drugs fail in clinical development because they cannot be taken in doses
sufficient to provide efficacy without unacceptable side effects. We are
currently developing a relational database that uses our proprietary compound
library, known as our Diversity Library, as a basis to predict human metabolism
and toxicity. Our libraries are profiled through well-defined human and in vitro
metabolism and toxicity assays to create this predictive SAR database. We expect
this information will allow our chemists to make better decisions throughout the
drug discovery process and therefore create potential drug candidates with a
higher probability of clinical success.

Chemical genomics. The recent mapping of the human genome has created a
wealth of information for the development of potential new drugs. However, full
elucidation of the function of newly discovered potential targets and their role
in disease is expected to require decades of research. Our libraries can be
utilized both to identify novel leads and to better understand the biochemistry
and therapeutic relevance of targets with unknown function. We currently
participate in a chemical genomics collaboration with Neurocrine Biosciences,
Inc., in which we create focused libraries that are designed to affect families
of targets and define their therapeutic importance.

ARRAY'S PRODUCTS AND SERVICES

We provide a broad range of premium drug discovery products and services,
including:

- Optimer building blocks;

- Lead generation;

- Lead optimization; and

- Process research and development.

We offer products and services to collaborators across the drug discovery
process and also use them internally for our own drug discovery programs. Our
proprietary chemoinformatics platform supports the entire drug discovery
process.

37
<PAGE> 42

[Graphic depicting Array's role in the Drug Discovery Process.]

Optimer building blocks

Quality building blocks enable chemists to make higher quality compounds
more rapidly. We have recognized that a rate-limiting step in drug discovery is
the availability of high-quality building blocks for initiating chemical
synthesis. Our chemists have designed a series of building blocks with desirable
drug characteristics, which we refer to as drug-relevant building blocks, using
our proprietary Radical software and based on their experience in assessing
drug-relevant chemical structures. These building blocks are added to a scaffold
during compound synthesis.

Our proprietary building blocks have become an important component of our
overall drug discovery strategy. We produce primary building blocks for
construction of lead generation libraries, and we use sets of complementary,
secondary building blocks for creating focused libraries to determine SAR in
lead optimization programs. In addition, we sell approximately 300 of these
building blocks under the trade name Optimer. Our building block customers
include a number of large pharmaceutical companies such as Astra-Zeneca, Merck
and Schering Plough Research Institute, biotechnology companies such as Biogen,
Inc., Millennium Pharmaceuticals, Inc. and Vertex Pharmaceutics, Inc., and
combinatorial chemistry companies such as ArQule, Inc., BioFocus plc and Siddco,
Inc.

Lead generation

Another rate-limiting step in the discovery chemistry process is the
availability of high quality compound libraries that have been designed with
structures relevant for screening specifically against important target classes
and that are designed for rapid lead optimization. We believe that the
production of large compound libraries, by itself, has limited value for
creating high quality leads. Instead, we design our libraries so that any leads
generated require less optimization and will result in clinical candidates with
a greater likelihood of clinical success.

Our library design criteria. We design our libraries according to the
following criteria:

- Incorporation of drug-relevant building blocks. We use our drug-relevant
building blocks to create libraries that facilitate our ability to
rapidly optimize a hit due to the availability of secondary building

38
<PAGE> 43

blocks to create a focused library to study the SAR around that hit. More
than 30% of the building blocks used to create our Diversity Library are
proprietary to us and not commercially available.

- Target-directed scaffolds. Our chemists create scaffolds directed toward
disease-related families of targets. We attach building blocks to these
scaffolds to create library compounds.

- Best-in-class quality. Our scientists recognize that it is the
best-in-class drug that wins the market. Our library compounds are
designed to economically achieve optimal drug characteristics.

- Optimized chemical synthetic processes. We invest significant effort in
the process design and synthesis of each library to ensure that the
compounds generated are of high purity and can be readily optimized. The
library undergoes analysis during each stage of its development to ensure
the identity of each compound and maintain quality.

- Biologically-relevant diversity. We have created a number of parameters
to define the diversity in a compound library. Our proprietary
chemoinformatics tools analyze how changes in chemical structure
correlate with biological activity, or SAR, by analyzing published data
of known drug candidates and correlating this information with our
diversity parameters. Libraries can be constructed to optimize diversity
and therefore maximize the information provided by each hit.

Diversity Library. We sell chemical compounds from our Diversity Library to
our customers with a non-exclusive license to use them for internal research. We
retain all other rights to these compounds, including the right to utilize these
compounds for our internal and collaborative programs, as well as the rights to
the synthetic processes used to create these compounds. In future years, we
intend to increase our compound production for our Diversity Library up to
100,000 compounds annually. We create sub-libraries that interact with specific
target families, including G-protein coupled receptors, nuclear receptors,
enzymes and protein-protein interactions. The majority of all drugs on the
market today are aimed at targets within these families. Celltech Chiroscience
Ltd., through its subsidiary Darwin Discovery Limited, Immunex Corporation and
Tularik have multi-year subscriptions to our Diversity Library. We have also
sold portions of our Diversity Library to Asahi Chemical Industry Co., Ltd.,
Curis, Inc., DuPont, Fujisawa Pharmaceutical Co., Ltd., ICOS, Schering Plough
and Suntory Pharmaceutical Research Laboratories LLC, among others.

Custom libraries. We sell chemical compounds from the custom libraries we
design and synthesize for our collaborators, with either an exclusive or
non-exclusive license to use these compounds. These libraries are generally
focused towards specific target families or our collaborators' proprietary
scaffolds, and the compounds are of very high purity. Merck has been the largest
purchaser of custom libraries, working with us for over a year.

Screening. We have the capability to perform high-throughput screening of
our compound libraries for lead generation on behalf of our collaborators and in
our internal drug discovery programs. Collaborators would pay a per-compound
charge and compensate us on a headcount basis for the service. We have the
capability to create our own assays or to format assays supplied by a
collaborator for high-throughput screening. We also screen our compound
libraries against metabolism and toxicology assays both to establish quality and
to populate our predictive database.

39
<PAGE> 44

[Graphic depicting lead optimization of a hit.]

Lead optimization

Our chemists optimize leads generated from multiple starting points,
including:

- Leads provided by our collaborators;

- Leads generated internally or by our collaborators through screening our
Diversity Library; and

- Leads generated through structure-based drug design.

Regardless of a lead's source, we take an iterative, structure-based
approach to lead optimization. This approach typically begins with the design
and synthesis of focused libraries to identify the SAR of a lead. From this, we
can utilize x-ray crystallography and our chemoinformatics platform to
continuously design and synthesize additional focused libraries until we achieve
the drug candidate criteria. We screen these libraries against secondary assays
to minimize the potential for toxicity or metabolic deficiencies.

Because no single technology exists to accurately predict clinical outcomes
for potential drug candidates, experienced chemists with success in generating
clinical candidates are vital to an effective lead optimization program. Our
approach is to work closely with our collaborators, putting multi-disciplinary
teams of experienced chemists on projects to identify potential drug candidates.
We have successfully validated this approach to lead optimization with a lead
provided to us by ICOS. Within 12 months from the initiation of the program,
Array and ICOS scientists identified a potential drug candidate. In addition,
our lead optimization capabilities have been recognized by Eli Lilly, which
selected us to collaborate on multiple lead optimization programs. We have
contracted to supply Eli Lilly with up to 30 scientists to work on some of their
medicinal chemistry programs.

Process research and development

The processes to synthesize many pre-clinical candidates can be long,
complex and costly to scale-up. Our process chemists have solved significant
synthetic challenges in their careers, including the development of patentable
processes for synthesizing drugs that have entered clinical trials, and have
contributed to the synthesis of several complex drugs derived from natural
products, such as rapamycin, brevetoxin and taxol.
40
<PAGE> 45

Our goal is to apply these skills and experience to create novel yet efficient
processes to synthesize complex molecules.

Process design. Once a potential drug candidate has been identified, it is
critical to be able to reach a rapid decision whether to advance that candidate
into the clinic. In many cases, lack of an adequate quantity of a specific
compound for pre-clinical testing delays that decision. Our efforts are designed
to take complex medicinal chemistry processes and reduce the number of steps and
improve yields to allow for the rapid synthesis and scale-up of pre-clinical and
clinical drug candidates.

Custom synthesis. Our chemists can undertake challenging syntheses to
produce building blocks, complex intermediates and final products on a custom
basis or from small-scale through bulk quantities. We synthesize compounds both
on a proprietary and non-proprietary basis. A number of customers have asked us
to synthesize larger quantities of compounds we previously produced for them. We
expect to create proprietary processes that can be licensed to collaborators as
they advance potential drug candidates into clinical trials.

Process scale-up. Often a synthetic process can face unknown challenges
upon scale-up. Our chemists have demonstrated their ability to rapidly scale-up
compound production to meet customer deadlines. We have the capacity to produce
lots of up to 10 kilograms.

PROPRIETARY DRUG DISCOVERY

We leverage all of our capabilities internally to create our own potential
drug candidates for partnering with pharmaceutical and biotechnology companies.
We generate our own early-stage leads against therapeutically important targets
and target families that have been identified in the academic literature or
through patent applications. We typically focus on targets to which we believe
no promising lead has been identified. We generate quality leads by screening
our Diversity Library against the target and applying our chemoinformatic tools.
We then apply our iterative structure-based drug design approach. Once we have
qualified a valuable lead through secondary screening, we will seek to initiate
a collaboration in which we license the lead to a partner for subsequent
development and commercialization and in which we participate in the lead
optimization program. To date, we have entered into one such collaboration
agreement that provides an up-front fee, license fees, payments for each
full-time equivalent employee providing lead optimization services and milestone
payments. We expect to enter into future collaborations that may provide similar
fees and that also allow us to participate in the success of these potential
drug candidates through royalty payments.

We have worked on a number of targets, including those related to asthma,
diabetes and cancer. Two programs have developed early-stage leads for which we
are currently seeking licensing partners for further optimization. These
programs address a target for diabetes, phosphotyrosine phosphatase 1B, called
PTP1B, and a target for asthma, called tryptase. For example, shortly after the
publication of PTP1B as a key target for diabetes in March 1999, we initiated
structure-based lead generation and have now identified very promising leads. In
October 2000, we licensed these leads to Amgen Inc. and initiated a joint
research program with Amgen to identify potential drug candidates targeting
PTP1B.

COMMERCIALIZATION

We intend to grow revenue and achieve profitability while sharing in the
success we aim to create for our collaborators. We intend to maximize the value
we capture by focusing our scientific resources on our proprietary drug programs
and collaborations that utilize our full breadth of products and services and
that enable us to participate in the success of the potential drug candidates
that we create.

Our diverse products and services provide multiple revenue streams. We can
sell our Optimer building blocks and chemical compounds in our Diversity
Library, once synthesized, to multiple customers, creating a recurring revenue
stream. We provide our services on a fee-for-service basis to pharmaceutical and
biotechnology companies. Generally, a collaboration begins through a single
service or product area. Our intent is to increase revenue by expanding customer
relationships across our multiple products and services to

41
<PAGE> 46

eventually collaborate across the entire discovery chemistry process. As we
become more valuable to our collaborators, we intend to add milestones and/or
royalty payments to capture a larger portion of the value we create. To date,
two of our collaborations provide for milestone payments for achieving key drug
discovery events, and one provides for license payments.

We create proprietary drug candidates with the intent of furthering their
development and increasing their potential commercial value through
collaborating with biotechnology or pharmaceutical partners. We expect generally
to license additional potential drug candidates to future partners prior to lead
optimization. We will seek collaborations that provide us with an initial
licensing fee for exclusive rights to the compound, fee-for-service lead
optimization and downstream payments that may include milestone and/or royalty
payments.

CUSTOMERS AND COLLABORATORS

The following table lists, in alphabetical order, 15 of our top customers
and collaborators based on contracted-for revenue since our inception and
indicates the applicable products and services:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
PROCESS OPTIMER PROPRIETARY
LEAD LEAD RESEARCH & BUILDING DRUG
CUSTOMER/COLLABORATOR GENERATION OPTIMIZATION DEVELOPMENT BLOCKS CANDIDATES
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amgen Inc. X X X X
Biogen, Inc. X X
Celltech Chiroscience Limited, through its
subsidiary Darwin Discovery Limited X
Chiron Corporation X
CV Therapeutics, Inc. X X X
DuPont X X
Eli Lilly and Company X X
Fujisawa Pharmaceuticals Co., Ltd. X
Gilead Sciences, Inc. X
ICOS Corporation X X X
Immunex Corporation X
Merck & Co., Inc. X X X
Neurocrine Biosciences, Inc. X X
Schering Plough Research Institute X X
Tularik Inc. X X X
</TABLE>

A key element of our strategy is to increase the value we provide to our
customers by expanding our relationships with them across complementary products
and services. Below we describe several customers that chose to expand their
initial relationship with us.

ICOS. ICOS was one of our first customers. Our first agreement with ICOS
addressed lead optimization of up to four ICOS targets. This agreement,
initiated in December 1998, called for our scientists, in collaboration with
ICOS' scientists, to develop clinical candidates from ICOS' preliminary leads.
Based upon the success of this program, ICOS expanded this relationship in the
spring of 1999, by both initiating a second lead optimization program on a
separate set of targets, and subscribing to our Diversity Library. In less than
one year, our initial collaboration led to the development of a potential
clinical candidate for a target called phosphodiesterase 4, or PDE 4. In order
to speed the development of this clinical candidate, ICOS chose to access our
chemistry process research service to refine the production process in order to
produce sufficient quantities for pre-clinical and early phase clinical testing.
In July 2000, ICOS announced that they have expanded and consolidated these
earlier lead optimization agreements, providing additional

42
<PAGE> 47

milestones and more favorable terms. This new agreement includes lead generation
on hits identified during ICOS' screening of our Diversity Library.

ICOS has now taken advantage of our lead generation, lead optimization and
process chemistry products and services. We anticipate that clinical trials for
this PDE 4 inhibitor will be initiated approximately in mid-2001. We are
entitled to milestone payments based on the successful clinical development of
this drug.

Tularik. Our initial interaction with Tularik came through their interest
in our approach to creating lead generation libraries. In order to evaluate the
quality of our libraries, Tularik acquired a small subset of our Diversity
Library in April 1999. Within three months they initiated a one-year
subscription to our entire Diversity Library. Six months later, Tularik
exercised an option to subscribe to our entire second-year Diversity Library. We
have also expanded our relationship with Tularik by creating focused libraries
to an important class of targets called orphan nuclear receptors.

Merck. Merck began working with us in May 1999 by purchasing building
blocks from our Optimer collection on a non-exclusive basis. This initial
introduction led to an agreement between the parties for the exclusive
development and supply of custom synthesized compounds for Merck. Building on
this relationship, we announced in September 2000 an agreement with Merck for
the exclusive synthesis, development and supply of custom libraries, whereby we
will supply high quality focused libraries for Merck's drug discovery programs.

Eli Lilly. In March 2000, Eli Lilly purchased from us medicinal chemistry
services of up to 30 of our scientists. To date, this collaboration is moving
forward successfully. Our scientists are fully integrated into some of Eli
Lilly's drug discovery project teams. Initially this collaboration focused on
certain aspects of our lead optimization chemistry; however, Eli Lilly is
exploring expansion of joint efforts to other aspects of our technology platform
for drug discovery. This exploration may not result in an expanded
collaboration.

BUSINESS DEVELOPMENT

To date, our business development activities have been conducted primarily
through direct customer contact by our senior management and scientists and
through customer referrals. Because our customers are primarily skilled
scientists, we use our scientific expertise to initiate and to build upon strong
customer relationships. In Japan, we have relied upon the services of a
consulting company, Transpect, Inc., to help introduce and promote our company.
We market our Optimer building blocks through multiple channels, including
targeted mailing of a hardcopy catalog and through an Internet catalog. We plan
to continue to grow our business development resources.

RESEARCH AND DEVELOPMENT

Our research and development expenses were approximately $3.3 million in
fiscal year 1999, and $4.0 million in fiscal year 2000. We conduct research and
development in the following areas:

Assay development and high-throughput screening automation. We are
investing in the development of new assay and high speed screening technologies
in order to more effectively evaluate potential drug compounds for their
therapeutic value, including specificity and metabolism, and to increase the
speed of our screening capability.

Chemoinformatics. We are continuing our development of database technology,
to more effectively capture, organize and link the data generated by our
scientists, and to make this information more seamlessly accessible to any of
our drug discovery efforts. In addition, we are continuing the development of
internal software technologies designed to increase the speed and efficacy of
our lead generation and lead optimization chemistry.

Libraries. We have ongoing projects to develop and refine technologies
necessary to create high quality compound libraries composed of drug-relevant
compounds that can be rapidly optimized. Our research is focused in the areas of
designing drug-relevant building blocks and scaffolds, maximizing drug-like

43
<PAGE> 48

characteristics of our library compounds, optimizing library synthesis processes
and maximizing biologically-relevant compound diversity.

Internal Drug Discovery Projects. We will continue to invest in internal
drug discovery programs intended to create our own potential drug candidates. We
intend to commercialize any potential drug candidates that we are successful in
developing in these programs through partnerships with pharmaceutical and
biotechnology companies.

COMPETITORS

Competition across the range of our drug discovery products and services is
currently fragmented. We compete, however, with a number of companies in each of
the functional areas of drug discovery that we serve. Our major competitors are
medicinal outsourcing companies, including Albany Molecular Research Inc.,
ArQule, Inc., Discovery Partners Inc., MediChem Life Sciences, Inc. and Oxford
Asymmetry International plc, and drug discovery companies, including
3-Dimensional Pharmaceuticals, Inc., BioCryst Pharmaceuticals, Inc., Texas
Biotechnology Corporation and Vertex Pharmaceuticals Incorporated. In addition,
we compete with the internal research departments of biotechnology,
pharmaceutical and contract research companies. Many of these companies, which
also represent a significant market for our products and services and some of
which are our collaborators or customers, are developing or already possess
internally the technologies and services that we offer. Academic institutions
and other research organizations are also conducting research in areas in which
we provide services, either on their own or through collaborative efforts.

Many of our competitors are larger than we are and have greater financial
and other resources. We expect that we will face increased competition in the
future as new companies enter the market and advanced technologies become
available. Any of our competitors could broaden the scope of their drug
discovery offerings through acquisition, collaboration or internal development
to integrate their offerings or compete with us comprehensively across the drug
discovery process. Our competitors may also develop new, more effective or
affordable approaches or technologies that compete with our products and
services or render them obsolete or uneconomical.

In addition, we compete with pharmaceutical and biotechnology companies,
including our customers and collaborators, academic and research institutions,
contract research companies and other firms to hire qualified scientists. Some
of our competitors may have stronger financial resources, offer more attractive
equity compensation or have a proven operating history, any of which may make
our competitors more attractive employers than us to potential employees.

GOVERNMENT REGULATION

In the course of our business, we handle, store and dispose of chemicals.
We are subject to various federal, state and local laws and regulations relating
to the use, manufacture, storage, handling and disposal of hazardous materials
and waste products. These environmental laws generally impose liability
regardless of the negligence or fault of a party and may expose us to liability
for the conduct of, or conditions caused by, others. We have not incurred, and
do not expect to incur, material costs to comply with these laws and
regulations. Because the requirements imposed by these laws and regulations
change frequently, however, we may be unable to accurately predict the cost of
complying with these laws and regulations. In addition, although we believe that
we currently comply with the standards prescribed by these laws and regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In that event, we could be liable for any resulting damages, which
could exceed our resources and harm our results of operations.

Our customers and collaborators are subject to substantial regulation by
governmental agencies in the United States and other countries. Virtually all
pharmaceutical products are subject to rigorous pre-clinical and clinical
testing and other approval procedures by the FDA and by foreign regulatory
agencies. Various federal and state laws and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of these pharmaceutical products. This approval process is
time-consuming and expensive and there are no assurances that approval will be
granted on a timely basis, or at all. Even if
44
<PAGE> 49

regulatory approvals are granted, a marketed product is subject to continual
review. Later discovery of previously unknown problems or a failure to comply
with applicable regulatory requirements may result in restrictions on the
marketing of a product or the withdrawal of the product, as well as possible
civil or criminal sanctions. To the extent our customers or collaborators are
unable to obtain the necessary regulatory approvals to market their products, or
fail to continue to comply with regulatory requirements, we may be unable to
realize revenue from milestone and/or royalty payments.

We are subject to other regulations, including regulations under the
Occupational Safety and Health Act, regulations promulgated by the United States
Department of Agriculture, and other federal, state and local laws.

INTELLECTUAL PROPERTY

Our success will depend in part on our ability to protect our proprietary
software, potential drug candidates and other intellectual property rights. To
establish and protect our proprietary technologies and products, we rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality provisions in our contracts with our collaborators, customers,
employees, consultants and other third parties.

We attempt to protect our trade secrets in part by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable, and if so,
there may not be an adequate corrective remedy available. Despite the measures
we have taken to protect our intellectual property, parties to our agreements
may breach the confidentiality provisions in our contracts or infringe or
misappropriate our patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets or other
technology.

We also have implemented a patent strategy designed to protect technology,
inventions and improvements to inventions that are commercially important to our
business. We currently have seven patent applications on file in the United
States, including three provisional applications, and we are pursuing limited
patent coverage in foreign countries. Provisional patent applications provide no
substantive rights but do secure a priority date on which later patent
applications may be based, including both United States and foreign patent
applications. Provisional applications expire one year from the date of filing.
Four of our patent applications filed in the United States relate to proprietary
compounds that are pharmaceutical candidates, two relate to inventions based on
and used in our research efforts, and one relates to compounds that are
pharmaceutical candidates and the compound synthesis process. Two of our United
States patent applications relating to proprietary pharmaceutical candidates,
along with related foreign patent rights, were assigned to us by Amgen Inc. in
November 1998.

United States patents issued from applications filed on or after June 8,
1995 have a term of 20 years from the application filing date or earlier claimed
priority. All of our patent applications were filed after June 8, 1995. Patents
in most other countries have a term of 20 years from the date of filing of the
patent application. Because the time from filing patent applications to issuance
of patents is often several years, this process may result in a period of patent
protection significantly shorter than 20 years, which may adversely affect our
ability to exclude competitors from our markets. Our success will depend in part
upon our ability to develop proprietary products and technologies and to obtain
patent coverage for these products and technologies. We intend to continue to
file patent applications covering newly developed products and technologies. We
may not, however, commercialize the technology underlying any or all of our
existing or future patent applications.

Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
pharmaceuticals and biotechnology, involve complex legal and factual
determinations and, therefore, are characterized by some uncertainty. In
addition, the laws governing patentability and the scope of patent coverage
continue to evolve, particularly in biotechnology. As
45
<PAGE> 50

a result, patents may not issue from any of our patent applications or from
applications licensed to us. The scope of any of our patents, if issued, may not
be sufficiently broad to offer meaningful protection. In addition, our patents
or patents licensed to us, if they are issued, may be successfully challenged,
invalidated, circumvented or rendered unenforceable so that our patent rights
might not create an effective competitive barrier. Moreover, the laws of some
foreign countries may not protect our proprietary rights to the same extent as
do the laws of the United States. Any patents issued to us or our strategic
partners may not provide a legal basis for establishing an exclusive market for
our products or provide us with any competitive advantages. Moreover, the
patents held by others may adversely affect our ability to do business or to
continue to use our technologies freely. In view of these factors, our
intellectual property positions bear some degree of uncertainty.

The source code for our proprietary software programs is protected both as
a trade secret and as a copyrighted work.

We have registrations pending in the United States for the following
trademarks: "Array BioPharma," "Array Biopharma The Discovery Research Company,"
the Array Biopharma logo, "The Discovery Research Company," "Optimer" and
"Radical." We may not be able to obtain registrations for these marks in the
United States or other jurisdictions in which we may submit applications, or to
protect the use of these marks effectively.

Although we are not a party to any legal proceedings, in the future, third
parties may file claims asserting that our technologies or products infringe on
their intellectual property. We cannot predict whether third parties will assert
such claims against us or our licensees or against the licensors of technology
licensed to us, or whether those claims will harm our business. If we are forced
to defend against such claims, whether they are with or without merit, and
whether they are resolved in favor of or against us, our licensees or our
licensors, we may incur significant expenses and diversion of management's
attention and resources. As a result of such disputes, we may have to develop at
a substantial cost non-infringing technology or enter into licensing agreements.

LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

EMPLOYEES

As of October 31, 2000, we had 124 full-time and 10 part-time employees,
consisting of 92 scientists, 54 with Ph.D. degrees in chemistry and 49 with
large pharmaceutical company experience. None of our employees is covered by a
collective bargaining agreement. We consider our employee relations to be good.

FACILITIES

We are headquartered in Boulder, Colorado, where we lease approximately
26,400 square feet of space under a lease that expires July 15, 2001. We are
currently negotiating to expand and to extend the terms of this lease. In
February 2000, we leased approximately 24,000 square feet of space in a building
in Longmont, Colorado under a lease that expires on May 31, 2005, and has an
option to renew for two additional five-year terms. We have exercised an option
to lease an additional 19,200 square feet at our Longmont facility and are
scheduled to occupy this space in April 2001. We also have an option to lease an
additional 28,800 square feet in a building adjacent to our Longmont facility
when it becomes available for lease. We believe that these facilities, including
our option to expand our Longmont facility, will be sufficient for our
anticipated growth for the next 12 months.

CERTAIN KEY CONTRACTS

Collaboration Agreements with Potential Milestones

ICOS. In July 2000, we consolidated and expanded our lead optimization
agreements with ICOS into a drug discovery collaboration agreement for lead
optimization on undisclosed targets. Under the agreement,

46
<PAGE> 51

ICOS has the exclusive worldwide right to develop and market any products
resulting from the collaboration. We are compensated based on an annual rate for
each full-time equivalent employee working on an ICOS project and will receive
milestone payments upon achievement of identified development and
commercialization goals for products resulting from the collaboration. To date,
we have not received any milestone payments from ICOS. The agreement expires in
July 2002, and may be terminated upon 90 days' notice by ICOS following the
first anniversary of the agreement.

Amgen. In October 2000, we entered into a Research and License Agreement
with Amgen. Under the terms of this agreement, we granted Amgen an exclusive
license to our existing PTP1B program and we initiated a joint research program
to identify, characterize and optimize potential drug candidates targeting
PTP1B. Amgen has the exclusive worldwide right to develop and commercialize any
drugs that target PTP1B developed under this collaboration. The agreement
provides for an initial up-front fee of $1.8 million payable in November 2000,
license fees, quarterly payments for each full-time equivalent employee working
on the PTP1B project, and milestone payments upon achievement of identified
research, development and commercialization goals for products resulting from
the collaboration. To date, we have not received any milestone payments from
Amgen. The initial term of the research program is two years, and Amgen may
terminate the research program with six months' written notice during this term.

Our agreements with ICOS and Amgen provide for potential milestone payments
that may be as high as $63.0 million in the aggregate. These payments depend
upon our achievement of research objectives and upon other factors that we
cannot control, including these collaborators' financial, competitive, marketing
and strategic considerations and the approval of regulatory agencies in the
United States and abroad. As a result, we may not realize all or any of these
milestone payments.

Other Collaboration Agreements

Merck. In May 1999, we entered into a custom synthesis agreement with Merck
under which we provide custom compounds. Under the terms of this agreement, we
have entered into multiple exclusive custom library agreements with Merck in
which we are reimbursed on a headcount and per compound basis. This agreement
expires in May 2004, and Merck may terminate the agreement at any time. In
September 2000, we entered into a custom synthesis development and supply
agreement with Merck under which we synthesize and develop custom libraries
specified by Merck. We are compensated for development services and for the
delivery of compounds. The agreement begins in January 2001 and expires in
December 2003, and may be terminated by Merck upon six months' prior notice
after the first anniversary of the agreement.

Eli Lilly. In March 2000, we entered into a Research Services Agreement
with Eli Lilly to form a chemistry-based research collaboration. Under the terms
of the agreement, up to 30 of our scientists will provide drug research services
in collaboration with Eli Lilly scientists on identified Eli Lilly drug
discovery projects. We are compensated based on an annual rate for each
full-time equivalent employee working on an Eli Lilly project. Our contract with
Eli Lilly terminates in March 2005, but Eli Lilly may terminate the agreement at
any time upon payment of an early termination payment.

Compound Library Agreements

We have entered into compound library agreements with customers, including:

- Celltech Chiroscience Ltd., through its subsidiary Darwin Discovery
Limited, in April 1999, which expires April 2001;

- Tularik in June 1999, which Tularik extended in April 2000 and which
expires in January 2002; and

- DuPont in August 2000, which expires in December 2005.

Under these agreements, we sell chemical compounds from our Diversity
Library on a per-compound fee basis to our customers with a non-exclusive
license to use these compounds for their internal lead generation efforts. These
customers have the option to gain exclusive rights to compounds they intend to
commercialize

47
<PAGE> 52

upon payment of either a one-time activation fee or annual fees. We retain
ownership of the intellectual property rights to the compounds, our Diversity
Library and to any inventions made by our scientists working under these
agreements. Other than our agreement with DuPont, which may be terminated after
September 30, 2001 upon 90 days' notice, these agreements are terminable upon
breach or insolvency of a party. In addition, our agreement with Chiroscience
provides for an up-front payment of $300,000 and for up to $4.0 million of
additional amounts if we deliver both libraries under the agreement.
Chiroscience may purchase a third library from us and renew the agreement for an
additional one-year period under terms to be negotiated by the parties.

SCIENTIFIC ADVISORS

We have established a group of scientific advisors made up of leading
scholars in various functional disciplines of synthetic and medicinal chemistry.
Our scientific advisors are as follows:

<TABLE>
<CAPTION>
ADVISOR TITLE AND INSTITUTION
------------------------------------ ------------------------------------------------------
<S> <C>
Gregory C. Fu, Ph.D. ............... Professor, Department of Chemistry, Massachusetts
Institute of Technology
Ashit Ganguly, Ph.D. ............... Former Vice President of Chemistry, Schering Plough,
Professor of Chemistry, Stevens Institute of
Technology
K.C. Nicolaou, Ph.D. ............... Chairman, Department of Chemistry, The Scripps
Research Institute
Nicos A. Petasis, Ph.D. ............ Professor of Chemistry, University of Southern
California
Masakatsu Shibasaki, Ph.D. ......... Professor, The University of Tokyo
</TABLE>

48
<PAGE> 53

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES

Shown below are the names, ages and positions of our executive officers,
directors and other key employees as of October 31, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
--------------------------------------- --- --------------------------------------------
<S> <C> <C>
Robert E. Conway....................... 46 Chief Executive Officer and Director
Kevin Koch, Ph.D....................... 40 President, Chief Science Officer and
Director
David L. Snitman, Ph.D................. 48 Chief Operating Officer, Vice President,
Business Development and Director
Michael Carruthers..................... 43 Chief Financial Officer and Secretary
Anthony D. Piscopio, Ph.D.............. 39 Vice President, Chemistry and Director of
Process Chemistry
John A. Josey, Ph.D.................... 40 Senior Director of High-Speed Synthesis
Laurence Burgess, Ph.D................. 38 Senior Director of Medicinal Chemistry and
Lead Optimization
Joanna K. Money, Ph.D.................. 39 Director of Business Development
Kyle Lefkoff (a)(b).................... 41 Chairman
Francis J. Bullock, Ph.D. (a)(b)....... 63 Director
Marvin H. Caruthers, Ph.D.............. 60 Director
Kirby L. Cramer (a).................... 62 Director
Robert W. Overell, Ph.D. (b)........... 45 Director
</TABLE>

---------------

(a) Member of our audit committee.
(b) Member of our compensation committee.

Robert E. Conway has served as our Chief Executive Officer and a member of
our board of directors since November 1999. From October 1996 to October 1999,
Mr. Conway was the Chief Operating Officer and Executive Vice President of the
Clinical Trials Division of Hill Top Research, Inc. where he managed 22
company-owned research centers conducting clinical trials for pharmaceutical and
biotechnology companies. From 1979 until 1996, Mr. Conway held various executive
positions with Corning, Inc., including Corporate Vice President and General
Manager of Corning Hazleton, Inc., a pre-clinical contract research
organization, where he was responsible for North American operations. Mr. Conway
serves on the board of directors of DEMCO, Inc. Mr. Conway received a B.S. in
accounting from Marquette University, received an M.B.A. from the University of
Cincinnati and is a Certified Public Accountant.

Kevin Koch, Ph.D. has served as our President, our Chief Science Officer
and a member of our board of directors since May 1998. Prior to joining us, Dr.
Koch was an Associate Director of Medicinal Chemistry and Project Leader for the
Protease Inhibitor and New Leads project teams from May 1995 to April 1998 for
Amgen Inc. From September 1988 until May 1995, Dr. Koch held various positions
with Pfizer Central Research, including Senior Research Investigator-Project
Coordinator for the Cellular Migration and Immunology Project Teams. Dr. Koch is
chairman of the Strategic Research Institute's Anti-inflammatory Drug Discovery
Summit and is an elected board member of the Inflammation Research Association.
Dr. Koch received a B.S. in chemistry and in biochemistry from the State
University of New York at Stony Brook and a Ph.D. in synthetic organic chemistry
from the University of Rochester.

David L. Snitman, Ph.D. has served as our Vice President, Business
Development, our Chief Operating Officer and a member of our board of directors
since May 1998. Prior to joining us, Dr. Snitman held various positions with
Amgen Inc. since December 1981, including Associate Director, New Products and
Technology and Manager of Amgen's Boulder facility. Dr. Snitman received a B.S.
in chemistry from Northeastern University, received a Ph.D. in the synthesis of
natural products from the University of Colorado and was a National Institutes
of Health Postdoctoral Fellow at the Massachusetts Institute of Technology.

49
<PAGE> 54

Michael Carruthers has served as our Chief Financial Officer and Secretary
since December 1998. Prior to joining us, Mr. Carruthers was Chief Financial
Officer from October 1993 until December 1998 of Sievers Instrument, Inc. From
May 1989 until October 1993 Mr. Carruthers was the treasurer and controller for
the Waukesha division of Dover Corporation. Mr. Carruthers is a Certified Public
Accountant and was previously employed as an accountant with Coopers & Lybrand,
LLP. Mr. Carruthers received a B.S. in accounting from the University of
Colorado and an M.B.A. from the University of Chicago.

Anthony D. Piscopio, Ph.D. has served as our Vice President, Chemistry and
Director of Process Chemistry since May 1998. Prior to joining us, Dr. Piscopio
had been employed by Amgen Inc. since June 1995 in various capacities, including
as a founder of Amgen's small molecule drug discovery program. While at Amgen,
Dr. Piscopio worked in the area of protease inhibition and pioneered novel
high-speed synthesis methodologies for the preparation of B-turn mimetics and
other heterocyclic classes. From August 1992 until June 1995, Dr. Piscopio was
employed with Pfizer, Inc.'s Inflammation Group and worked in the areas of
G-protein coupled receptor modulation and computer-assisted design of protease
inhibitors. Dr. Piscopio received a B.A. in chemistry from West Virginia
University, received a Ph.D. in synthetic organic chemistry from the University
of Wisconsin-Madison and completed his postdoctoral fellowship at the Scripps
Research Institute in La Jolla, California as a National Institutes of Health
Postdoctoral Fellow.

John A. Josey, Ph.D. has served as our Senior Director of High-Speed
Synthesis since May 1998. Prior to joining us, Dr. Josey had been employed by
Amgen Inc. since September 1995 in the New Leads/ Combinatoral Chemistry Group
of Amgen's small molecule drug discovery program. From August 1991 until
September 1995, Dr. Josey was a research investigator in the Medicinal Chemistry
Department of Glaxo Research Institute. Dr. Josey received a B.S. in chemistry
from Colorado State University, received a Ph.D. in organic chemistry from the
University of Texas at Austin and was a Damon Runyon-Walter Winchell Fellow at
the California Institute of Technology.

Laurence Burgess, Ph.D. has served as our Senior Director of Medicinal
Chemistry and Lead Optimization since May 1998. Prior to joining us, Dr. Burgess
had been employed by Amgen Inc. since August 1995 in various capacities,
including as a project leader in its small molecule drug discovery research
program in the areas of respiratory and allergic disease. From February 1992
until August 1995, Dr. Burgess was employed by Pfizer Central Research working
in the areas of inflammation and immunology. Dr. Burgess received a B.S. in
chemistry from the Georgia Institute of Technology, received a Ph.D. from the
University of Texas and completed his postdoctoral research at Colorado State
University.

Joanna K. Money, Ph.D. has served as our Director of Business Development
since September 1999. Prior to joining us, Dr. Money was the Director of
Business Development from May 1998 to July 1999 for NeXstar Pharmaceuticals.
From September 1987 to April 1998, Dr. Money held various positions with Amoco
Chemical Company, including research chemist and business development manager
for the Asia Pacific Region as well as positions in marketing, strategic
planning and product management. Dr. Money received a B.Sc. in chemistry from
Imperial College, London and a Ph.D. in inorganic chemistry from Indiana
University.

Kyle Lefkoff has served as the Chairman of our board of directors since May
1998. Since 1995, Mr. Lefkoff has been a General Partner of Boulder Ventures
Limited, a venture capital firm and investor in our company. From June 1986
until June 1995, Mr. Lefkoff was employed by Colorado Venture Management, a
venture capital firm. Mr. Lefkoff serves on the boards of directors of Trust
Company of America, Vexcel Corporation and Metabolite Laboratories Inc. Mr.
Lefkoff received a B.A. in economics from Vassar College and an M.B.A. from the
University of Chicago.

Francis J. Bullock, Ph.D. has served as a member of our board of directors
since May 1998. Since 1993, Dr. Bullock has been a senior consultant for Arthur
D. Little, Inc., concentrating on pharmaceutical and biotechnology research and
development, as well as the fine chemicals and agricultural chemicals
industries. From April 1981 until September 1993, Dr. Bullock served as Senior
Vice President, Research Operations at Schering Plough Research Institute. Dr.
Bullock serves on the boards of directors of Genzyme Transgenics Corporation,
Neogenesis and Atherex. Dr. Bullock received a B.S. in pharmacy from the
Massachusetts

50
<PAGE> 55

College of Pharmacy, an A.M. in organic chemistry from Harvard University and a
Ph.D. in organic chemistry from Harvard University.

Marvin H. Caruthers, Ph.D. has served as a member of our board of directors
since August 1998. Since 1979, Dr. Caruthers has been a Professor of
Biochemistry and Bioorganic Chemistry at the University of Colorado. Dr.
Caruthers is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences and was previously a member of the scientific
advisory board of Amgen Inc. Dr. Caruthers serves on the boards of directors of
Oxigene and Genomica Corporation. Dr. Caruthers received a B.S. in chemistry
from Iowa State University and a Ph.D. in chemistry from Northwestern
University.

Kirby L. Cramer has served as a member of our board of directors since
August 2000. Mr. Cramer is the Chairman Emeritus of Hazleton Laboratories
Corporation, a Covance company, Chairman of the Board of Directors of
Northwestern Trust and Investors Advisory Company and Chairman of the Board of
Directors of SonoSite, Inc. From 1987 until 1991, Mr. Cramer served as the
Chairman of the Board of Directors of Kirschner Medical Corporation. Mr. Cramer
serves on the boards of directors of Immunex Corporation, Northwestern Trust and
Investors Advisory Company, SonoSite, Inc., Huntingdon Life Sciences Group plc,
Landec Corporation, D.J. Orthopedics, Inc. and Commerce Bank of Washington. Mr.
Cramer received a B.A. in history from Northwestern University, received an
M.B.A. from the University of Washington and is a graduate of Harvard Business
School's Advanced Management Program. Mr. Cramer is a Chartered Financial
Analyst.

Robert W. Overell, Ph.D. has served as a member of our board of directors
since December 1999. Since 1996, Dr. Overell has been with Frazier & Company, a
venture capital firm and investor in our company, and has served as a General
Partner since 1998 and a venture partner from 1996 until 1998. Dr. Overell's
operational experience in biotechnology companies includes joining Immunex
Corporation early in its development and co-founding Target Genetics. Dr.
Overell serves on the board of directors of FastTrack Systems, GeneMachines,
InPharos, Inc., SkeleTech, Inc. and XenoPort, Inc. Dr. Overell received his B.S.
in biological sciences from the University of Newcastle-upon-Tyne and a Ph.D. in
biochemistry from the Institute of Cancer Research, University of London.

Certain of our current directors were elected as designees of our preferred
stockholders and our founders in accordance with voting agreements that will
terminate following this offering. The current designees of our preferred
stockholders are Dr. Caruthers, Dr. Overell and Messrs. Lefkoff and Cramer, and
the current designees of our founders are Dr. Bullock, Dr. Koch and Dr. Snitman.

BOARD COMPOSITION

Our board of directors currently consists of eight directors. Upon
completion of this offering, our board of directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2001; Class II, whose term will expire at the annual meeting of
stockholders to be held in 2002; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2003. The initial Class I directors
will be Dr. Overell and Dr. Snitman, the initial Class II directors will be
Messrs. Conway and Lefkoff and Dr. Caruthers, and the initial Class III
directors will be Dr. Bullock, Dr. Koch and Mr. Cramer.

At each annual meeting of the stockholders beginning in 2001, the
successors to the class of directors whose terms expired will be elected to
serve three-year terms. If the number of directors on our board increases, the
newly created directorships will be distributed among the three classes so that
each class will, as nearly as possible, consist of one-third of the directors.
The classification of our board of directors may delay or prevent changes in our
control or management. In addition, our directors may be removed only with cause
and upon the vote of holders of two-thirds of our outstanding common stock.

51
<PAGE> 56

BOARD COMMITTEES

Our board of directors has established an audit committee and a
compensation committee.

The audit committee consists of Dr. Bullock, Mr. Cramer and Mr. Lefkoff.
The audit committee meets periodically with management and our independent
accountants to review their work and confirm that they are properly discharging
their respective responsibilities. The audit committee also:

- recommends the appointment of independent accountants to audit our
financial statements and perform services related to the audit;

- reviews the scope and results of the audit with the independent
accountants;

- reviews with management and the independent accountants our annual
operating results;

- considers the adequacy of the internal accounting control procedures; and

- considers the independence of our accountants.

The compensation committee consists of Dr. Bullock, Mr. Lefkoff and Dr.
Overell. The compensation committee determines the salary and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of our other employees. The compensation committee also
administers our stock option plan and our employee stock purchase plan,
including reviewing management recommendations with respect to option grants and
taking other actions as may be required in connection with our compensation and
incentive plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee currently consists of Dr. Bullock, Mr. Lefkoff
and Dr. Overell. No current member of the compensation committee has been an
officer or employee of ours at any time. None of our executive officers serve as
a member of the board of directors or compensation committee of any other
company that has one or more executive officers serving as a member of our board
of directors, nor has such a relationship existed in the past. Prior to July
2000, our board of directors, as a whole, including Mr. Conway, Dr. Koch and Dr.
Snitman, made decisions relating to the compensation of our executive officers
following recommendations from the compensation committee. In July 2000, our
board of directors delegated its authority to determine salaries of our
executive officers and administer our benefit plan to the compensation
committee. Mr. Conway, our Chief Executive Officer, served as a member of the
compensation committee from November 1999 through August 2000.

DIRECTOR COMPENSATION

We reimburse our directors for reasonable out-of-pocket expenses related to
attending board and committee meetings. Following the completion of this
offering, we intend to compensate each non-employee director who is not
affiliated with one of our preferred stock investors $12,000 annually, $1,000
for attending each board meeting and each committee meeting and $1,000 for
serving as chairman of a board meeting or a committee meeting. We have granted
certain non-employee directors non-qualified options to purchase our common
stock, including 10,000 options to Dr. Bullock in July 2000 for service during
fiscal year 2000 and 20,000 options to each of Dr. Bullock and Mr. Cramer in
August 2000 for service during fiscal year 2001. We intend to grant non-employee
directors who are not affiliated with our venture capital investors non-
qualified options to purchase shares of our common stock on a yearly basis in an
amount and with a vesting schedule to be determined by the compensation
committee.

52
<PAGE> 57

EXECUTIVE COMPENSATION

The following table sets forth summary information concerning the
compensation we paid during the fiscal year ended June 30, 2000 to our chief
executive officer and each of our other four most highly compensated executive
officers who were serving as executive officers at June 30, 2000. We refer to
these individuals as our named executive officers.

EXECUTIVE COMPENSATION SUMMARY

<TABLE>
<CAPTION>
COMPENSATION FOR THE LONG-TERM
FISCAL YEAR ENDED COMPENSATION
JUNE 30, 2000 ------------------
-------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- --------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Robert E. Conway(a)........................ $141,477 $60,000 800,000 $78,458(b)
Chief Executive Officer
Kevin Koch, Ph.D. ......................... 160,500 -- 58,125 --
President and Chief Science Officer
David L. Snitman, Ph.D. ................... 160,500 -- 58,125 --
Chief Operating Officer and Vice
President, Business Development
Anthony D. Piscopio, Ph.D. ................ 139,800 -- 50,625 --
Vice President, Chemistry and Director of
Process Chemistry
Michael Carruthers......................... 112,300 -- 41,250 --
Chief Financial Officer and Secretary
</TABLE>

---------------

(a) Mr. Conway became Chief Executive Officer in November 1999. His annual
salary during the first year of his employment agreement is $225,000.
(b) Consists of reimbursement of relocation expenses.

OPTION GRANTS DURING THE FISCAL YEAR ENDED JUNE 30, 2000

The following table sets forth information related to each grant of stock
options to our named executive officers during the fiscal year ended June 30,
2000. We have never granted any stock appreciation rights.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF SHARE PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(C)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR(A) SHARE(B) DATE 5% 10%
---- ---------- -------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Conway(d)........... 800,000 44.1% $0.600 11/15/09 $10,596,483 $17,157,449
Kevin Koch, Ph.D.(e).......... 58,125 3.2 0.235 7/1/09 791,116 1,267,812
David L. Snitman, Ph.D.(e).... 58,125 3.2 0.235 7/1/09 791,116 1,267,812
Anthony D. Piscopio,
Ph.D.(e).................... 50,625 2.8 0.235 7/1/09 689,037 1,104,223
Michael Carruthers(e)......... 41,250 2.3 0.235 7/1/09 561,437 899,737
</TABLE>

---------------

(a) Based on options to purchase an aggregate of 1,815,740 shares of common
stock granted to our employees between June 30, 1999 and June 30, 2000.
(b) The exercise price per share of each option was equal to the fair market
value of our common stock on the date of grant as determined by the board
of directors.

(c) Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by the assumed initial
public offering price of $8.50 per share, (2) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option, and (3)
subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are

53
<PAGE> 58

mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.

(d) Of Mr. Conway's 800,000 options, 133,333 vested on December 31, 1999 based
on his continuous service as of such date and 106,667 vested on July 1,
2000 based on our achievement of certain performance milestones. If we do
not close an initial public offering of our common stock, the vesting of
the remaining 560,000 unvested options is based on Mr. Conway's continuous
service in accordance with the following schedule: 55,000 will vest on
November 15, 2000; 5,000 will vest each month between December 15, 2000 and
October 15, 2003; 10,000 will vest on November 15, 2003 and 320,000 will
vest on July 1, 2005. Upon the closing of this offering, the vesting of
378,750 of Mr. Conway's unvested options will be accelerated and become
immediately exercisable, and the remaining 181,250 unvested options will
vest and become exercisable between November 15, 2000 and one year from the
date of the closing of this offering.

(e) All options vest monthly over a four-year period ending June 1, 2003.

OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED JUNE 30, 2000, AND OPTION VALUES
AS OF JUNE 30, 2000
The following table provides summary information for each of our named executive
officers with respect to stock options held as of June 30, 2000, and with
respect to stock options exercised during the fiscal year ended June 30, 2000.
The value realized upon exercise and the value of unexercised in-the-money
options shown below have been calculated on the basis of the assumed initial
public offering price of $8.50 per share, less the applicable exercise price per
share, multiplied by the number of shares underlying these options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AS OF MONEY OPTIONS AS OF
SHARES JUNE 30, 2000 JUNE 30, 2000
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ----------- -------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Conway................. -- $ -- 666,667 133,333 $5,266,669 $1,053,331
Kevin Koch, Ph.D................. 7,265 60,045 43,594 7,266 360,304 60,053
David L. Snitman, Ph.D........... -- -- 43,594 14,531 360,304 120,099
Anthony D. Piscopio, Ph.D........ 10,546 87,163 38,969 2,110 322,079 17,439
Michael Carruthers............... 34,401 284,324 80,938 5,911 668,953 48,854
</TABLE>

EMPLOYMENT AGREEMENTS

Effective November 15, 1999, we entered into an employment agreement with
Mr. Conway to serve as our Chief Executive Officer. The agreement is for an
initial term of two years and may be then renewed for additional one-year terms.
Either party may terminate the agreement for any reason upon 30 days' prior
notice to the other party during the initial term or any additional term. Under
the agreement, we will pay Mr. Conway an annual salary of $225,000 subject to
subsequent adjustment. In addition, we granted to Mr. Conway options to purchase
800,000 shares of our common stock that vest periodically over a six-year term,
subject to his continued employment. Upon the closing of this offering, 75% of
Mr. Conway's options will vest and become immediately exercisable and all
remaining options will vest between November 15, 2000 and one year from the date
of the closing of this offering. If Mr. Conway elects to terminate his
employment agreement following the closing of this offering, he would be
entitled to exercise any vested options during the 30-day period following such
termination. Mr. Conway is also eligible to receive a cash bonus each fiscal
year beginning in 2001 based on a percentage of his base salary provided he
meets minimum performance criteria to be established by our board of directors.
The cash bonus, if any, may be paid in equity in lieu of cash. We also agreed to
reimburse Mr. Conway for reasonable out-of-pocket expenses he incurred in
connection with his performance of services under this agreement and for
relocation costs of up to $80,000 for moving him and his family from Cincinnati,
Ohio to Boulder, Colorado.

If Mr. Conway's employment is terminated as a result of his disability or
by us without cause, we agreed to pay him a severance payment equal to one year
of his then current base salary in equal monthly

54
<PAGE> 59

installments and he will be entitled to receive, pro-rated to the date of
termination, any cash performance bonus he would have received for that year and
any performance options that would have vested in that year. Mr. Conway agreed
to execute a release acceptable to us in consideration for our severance
obligations under the agreement. If Mr. Conway terminates his employment without
cause, he will not receive any performance bonus for that year or acceleration
of any of his options granted under the agreement. Mr. Conway is also subject to
a non-compete agreement in which he agreed for a period of two years not to
engage in any competing activities in a 50-mile radius of any area where we are
doing business and not to recruit or solicit any of our employees or customers.

Effective September 1, 2000, we entered into employment agreements with Dr.
Koch, Dr. Snitman, Dr. Piscopio, Mr. Carruthers, Dr. Josey, Dr. Burgess and Dr.
Money. These agreements are for an initial term of two years and may then be
renewed for additional one-year terms. Either party may terminate for any reason
upon 30 days' prior notice to the other. Under these agreements we will pay the
employees annual salaries ranging from $120,000 to $175,000. If the employee is
terminated as a result of disability or by us without cause, including a
reduction in the employee's salary, we have agreed to pay the employee a
severance payment equal to the greater of one year, or the remaining term, of
his or her then-current base salary in equal monthly installments. Upon a change
of control of the company, 75% of each employee's outstanding options will vest
and the remaining 25% of such options will vest one year later, if the employee
is still working for us. Each of these employees is also subject to a
non-compete agreement in which he or she has agreed for a period of two years
following his or her termination not to engage in any competing activities
within a 50-mile radius of any area where we are doing business and not to
recruit or solicit any of our employees or customers.

In connection with our employment agreements with Dr. Koch and Dr.
Piscopio, we agreed to extend the due dates for a $100,000 note that we hold
from Dr. Koch and a $125,000 note that we hold from Dr. Piscopio to coincide
with the initial term of their employment agreements and to reduce the number of
shares of our common stock pledged as security for these notes to 50,000 shares
each.

EMPLOYEE BENEFIT PLANS

Amended and Restated Stock Option and Incentive Plan

Our Amended and Restated Stock Option and Incentive Plan is the successor
equity incentive program to our 1998 Stock Option Plan. Our amended stock option
plan was adopted by our board of directors and approved by our stockholders in
September 2000. Upon the closing of this offering, our amended stock option plan
will become effective, and we will make no further grants under our current
stock option plan. At that time, all awards under our current stock option plan
will be transferred to our amended stock option plan, however, such awards will
continue to be subject to their existing terms. The primary differences between
our current stock option plan and our amended stock option plan are described
below. This summary is qualified in its entirety by the detailed provisions of
our current stock option plan and our amended stock option plan, which have been
filed as exhibits to the registration statement of which this prospectus is a
part.

At October 31, 2000, there were 4,837,500 shares of common stock reserved
for issuance under the stock option plan and options to purchase 519,594 shares
of common stock remain available for issuance under the stock option plan.
Effective as of the closing of this offering, there will be 7,000,000 shares of
common stock reserved for issuance under the stock option plan. The stock option
plan provides that the number of shares reserved for issuance under the stock
option plan shall be increased, but not decreased, by any additional authorized
shares. Additional authorized shares, for purposes of the stock option plan,
means on any given day the difference between:

- 25% of our issued and outstanding shares of common stock, on a fully
diluted, as converted basis, minus

- the number of outstanding shares relating to awards under the stock
option plan plus the number of shares available for future grants of
awards under the stock option plan on that date.

55
<PAGE> 60

The number of shares available for issuance under the stock option plan as
incentive stock options may not initially exceed 7,000,000 shares, provided that
this number will be increased each January 1 for the next five years beginning
in 2001 by 250,000 shares. At no time can the number of shares available for
issuance under our stock option plan as incentive stock options exceed the total
number of shares reserved for issuance under our stock option plan.

The maximum number of shares subject to options that can be awarded under
the stock option plan to any person is 2,000,000 per year. The maximum number of
shares that can be awarded under the stock option plan to any person, other than
pursuant to an option, is 400,000 per year. The maximum amount that may be
earned as an annual incentive award or other cash award in any fiscal year by
any one person is $1,000,000 and the maximum amount that may be earned as a
performance award or other cash award in respect of a performance period by any
one person is $3,000,000.

Administration. The stock option plan is administered by our compensation
committee. Subject to the terms of the stock option plan, the compensation
committee may select participants to receive awards, determine the types of
awards and terms and conditions of awards, and interpret provisions of the stock
option plan.

The common stock issued or to be issued under the stock option plan
consists of authorized but unissued shares. Shares covered by an award that are
not purchased or that are forfeited will again be available for issuance as
awards under the stock option plan.

Eligibility. Awards may be made under our stock option plan to our
employees, officers, directors or consultants, or to any of our affiliates, or
their officers or directors, and to any other individual whose participation in
the stock option plan our compensation committee determines to be in our best
interests.

Amendment or Termination of the Plan. The board of directors may terminate
or amend the stock option plan at any time and for any reason as long as the
amendment does not adversely impair the rights of grantees with respect to
outstanding awards. Further, unless terminated earlier, the stock option plan
will terminate on the date 10 years from the date of the closing of this
offering. Amendments will be submitted for stockholder approval to the extent
required by the Internal Revenue Code or other applicable laws.

Options. We may grant options under the stock option plan that are either
intended to qualify as incentive stock options under the Internal Revenue Code
or not to qualify as incentive stock options, referred to as non-qualified stock
options.

The exercise price of each stock option may not be less than 100% of the
fair market value of our common stock on the date of grant. In the case of
specified 10% stockholders who receive incentive stock options, the exercise
price may not be less than 110% of the fair market value of our common stock on
the date of grant. An exception to these requirements is made for options that
we grant in substitution for options held by employees of companies that we
acquire. In this case, the exercise price is adjusted to preserve the economic
value of the employee's stock option from his or her former employer.

The term of each stock option is fixed by the compensation committee and
may not exceed 10 years from the date of grant. The compensation committee
determines when each option may be exercised and the period of time, if any,
after retirement, death, disability or termination of employment during which
options may be exercised. Options granted under our current stock option plan,
however, are generally exercisable, to the extent vested, for up to 30 days
after the optionee terminates employment without cause if the termination occurs
more than six months after the option is granted, unless the option agreement
provides otherwise.

Options may be exercisable in installments. Options granted under our
current stock option plan vest 25% per year over a four-year period based on
continued service with us, unless the option agreement provides otherwise. The
exercisability of options may be accelerated by the compensation committee.

In general, an optionee may pay the exercise price of an option by cash,
certified check, by tendering shares of our common stock, which if acquired from
us have been held by the optionee for at least six months, or by means of a
broker-assisted cashless exercise.

56
<PAGE> 61

Stock options granted under our stock option plan may not be sold,
transferred, pledged, or assigned other than by will or under applicable laws of
descent and distribution. However, we may permit limited transfers of
non-qualified options for the benefit of immediate family members of grantees to
help with estate planning concerns.

Other Awards. The compensation committee may also award under the stock
option plan:

- shares of common stock subject to restrictions;

- deferred stock, credited as deferred stock units, but ultimately payable
in the form of unrestricted shares of common stock in accordance with the
participant's deferral election;

- common stock units subject to restrictions;

- unrestricted shares of common stock, which are shares of common stock
issued at no cost or for a purchase price determined by the compensation
committee which are free from any restrictions under the stock option
plan;

- dividend equivalent rights entitling the grantee to receive credits for
dividends that would be paid if the grantee had held a specified number
of shares of common stock;

- a right to receive a number of shares or, in the discretion of the
compensation committee, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares
underlying the right during a stated period specified by the compensation
committee;

- a right to receive a number of shares, subject to the attainment of
specified performance goals; and

- performance and annual incentive awards, ultimately payable in stock or
cash, as determined by the compensation committee. The compensation
committee may grant multi-year and annual incentive awards subject to
achievement of specified performance goals tied to business criteria
described below.

Section 162(m) of the Internal Revenue Code limits publicly-held companies
to an annual deduction for federal income tax purposes of $1,000,000 for
compensation paid to their chief executive officer and the four highest
compensated executive officers (other than the chief executive officer)
determined at the end of each year. However, performance-based compensation is
excluded from this limitation. Although our stock option plan is currently not
subject to Section 162(m) because Section 162(m) provides for a grace period
following an initial public offering, the stock option plan is designed to
permit the compensation committee to grant awards that qualify as
performance-based for purposes of satisfying the conditions of Section 162(m)
after the stock option plan becomes subject to Section 162(m).

Business Criteria. The compensation committee may use exclusively one or
more of the following business criteria to establish performance goals for
awards granted to "covered employees" as defined by to Section 162(m) of the
Internal Revenue Code:

- total stockholder return;

- such total stockholder return as compared to total return, on a
comparable basis, of a publicly available index such as, but not limited
to, the Standard & Poor's 500 Stock Index;

- net income;

- pretax earnings;

- earnings before interest expense, taxes, depreciation and amortization;

- pretax operating earnings after interest expense and before bonuses,
service fees, and extraordinary or special items;

- operating margin;

- earnings per share;

- return on equity;

- return on capital;

- return on investment;

- operating earnings;

57
<PAGE> 62

- working capital;

- ratio of debt to stockholders' equity; and

- revenue.

Effect of Certain Corporate Transactions. Certain change of control
transactions involving us, such as a sale of all or substantially all of our
assets or stock, may cause awards granted under the stock option plan to vest,
unless the awards are continued or substituted for by the surviving company in
connection with the change of control transaction.

Adjustments for Stock Dividends and Similar Events. The compensation
committee will make appropriate adjustments in outstanding awards and the number
of shares available for issuance under the stock option plan, including the
individual limitations on awards, to reflect common stock dividends, stock
splits and other similar events.

Employee Stock Purchase Plan

The following is a summary description of our Employee Stock Purchase Plan,
which our board of directors adopted and stockholders approved in September
2000, effective upon the closing of this offering. Our stock purchase plan has
been filed as an exhibit to the registration statement of which this prospectus
is a part.

The purpose of our stock purchase plan is to permit eligible employees to
purchase shares of our common stock at a discount. Our stock purchase plan is
administered by the compensation committee. All of our employees whose customary
employment is more than 20 hours per week and for more than 5 months in any
calendar year will be eligible to participate in this plan, provided that any
employee who would own 5% or more of the total combined voting power or value of
our common stock immediately after any grant is not eligible to participate.

We have reserved 800,000 shares of common stock for issuance under our
stock purchase plan. We intend that our stock purchase plan meet the
requirements for an employee stock purchase plan under Section 423 of the
Internal Revenue Code.

During an offering period, we will withhold amounts through payroll
deductions for eligible employees who elect to participate in the stock purchase
plan. At the end of each offering period, we will use accumulated payroll
deductions to purchase, on behalf of eligible employees who are participating in
the plan, stock at a price equal to the lesser of 85% of the market price of the
common stock at either the beginning of the offering period or the end of the
offering period. The duration of each offering period will be determined by the
compensation committee.

Our compensation committee may prohibit our employees from selling shares
of common stock purchased under the stock purchase plan for a period of up to 12
months from the date the shares were purchased on the employee's behalf.

401(k) Savings Plan

We sponsor a 401(k) Savings Plan, a defined contribution plan intended to
qualify under Section 401 of the Internal Revenue Code. All employees who are at
least 21 years old are eligible to participate. Participants may make pre-tax
contributions to our 401(k) plan of up to 15% of their eligible earnings,
subject to a statutorily prescribed annual limit. We may make matching
contributions at 50% up to the first 4% contributed by employees under the
401(k) plan. Each participant is fully vested in his or her contributions. Our
matching contributions vest over four years. Contributions by the participants
or by us to the 401(k) plan, and the income earned on such contributions, are
generally not taxable to the participants until withdrawn. Our contributions, if
any, are generally deductible when made. All contributions are held in trust as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.

58
<PAGE> 63

RELATED PARTY TRANSACTIONS

Since our inception, we have issued shares of common and preferred stock in
private placement transactions as follows:

On May 18, 1998, we issued and sold 2,913,367 shares of our common stock at
a purchase price of $0.235 per share and 2,500,000 shares of our Series A
preferred stock at a purchase price of $1.00 per share. Between August 8, 1998
and January 15, 1999, we issued and sold an additional 4,135,000 shares of our
Series A preferred stock at a purchase price of $1.00 per share. On November 16,
1999, we issued and sold 3,199,999 shares of our Series B preferred stock at a
purchase price of $2.50 per share. On August 31, 2000, we issued and sold
1,666,667 shares of our Series C preferred stock at a purchase price of $6.00
per share. Each share of Series A preferred stock, Series B preferred stock and
Series C preferred stock currently converts into one share of common stock. Upon
the closing of this offering, the following shares of preferred stock convert
into common stock at a rate of one share of common stock for each share of
preferred stock.

The following table identifies our executive officers, directors and five
percent stockholders who have made equity investments in our company, excluding
the exercise of options to purchase shares of our common stock. See "Principal
and Selling Stockholders" for additional information relating to the beneficial
ownership of shares of our preferred and common stock of these stockholders.

<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SHARES OF SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK STOCK
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS
Kevin Koch, Ph.D.(a)................................. 648,654 5,000 54,000 --
David L. Snitman, Ph.D. ............................. 648,654 250,000 385,548 266,667
Anthony D. Piscopio, Ph.D. .......................... 648,654 -- 30,000 1,667
Michael Carruthers................................... -- 25,000 16,000 3,332
DIRECTORS
Kyle Lefkoff(b)...................................... 150,000 1,000,000 463,409 161,163
Marvin H. Caruthers, Ph.D.(c)........................ 18,750 250,000 80,000 33,936
Kirby L. Cramer...................................... -- -- -- 83,333
Robert Overell, Ph.D.(d)............................. -- 1,500,000 604,446 16,667
FIVE PERCENT STOCKHOLDERS
ARCH Venture Fund III, L.P. ......................... -- 1,500,000 604,446 204,779
Boulder Ventures II, L.P.(e)......................... 150,000 1,000,000 463,409 156,997
Falcon Technology Partners L.P. ..................... 150,000 1,000,000 463,409 156,997
Frazier Healthcare II, L.P. ......................... -- 1,500,000 604,446 16,667
K.C. Nicolaou, Ph.D. ................................ 648,654 -- 252,000 50,000
Rovent II Limited Partnership........................ -- 750,000 120,000 50,000
</TABLE>

---------------

(a) Includes 5,000 shares of Series A preferred stock and 2,000 shares of
Series B preferred stock purchased by Dr. Koch's spouse.

(b) Includes 130,500 shares of common stock, 870,000 shares of Series A
preferred stock, 403,166 shares of Series B preferred stock and 136,587
shares of Series C preferred stock purchased by Boulder Ventures II, L.P.;
19,500 shares of common stock, 130,000 shares of Series A preferred stock,
60,243 shares of Series B preferred stock and 20,410 shares of Series C
preferred stock purchased by Boulder Ventures II (Annex), L.P., an
affiliate of Boulder Ventures II, L.P. and 4,166 shares of Series C
preferred stock purchased by Mr. Lefkoff's father. The general partner of
Boulder Ventures II L.P. and Boulder Ventures II (Annex), L.P. is BV
Partners II, LLC. Mr. Lefkoff is a member and manager of BV Partners II,
LLC, and he disclaims beneficial ownership in the above shares except to
the extent of his pecuniary interest in such shares.

59
<PAGE> 64

(c) All shares of common stock and preferred stock were purchased by The
Caruthers Family, L.L.C., of which Dr. Caruthers is the manager and a
member. Dr. Caruthers disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest in the shares.

(d) Includes 1,500,000 shares of Series A preferred stock, 604,446 shares of
Series B preferred stock and 16,667 shares of Series C preferred stock
purchased by Frazier Healthcare II, L.P. The general partner of Frazier
Healthcare II, L.P. is FHMII, L.L.C., and the managing member of FHMII,
L.L.C. is Frazier Management, L.L.C. Dr. Overell is a member of Frazier
Management, L.L.C., and he disclaims beneficial ownership in the above
shares except to the extent of his pecuniary interest in such shares.

(e) Includes 19,500 shares of common stock, 130,000 shares of Series A
preferred stock, 60,243 shares of Series B preferred stock and 20,410
shares of Series C preferred stock purchased by Boulder Ventures II,
(Annex) L.P., an affiliate of Boulder Ventures II, L.P.

We believe that the terms of all the above-described transactions were no
less favorable than we could have obtained from unaffiliated third parties.

In connection with the above-described transactions, we entered into an
agreement with the investors providing for registration rights with respect to
the shares of common stock, including those issuable upon conversion of each
series of preferred stock. For more information, please see "Description of
Capital Stock -- Registration Rights."

Mr. Lefkoff is a manager and member of BV Partners II, LLC, which is the
general partner of Boulder Ventures II, L.P. and Boulder Ventures II (Annex),
L.P., and he was appointed as one of our directors by our stockholders under the
terms of a voting agreement that will terminate upon the consummation of this
offering. Dr. Overell is a member of Frazier Management, L.L.C., which is the
managing member of FHMII, L.L.C., which is the general partner of Frazier
Healthcare II, L.P., and he was appointed as one of our directors by Frazier
Healthcare II, L.P.

In connection with Dr. Koch's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $100,000, an interest rate of 6.0% per annum and a maturity date on the
earlier of May 18, 2001 or the date he voluntarily terminates his employment
with us. Dr. Koch initially pledged all 648,655 shares of common stock as
security for his loan. On September 1, 2000, we released 598,655 shares of
common stock from Dr. Koch's pledge and extended the maturity date of his loan
to the earlier of September 1, 2002 or the date Dr. Koch voluntarily terminates
his employment with us.

In connection with Dr. Nicolaou's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $125,000, an interest rate of 6.0% per annum and a maturity date of the
earlier of May 18, 2002 or the date Dr. Nicolaou terminates his consulting
arrangement with us. Dr. Nicolaou pledged all 648,655 shares of common stock as
security for his loan.

In connection with Dr. Piscopio's purchase of 648,655 shares of our common
stock on May 18, 1998, he issued us a promissory note with a principal balance
of $125,000, an interest rate of 6.0% per annum and a maturity date of the
earlier of May 18, 2002 or the date Dr. Piscopio terminates his employment with
us. Dr. Piscopio initially pledged all 648,655 shares of common stock as
security for his loan. On September 1, 2000, we released 598,655 shares of
common stock from Dr. Piscopio's pledge and extended the maturity date of his
loan to the earlier of September 1, 2002 or the date Dr. Piscopio voluntarily
terminates his employment with us.

Stock option grants to our directors and executive officers are described
in this prospectus under the heading "Management -- Director Compensation" and
"Management -- Executive Compensation." In addition, we have employment
agreements with our executive officers and some of our other employees, which
are discussed under "Management -- Employment Agreements."

60
<PAGE> 65

PRINCIPAL AND SELLING STOCKHOLDERS

The following table shows information with respect to beneficial ownership
of our common stock, as of October 31, 2000, after giving pro forma effect to
the conversion of all of our outstanding shares of preferred stock into common
stock on a one-to-one basis, and as adjusted to reflect the sale of the common
stock offered by us in this offering, for:

- each of our named executive officers;

- each of our directors;

- all of our directors and executive officers as a group; and

- each person known by us to beneficially own more than 5% of our common
stock.

We have calculated the percentage of stock beneficially owned based on
15,466,922 shares of common stock outstanding as of October 31, 2000, after
giving effect to the conversion of our convertible preferred stock, and
21,466,922 shares of common stock outstanding after completion of this offering.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF NUMBER OF BENEFICIALLY OWNED(B)
SHARES SHARES ----------------------
BENEFICIALLY BEING BEFORE AFTER
NAME OWNED OFFERED(A) OFFERING OFFERING
---- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
Robert E. Conway(c)................................... 653,750 4.2% 3.0%
Kevin Koch, Ph.D.(d).................................. 731,416 50,000 4.7 3.4
David L. Snitman, Ph.D.(e)............................ 1,541,427 10.0 7.2
Anthony D. Piscopio, Ph.D.(f)......................... 701,263 50,000 4.5 3.3
Michael Carruthers(g)................................. 92,910 * *
DIRECTORS
Kyle Lefkoff(h)....................................... 1,770,406 11.4 8.2
Francis J. Bullock, Ph.D.(i).......................... 40,000 * *
Marvin H. Caruthers, Ph.D.(j)......................... 382,686 2.5 1.8
Kirby L. Cramer....................................... 3,333 * *
Robert W. Overell, Ph.D.(k)........................... 2,121,113 13.7 9.9
All directors and executive officers as a group (10
persons)(l)......................................... 8,038,304 52.0 37.5
FIVE PERCENT STOCKHOLDERS
ARCH Venture Fund III, L.P.(m)........................ 2,309,225 14.9 10.8
Boulder Ventures II, L.P.(n).......................... 1,770,406 11.4 8.2
Falcon Technology Partners L.P.(o).................... 1,770,406 11.4 8.2
Frazier Healthcare II, L.P.(p)........................ 2,121,113 13.7 9.9
K.C. Nicolaou, Ph.D.(q)............................... 950,654 6.1 4.4
Rovent II Limited Partnership(r)...................... 920,000 5.9 4.3
</TABLE>

---------------

* Less than 1% beneficial ownership.

(a) Certain of our stockholders have granted the underwriters an over-allotment
option. If the over-allotment option is exercised in full, Dr. Koch and Dr.
Piscopio will each sell 50,000 shares of common stock in this offering. The
percentage of shares beneficially owned after the offering in the table
above assumes no exercise of the over-allotment option. If the
over-allotment option is exercised in full, Dr. Koch's and Dr. Piscopio's
percentage of shares beneficially owned after the offering would be 3.1%
and 2.9%, respectively.

(b) Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to
the securities. Unless indicated by footnote, the address for each listed
director, officer and principal stockholder is Array BioPharma Inc., 1885
33rd Street, Boulder, Colorado 80301. Except as indicated by footnote, the
persons named in the table have

61
<PAGE> 66

sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. The number of shares of common stock
outstanding used in calculating the percentage for each listed person
includes the shares of common stock underlying options held by that person
that are currently exercisable or are exercisable within 60 days of October
31, 2000, but excludes shares of common stock underlying options held by
any other person.

(c) Includes 20,000 shares of common stock held in uniform gift to minor
accounts for the benefit of Mr. Conway's children, options to purchase
378,750 shares that will become exercisable upon the closing of this
offering and options to purchase an additional 55,000 shares that are
exercisable within 60 days of October 31, 2000.

(d) Includes options to purchase 5,683 shares of common stock that are
exercisable within 60 days of October 31, 2000, 99,000 shares of common
stock held in trust for the benefit of Dr. Koch's minor children, and the
following shares held by Dr. Koch's spouse: options to purchase 1,626
shares of common stock that are exercisable within 60 days of October 31,
2000, 11,678 shares of common stock, 5,000 shares of Series A preferred
stock and 12,500 shares of Series B preferred stock.

(e) Includes options to purchase 10,216 shares of common stock that are
exercisable within 60 days of October 31, 2000, and 100,000 shares of
common stock held in trust for the benefit of Dr. Snitman's children.

(f) Includes options to purchase 8,286 shares of common stock that are
exercisable within 60 days of October 31, 2000.

(g) Includes options to purchase 8,877 shares of common stock that are
exercisable within 60 days of October 31, 2000.

(h) Includes 130,500 shares of common stock, 870,000 shares of Series A
preferred stock, 403,166 shares of Series B preferred stock and 136,587
shares of Series C preferred stock held by Boulder Ventures II, L.P., and
19,500 shares of common stock, 130,000 shares of Series A preferred stock,
60,243 shares of Series B preferred stock and 20,410 shares of Series C
preferred stock held by Boulder Ventures II (Annex), L.P., an affiliate of
Boulder Ventures II, L.P. The general partner of Boulder Ventures II L.P.
and Boulder Ventures II (Annex), L.P. is BV Partners II, LLC. Mr. Lefkoff
is a member and manager of BV Partners II, LLC, and he shares voting and
dispositive power in these shares. Mr. Lefkoff disclaims beneficial
ownership in these shares except to the extent of his pecuniary interest in
such shares.

(i) Includes options to purchase 30,000 shares of common stock that are
exercisable within 60 days of October 31, 2000.

(j) All shares of stock are held by The Caruthers Family, L.L.C., of which Dr.
Caruthers is the manager and a member. Dr. Caruthers disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
such shares.

(k) Includes 1,500,000 shares of Series A preferred stock, 604,446 shares of
Series B preferred stock and 16,667 shares of Series C preferred stock
owned by Frazier Healthcare II, L.P. The general partner of Frazier
Healthcare II, L.P. is FHMII, L.L.C., and the managing member of FHMII,
L.L.C. is Frazier Management, L.L.C. Dr. Overell is a member of Frazier
Management, L.L.C., and he shares voting and dispositive power in these
shares. Dr. Overell disclaims beneficial ownership in these shares except
to the extent of his pecuniary interest in such shares.

(l) Includes options to purchase 413,438 shares of common stock that are
exercisable within 60 days of October 31, 2000 or upon consummation of this
offering.

(m) The general partner of ARCH Venture Fund III, L.P. is Arch Venture
Partners, LLC. Steven Lazarus, Robert Nelsen, Keith Crandell, Clinton
Bybee, Alex Knight and Karen Kerr are each managers of Arch Venture
Partners, LLC and share voting and dispositive power for these shares.
Messrs. Lazarus, Nelsen, Crandell, Bybee and Knight and Ms. Kerr disclaim
beneficial ownership in these shares except to the extent of their
respective pecuniary interest in such shares. The business address of ARCH
Venture Fund III, L.P. is 8725 West Higgins Road, Suite 290, Chicago, IL
60631.

62
<PAGE> 67

(n) Includes 19,500 shares of common stock, 130,000 shares of Series A
preferred stock, 60,243 shares of Series B preferred stock and 20,410
shares of Series C preferred stock held by Boulder Ventures II (Annex),
L.P., an affiliate of Boulder Ventures II, L.P. The general partner of
Boulder Ventures II, L.P. and Boulder Ventures II (Annex), L.P. is BV
Partners II, LLC. Mr. Lefkoff, one of our directors, Josh E. Fidler and
Lawrence M. Macks are each members and managers of BV Partners II, LLC and
share voting and dispositive power for these shares. Messrs. Lefkoff,
Fidler and Macks disclaim beneficial ownership in these shares except to
the extent of their respective precuniary interest in such shares. The
business address of Boulder Ventures II, L.P. and Boulder Ventures II
(Annex), L.P. is 1941 Pearl Street, No. 300, Boulder, CO 80302.

(o) The general partner of Falcon Technology L.P. is James L. Rathmann. Mr.
Rathmann has voting and dispositive power for these shares. Mr. Rathmann
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in such shares. The business address of Falcon
Technology Partners L.P. is 600 Dorset Road, Devon, PA 19333.

(p) The general partner of Frazier Healthcare II, L.P. is FHMII, L.L.C., and
the managing member of FHMII, L.L.C. is Frazier Management, L.L.C. Dr.
Overell, one of our directors, Fred E. Silverstein, Alan Frazier, Nadar
Naini and Jon Gilbert are each directly or indirectly members of Frazier
Management, L.L.C. and share voting and dispositive power for these shares.
Dr. Overell, Dr. Silverstein and Messrs. Frazier, Naini and Gilbert
disclaim beneficial ownership in these shares except to the extent of their
respective pecuniary interest in such shares. The business address of
Frazier Healthcare II, L.P. is 601 Union Street, Suite 3300, Seattle, WA
98101.

(q) The business address of Dr. Nicolaou is 10550 North Torrey Pines Road, La
Jolla, CA 92037.

(r) The business address of Rovent II Limited Partnership is 75 State Street,
Boston, MA 02109.

63
<PAGE> 68

DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the closing of this offering, is only a summary. The description is qualified in
its entirety by the complete provisions of our certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement of which
this prospectus is a part. Upon the closing of this offering, our certificate of
incorporation will authorize the issuance of up to 60,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. As of October 31, 2000, 3,965,256 shares of common stock
were outstanding and 11,501,666 shares of convertible preferred stock,
convertible on a one-to-one basis into shares of common stock upon the
completion of this offering, were issued and outstanding. As of October 31,
2000, we had 124 stockholders.

COMMON STOCK

Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders. Holders of common stock are not
entitled to cumulative voting rights with respect to the election of directors.
Subject to preferences that may be applicable to any preferred stock outstanding
at the time, holders of common stock are entitled to receive ratable dividends,
if any, as may be declared from time to time by the board of directors out of
funds legally available for that purpose. In the event of our liquidation,
dissolution or winding up, holders of common stock would be entitled to share
ratably in all assets remaining after the payment of liabilities and liquidation
preferences on any outstanding preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and shares of common stock offered by us
in this offering, when issued and paid for, will be, fully paid and
nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of our preferred
stock will convert into shares of common stock on a one-to-one basis.
Thereafter, our board of directors will be authorized, without stockholder
approval, to issue up to an aggregate of 10,000,000 shares of preferred stock in
one or more series. The board of directors can fix the rights, preferences and
privileges of, and any qualifications, limitations or restrictions on, the
shares of each series of our preferred stock.

The issuance of preferred stock may have the effect of delaying or
preventing a change in our control or make removal of our management more
difficult. Additionally, the issuance of preferred stock could decrease the
amount of earnings and assets available for distribution to the holders of the
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of our common stock. The issuance of preferred stock
could also cause the market price of our common stock to decline. At present, we
have no plans to issue any shares of preferred stock.

WARRANTS

Prior to the closing of this offering, we will have outstanding warrants to
purchase a total of 53,750 shares of Series A preferred stock and 57,000 shares
of Series B preferred stock, including warrants to purchase 40,000 shares of
Series A preferred stock at $1.00 per share held by Silicon Valley Bank, which
will expire on October 9, 2005; warrants to purchase 13,750 shares of Series A
preferred stock at $3.00 per share held by Leasing Technologies International,
Inc., which will expire on March 31, 2006; warrants to purchase 7,000 shares of
Series B preferred stock at $2.50 per share held by Silicon Valley Bank, which
will expire on March 9, 2006; and warrants to purchase 50,000 shares of Series B
preferred stock at $5.00 per share held by Silicon Valley Bank, which will
expire on May 17, 2007. Upon completion of this offering, warrants to purchase
110,750 shares of preferred stock will convert automatically into warrants to
purchase an equal number of shares of common stock.

64
<PAGE> 69

REGISTRATION RIGHTS

At any time following three months from the effective date of this
offering, the holders of up to 14,185,184 shares of our common stock, or their
transferees, will be entitled to require the registration of those shares under
the Securities Act. Under an agreement with these holders, the holders of at
least 30% of these shares may on up to two occasions require us to register
their shares under the Securities Act, subject to some limitations described in
the agreement. In connection with this offering, some of our stockholders have
agreed with the underwriters not to exercise any demand registration rights for
a period of 365 days from the effective date of this offering. In addition,
these holders can require us to include their shares in future registrations of
our shares for our account or the account of another stockholder. After we
become eligible to register securities on Form S-3, these holders may require us
to register their shares on up to two occasions in any calendar year on Form
S-3. These registration rights are subject to limitations and conditions,
including the right of underwriters to limit the number of shares of common
stock held by existing stockholders to be included in a registration. The
registration rights as to any holder will terminate when all securities held by
the holder entitled to registration rights can be sold within a three-month
period under Rule 144 of the Securities Act and when the number of shares held
by the holder is less than 1% of our outstanding capital stock on an as
converted to common stock basis. In addition, we are generally required to bear
all expenses of registration, including the reasonable fees of a single counsel
acting on behalf of all selling stockholders, except underwriting discounts and
selling commissions.

Registration of any shares with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.
Sales of these shares could have a material adverse effect on the trading price
of our common stock.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

As permitted by the Delaware General Corporation Law, our certificate of
incorporation effective upon the closing of this offering provides that our
directors are not personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions; or

- for any transaction from which the director derives an improper personal
benefit.

As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.

Upon the closing of this offering, our bylaws will provide for the
indemnification of our directors and officers to the fullest extent authorized
by the Delaware General Corporation Law. We will indemnify a director or officer
in connection with an action initiated by that person if the action was
authorized by our board of directors. The indemnification provided under our
bylaws includes the right to be paid expenses in advance of the final
disposition of a proceeding for which indemnification may be had if the director
or officer agrees to repay all amounts paid in advance if it is ultimately
determined that the director or officer is not entitled to be indemnified. Under
our bylaws, if we do not pay a claim for indemnification within 60 days after we
have received a written claim, the director or officer may bring an action to
recover the unpaid amount of the claim. If successful, the director or officer
also will be entitled to be paid the expense of prosecuting the action to
recover these unpaid amounts.

Our bylaws also authorize us to purchase and maintain insurance on behalf
of any person who is or was one of our directors, officers, employees or agents,
or is or was serving at our request as a director, officer, employee, partner or
agent of another corporation or other entity or enterprise, against any
liability asserted

65
<PAGE> 70

against the person or incurred by the person in any of these capacities, or
arising out of the person's fulfilling one of these capacities, and related
expenses. We may obtain this insurance whether or not we would have the power to
indemnify the person against the claim under the provisions of the Delaware
General Corporation Law. We have purchased director and officer liability
insurance on behalf of our directors and officers. The indemnification
provisions under our certificate of incorporation and bylaws are not exclusive
of any other rights to indemnification under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.

ANTI-TAKEOVER PROVISIONS

General

Upon the closing of this offering, our certificate of incorporation and
bylaws will contain some provisions that are intended to enhance the likelihood
of continuity and stability in the composition of our board of directors and in
the policies formulated by our board of directors. In addition, provisions of
Delaware law may hinder or delay an attempted takeover of us other than through
negotiation with our board of directors. These provisions could have the effect
of discouraging attempts to acquire us or remove incumbent management even if
some or a majority of our stockholders believe this action is in their best
interest, including attempts that might result in the stockholders receiving a
premium over the market price for the shares of common stock they hold.

Classified Board

Our certificate of incorporation provides for the division of our board of
directors into three classes of directors serving staggered three-year terms.
Our certificate of incorporation further provides that the approval of the
holders of at least two-thirds of the shares entitled to vote is necessary for
the alteration, amendment or repeal of sections of our certificate of
incorporation relating to the election and classification of our board of
directors, limitation of director liability, indemnification and the vote
requirements for these amendments to our certificate of incorporation. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management.

Removal of Directors and Vacancies

Our certificate of incorporation provides that directors may be removed
only with cause upon the affirmative vote of holders representing two-thirds of
our outstanding shares. In addition, vacancies and newly created directorships
resulting from any increase in the size of the board of directors may be filled
only by the affirmative vote of a majority of the directors then in office, even
if they do not constitute a quorum, or by the sole remaining director. These
provisions would prevent stockholders from removing incumbent directors without
cause and filling the resulting vacancies with their own nominees.

Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors

Our bylaws establish an advance notice procedure with regard to the
nomination, other than by the board of directors, of candidates for election to
the board of directors and with regard to matters to be brought before an annual
meeting of our stockholders by a stockholder. For nominations and other business
to be brought properly before an annual meeting by a stockholder, the
stockholder must notify us between 60 and 90 days prior to the first anniversary
of the preceding year's annual meeting. Separate provisions based on public
notice by us specify how this advance notice requirement operates if the date of
the annual meeting is advanced by more than 30 days or delayed by more than 60
days from the anniversary date. The stockholder's notice must contain specified
information regarding the stockholder and its holdings, as well as background
information regarding any director nominee, together with that person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected, and a brief description of any business desired to be
brought before the meeting, the reasons for conducting the business at the
meeting and any material interest of the stockholder in the business proposed.
Although our bylaws do not give our

66
<PAGE> 71

board of directors any power to approve or disapprove stockholder nominations
for the election of directors or any other business desired by stockholders to
be conducted at an annual meeting, the bylaws:

- may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual
meeting if the proper procedures are not followed; or

- may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of us, even if the conduct of this solicitation or the
attempt to obtain control might be beneficial to us and our stockholders.

Special Stockholders' Meetings

Under our certificate of incorporation and bylaws, special meetings of
stockholders, unless otherwise prescribed by statute, may be called only by the
board of directors, the chairperson, or the chief executive officer.

Stockholder Action Only by Written Consent

Our certificate of incorporation provides that any action required or
permitted to be taken at a stockholders' meeting may be taken only by unanimous
written consent.

Section 203 of the Delaware General Corporation Law

Under Section 203 of the Delaware General Corporation Law, we may not
engage in a "business combination," which includes a merger or sale of more than
10% of our assets, with any "interested stockholder," namely, a stockholder who
owns 15% or more of our outstanding voting stock, as well as affiliates and
associates of any of these persons, for three years following the time that
stockholder became an interested stockholder, unless:

- the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;

- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding those shares owned by persons who are directors and
also officers; or

- at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.

Authorized but Unissued Shares

The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
our company. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of our company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock will be Computershare
Trust Company, Inc.

LISTING

We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "ARRY."

67
<PAGE> 72

SHARES ELIGIBLE FOR FUTURE SALE

If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also may make it more difficult for us to sell equity or equity-related
securities in the future and at a time and price that we deem appropriate.

Upon completion of this offering, we will have outstanding an aggregate of
21,466,922 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options, based on the
number of shares issued and outstanding as of October 31, 2000. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 15,466,922 shares eligible for sale in the
public market as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
----------------------------------------- -----------------------------------------
<S> <C>
486,226.................................. After 90 days from the date of this
prospectus.
13,284,629............................... After 180 days from the date of this
prospectus (subject, in some cases, to
volume limitations).
1,696,067................................ At various times after 180 days from the
date of this prospectus (subject, in some
cases, to volume limitations).
</TABLE>

LOCK-UP AGREEMENTS

All of our officers and directors and stockholders holding substantially
all of our outstanding stock have signed lock-up agreements with our
underwriters under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Lehman Brothers Inc. This consent may
be given at any time without public notice.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 214,669 shares immediately after this offering;
or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares of our common
stock from us in connection with a compensatory stock or

68
<PAGE> 73

option plan or other written agreement is eligible to resell those shares 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with some of the restrictions, including the holding period,
contained in Rule 144. As of October 31, 2000, a total of 4,317,906 shares of
common stock had been issued or were issuable upon the exercise of options. Of
these shares of common stock, 1,930,658 will be restricted by lock-up
agreements.

REGISTRATION RIGHTS

After this offering, the holders of 14,185,184 shares of our common stock,
or certain of their transferees, will be entitled to rights with respect to the
registration of those shares under the Securities Act. After such a
registration, these shares of our common stock become freely tradeable without
restriction under the Securities Act. Sales of these shares could have a
material adverse effect on the trading price of our common stock.

STOCK OPTIONS

As soon as practicable after this offering, we intend to file a
registration statement on Form S-8 covering the shares of common stock reserved
for issuance under our stock option plan and our employee stock purchase plan.
As of October 31, 2000, options to purchase 3,266,016 shares of common stock
were outstanding. The registration statement is expected to be filed and become
effective as soon practicable after the effective date of this offering. Shares
of common stock registered under any registration statement will, subject to
Rule 144 volume limitations applicable to affiliates, be available for sale in
the open market, unless the shares are subject to vesting restrictions or the
lock-up agreements described above.

69
<PAGE> 74

UNDERWRITING

Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Deutsche Bank Securities Inc. and Legg
Mason Wood Walker, Incorporated are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock shown
opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc. .......................................
Deutsche Bank Securities Inc. ..............................
Legg Mason Wood Walker, Incorporated........................
---------
Total............................................. 6,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement must be purchased. The conditions
contained in the underwriting agreement include the requirements that:

- the representations and warranties made by us to the underwriters are
true;

- there is no material change in the financial markets; and

- we deliver to the underwriters customary closing documents.

The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at this public offering price. The underwriters may allow, and
the dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.

We have granted the underwriters an option to purchase up to an additional
800,000 shares of common stock and two of our founding stockholders, Dr. Koch
and Dr. Piscopio, have granted the underwriters an option to purchase up to an
additional 100,000 shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting discount
shown on the cover page of this prospectus. The underwriters may exercise this
option at any time until 30 days after the date of the underwriting agreement.
If this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
commitment as indicated in the table above, and we and the selling stockholders
will be obligated, under the over-allotment option, to sell the shares of common
stock to the underwriters. If this option is exercised and the selling
stockholders fail to deliver some or all of the 100,000 shares, we have agreed
to deliver to the underwriters an amount of shares that will permit the
underwriters to exercise this option in full.

We have agreed not to, without the prior consent of Lehman Brothers Inc.,
directly or indirectly, offer, sell or otherwise dispose of any shares of common
stock or any securities which may be converted into or exchanged for any such
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and the holders of
substantially all of our shares of capital stock have agreed under lock-up
agreements that, without the prior written consent of Lehman Brothers Inc., they
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into or exchanged for
any such shares for the period ending 180 days after the date of this
prospectus. See "Shares Eligible for Future Sale," included elsewhere in this
prospectus.

70
<PAGE> 75

The underwriting discount is equal to the public offering price per share
of common stock less the amount paid by the underwriters to us per share of
common stock. The underwriting discount is % of the public offering price. We
have agreed to pay the underwriters the following total amount, assuming either
no exercise or full exercise by the underwriters of their over-allotment option:

<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------
NO FULL
EXERCISE EXERCISE
OF OVER- OF OVER-
PER ALLOTMENT ALLOTMENT
SHARE OPTIONS OPTIONS
--------- --------- ---------
<S> <C> <C> <C>
Underwriting discount paid by Array BioPharma.......... $ $ $
Underwriting discount paid by selling stockholders..... --
--- ---
Total........................................ $ $
</TABLE>

In addition, we estimate that our share of the total expenses of this
offering, excluding the underwriting discount, will be approximately $900,000.

Before this offering, there has been no public market for the shares of
common stock. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered, among other things and in addition
to prevailing market conditions:

- our historical performance and capital structure;

- estimates of our business potential and earning prospects;

- an overall assessment of our management; and

- the consideration of the above factors in relation to market valuations
of companies in related businesses.

We have applied to list our common stock for quotation on the Nasdaq
National Market under the symbol "ARRY."

We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.

Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.

The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.

The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that
71
<PAGE> 76

there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
common stock made by the underwriters in the open market prior to the completion
of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.

Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.

Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.

Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.

At our request, the underwriters have reserved up to 300,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates at the initial
public offering price set forth on the cover page of this prospectus. These
persons must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent these persons purchase the
reserved shares.

72
<PAGE> 77

LEGAL MATTERS

The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Hogan & Hartson L.L.P., Boulder, Colorado. Legal
matters relating to the sale of common stock in this offering will be passed
upon for the underwriters by Latham & Watkins, Costa Mesa, California. William
R. Roberts and Christopher D. Ozeroff, partners of Hogan & Hartson L.L.P., own
13,607 shares and 37,621 shares, respectively, of our preferred stock. These
shares will be converted on a one-to-one basis into shares of our common stock
upon completion of this offering.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 2000 and 1999, and for each of the two years in the
period ended June 30, 2000 and the period from February 6, 1998 (inception) to
June 30, 1998, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, including
amendments to it, relating to the common stock offered by us. This prospectus
does not contain all of the information in the registration statement and its
exhibits and schedules. For further information with respect to our company and
our common stock, you should review the registration statement and its exhibits
and schedules. You may inspect a copy of the registration statement and the
exhibits and schedules to the registration statement without charge at the SEC's
principal office in Washington, D.C. You may obtain copies of all or any part of
the registration statement from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located
at Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of fees prescribed by the SEC. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC. The address of the SEC's Web site is
www.sec.gov.

We intend to furnish our stockholders with annual reports containing
audited financial statements certified by our independent auditors.

ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.

73
<PAGE> 78

ARRAY BIOPHARMA INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 79

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Array BioPharma Inc.

We have audited the accompanying balance sheets of Array BioPharma Inc. as
of June 30, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended June 30, 2000 and the period from February 6, 1998 (inception) to June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Array BioPharma Inc. at June
30, 2000 and 1999, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 2000 and the period from February
6, 1998 (inception) to June 30, 1998, in conformity with accounting principles
generally accepted in the United States.

/s/ Ernst & Young LLP

Denver, Colorado
July 28, 2000,
except for the third paragraph
of Note 6, as to which the date is
September 1, 2000

F-2
<PAGE> 80

ARRAY BIOPHARMA INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
AS OF JUNE 30, AS OF AS OF
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000 2000
----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,185,915 $ 3,846,407 $ 9,764,709
Marketable securities.............................. -- 1,937,099 594,798
Accounts receivable................................ 507,242 885,522 1,163,248
Deposits........................................... 252,888 120,129 293,743
Inventories........................................ 979,158 1,557,376 1,943,174
Prepaid expenses and advances...................... 79,323 201,560 420,310
----------- ----------- -----------
Total current assets........................ 4,004,526 8,548,093 14,179,982
Property, plant and equipment, net................... 2,871,854 6,910,757 10,236,264
Other assets......................................... 248,244 364,342 370,458
----------- ----------- -----------
Total assets................................ $ 7,124,624 $15,823,192 $24,786,704
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade........................... $ 713,379 $ 1,708,750 $ 1,334,975
Advance payments from customers.................... 1,063,754 1,940,433 1,533,193
Accrued compensation............................... 65,127 359,871 751,295
Current portion of long-term debt.................. 764,206 1,723,837 2,416,574
Other current liabilities.......................... 137,794 605,309 598,308
----------- ----------- -----------
Total current liabilities................... 2,744,260 6,338,200 6,634,345
Long-term debt, less current portion................. 1,823,490 2,832,423 3,619,643
Stockholders' equity:
Preferred stock, par value $0.001, 11,825,000
shares authorized actual and pro forma...........
Series A convertible preferred stock; 6,635,000
shares issued and outstanding at June 30, 1999
and 2000 and September 30, 2000, no shares
outstanding pro forma; preference in liquidation
of $6,635,000 at June 30, 2000 and September 30,
2000............................................. 6,635 6,635 6,635 $ --
Series B convertible preferred stock; 3,199,999
shares issued and outstanding at June 30, 2000
and September 30, 2000, no shares outstanding pro
forma; preference in liquidation of $8,000,000 at
June 30, 2000 and September 30, 2000............. -- 3,200 3,200 --
Series C convertible preferred stock; 1,666,667
shares issued and outstanding at September 30,
2000, no shares outstanding pro forma; preference
in liquidation of $10,000,000 at September 30,
2000............................................. -- -- 1,667 --
----------- ----------- ----------- -----------
Total preferred stock....................... 6,635 9,835 11,502 --
Common stock, $0.001 par value;
20,225,000 shares authorized actual and pro
forma, 2,923,367, 3,370,207, 3,902,666 and
15,404,332 shares issued and outstanding at June
30, 1999 and 2000, September 30, 2000 and pro
forma, respectively.............................. 2,923 3,370 3,902 15,404
Additional paid-in capital......................... 7,276,776 21,168,078 37,417,704 37,417,704
Accumulated deficit................................ (4,356,710) (9,489,113) (12,574,956) (12,574,956)
Notes receivable for common stock - related
party............................................ (372,750) (393,750) (399,000) (399,000)
Deferred compensation.............................. -- (4,645,851) (9,926,436) (9,926,436)
----------- ----------- ----------- -----------
Total stockholders' equity.................. 2,556,874 6,652,569 14,532,716 $14,532,716
----------- ----------- ----------- ===========
Total liabilities and stockholders'
equity................................... $ 7,124,624 $15,823,192 $24,786,704
=========== =========== ===========
</TABLE>

See accompanying notes.
F-3
<PAGE> 81

ARRAY BIOPHARMA INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 6,
1998 THREE MONTHS ENDED
(INCEPTION) TO YEARS ENDED JUNE 30, SEPTEMBER 30,
JUNE 30, -------------------------- -------------------------
1998 1999 2000 1999 2000
-------------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Collaboration service revenue........ $ -- $ 992,000 $ 4,629,000 $ 730,000 $ 2,110,000
Product revenue...................... -- 511,859 2,144,634 619,812 651,204
-------- ----------- ------------ ----------- -----------
Total revenue..................... -- 1,503,859 6,773,634 1,349,812 2,761,204
Cost of revenue*....................... -- 1,032,910 4,444,958 817,037 2,407,992
-------- ----------- ------------ ----------- -----------
Gross profit........................... -- 470,949 2,328,676 532,775 353,212
Expenses:
Research and development expenses*... -- 3,300,941 3,962,969 695,789 1,701,591
Selling, general and administrative
expenses*......................... 62,359 1,522,067 3,469,969 438,529 1,693,978
-------- ----------- ------------ ----------- -----------
Total operating expenses.......... 62,359 4,823,008 7,432,938 1,134,318 3,395,569
-------- ----------- ------------ ----------- -----------
Loss from operations.............. (62,359) (4,352,059) (5,104,262) (601,543) (3,042,357)
Interest expense....................... -- (135,904) (384,378) (83,715) (173,249)
Interest income........................ 13,055 180,557 356,237 24,793 129,763
-------- ----------- ------------ ----------- -----------
Net loss............................... (49,304) (4,307,406) (5,132,403) (660,465) (3,085,843)
Deemed dividend related to beneficial
conversion feature of preferred
stock................................ -- -- -- -- (5,000,001)
-------- ----------- ------------ ----------- -----------
Net loss applicable to common
stockholders......................... $(49,304) $(4,307,406) $ (5,132,403) $ (660,465) $(8,085,844)
======== =========== ============ =========== ===========
Basic and diluted net loss
per share applicable to common
stockholders......................... $ (0.06) $ (1.48) $ (1.68) $ (0.22) $ (2.17)
======== =========== ============ =========== ===========
Shares used in computing basic and
diluted net loss per share........... 863,964 2,918,367 3,063,439 2,968,575 3,718,550
======== =========== ============ =========== ===========
Pro forma basic and diluted net loss
per share applicable to common
stockholders (unaudited)............. $ (0.44) $ (0.57)
============ ===========
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited).......................... 11,697,343 14,109,105
============ ===========

* Includes compensation related to stock option grants:
Cost of revenue...................... $ 42,689 $ 209,732
Research and development expenses.... 34,928 139,822
Selling, general and administrative
expenses.......................... 1,040,179 357,112
------------ -----------
Total........................ $ 1,117,796 $ 706,666
============ ===========
</TABLE>

See accompanying notes.
F-4
<PAGE> 82

ARRAY BIOPHARMA INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FOR COMMON
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK --
-------------------- ------------------ PAID-IN ACCUMULATED RELATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTY COMPENSATION
---------- ------- --------- ------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 6, 1998
(inception).............. -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash and notes
receivable............... -- -- 2,913,367 2,913 681,493 -- (350,000) --
Issuance of Series A
convertible preferred
stock, net of issuance
cost of $30,116.......... 2,500,000 2,500 -- -- 2,467,384 -- -- --
Interest accrued on notes
receivable............... -- -- -- -- -- -- (1,750) --
Net loss................... -- -- -- -- -- (49,304) -- --
---------- ------- --------- ------ ----------- ------------ --------- -----------
Balance at June 30, 1998... 2,500,000 2,500 2,913,367 2,913 3,148,877 (49,304) (351,750) --
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $60,381......... 4,135,000 4,135 -- -- 4,070,484 -- -- --
Exercise of stock
options.................. -- -- 10,000 10 2,340 -- -- --
Interest accrued on notes
receivable............... -- -- -- -- -- -- (21,000) --
Warrants issued in
connection with equipment
financing................ -- -- -- -- 55,075 -- -- --
Net loss................... -- -- -- -- -- (4,307,406) -- --
---------- ------- --------- ------ ----------- ------------ --------- -----------
Balance at June 30, 1999... 6,635,000 6,635 2,923,367 2,923 7,276,776 (4,356,710) (372,750) --
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $63,204......... 3,199,999 3,200 -- -- 7,933,594 -- -- --
Exercise of stock
options.................. -- -- 446,840 447 104,561 -- -- --
Interest accrued on notes
receivable............... -- -- -- -- -- -- (21,000) --
Compensation related to
stock option grants...... -- -- -- -- 5,763,647 -- -- (4,645,851)
Warrants issued in
connection with equipment
financing................ -- -- -- -- 89,500 -- -- --
Net loss................... -- -- -- -- -- (5,132,403) -- --
---------- ------- --------- ------ ----------- ------------ --------- -----------
Balance at June 30, 2000... 9,834,999 9,835 3,370,207 3,370 21,168,078 (9,489,113) (393,750) (4,645,851)
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $4,325
(unaudited).............. 1,666,667 1,667 -- -- 9,994,005 -- -- --
Exercise of stock options
(unaudited).............. -- -- 532,459 532 268,370 -- -- --
Interest accrued on notes
receivable (unaudited)... -- -- -- -- -- -- (5,250) --
Compensation related to
stock option grants
(unaudited).............. -- -- -- -- 5,987,251 -- -- (5,280,585)
Net loss (unaudited)....... -- -- -- -- -- (3,085,843) -- --
---------- ------- --------- ------ ----------- ------------ --------- -----------
Balance at September 30,
2000 (unaudited)......... 11,501,666 $11,502 3,902,666 $3,902 $37,417,704 $(12,574,956) $(399,000) $(9,926,436)
========== ======= ========= ====== =========== ============ ========= ===========

TOTAL
-----------
<S> <C>
Balance at February 6, 1998
(inception).............. $ --
Issuance of common stock
for cash and notes
receivable............... 334,406
Issuance of Series A
convertible preferred
stock, net of issuance
cost of $30,116.......... 2,469,884
Interest accrued on notes
receivable............... (1,750)
Net loss................... (49,304)
-----------
Balance at June 30, 1998... 2,753,236
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $60,381......... 4,074,619
Exercise of stock
options.................. 2,350
Interest accrued on notes
receivable............... (21,000)
Warrants issued in
connection with equipment
financing................ 55,075
Net loss................... (4,307,406)
-----------
Balance at June 30, 1999... 2,556,874
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $63,204......... 7,936,794
Exercise of stock
options.................. 105,008
Interest accrued on notes
receivable............... (21,000)
Compensation related to
stock option grants...... 1,117,796
Warrants issued in
connection with equipment
financing................ 89,500
Net loss................... (5,132,403)
-----------
Balance at June 30, 2000... 6,652,569
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $4,325
(unaudited).............. 9,995,672
Exercise of stock options
(unaudited).............. 268,902
Interest accrued on notes
receivable (unaudited)... (5,250)
Compensation related to
stock option grants
(unaudited).............. 706,666
Net loss (unaudited)....... (3,085,843)
-----------
Balance at September 30,
2000 (unaudited)......... $14,532,716
===========
</TABLE>

See accompanying notes.
F-5
<PAGE> 83

ARRAY BIOPHARMA INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
FEBRUARY 6, 1998 YEARS ENDED JUNE 30, SEPTEMBER 30,
(INCEPTION) TO ------------------------- -------------------------
JUNE 30, 1998 1999 2000 1999 2000
---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $ (49,304) $(4,307,406) $(5,132,403) $ (660,465) $(3,085,843)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. -- 530,932 989,127 210,817 453,805
Accrued interest on notes receivable for
common stock........................... (1,750) (21,000) (21,000) (172) (5,250)
Compensation related to stock option
grants................................. -- -- 1,117,796 -- 706,666
Accreted interest related to warrants.... -- 6,683 15,053 2,875 9,036
Changes in operating assets and
liabilities:
Accounts receivable.................... -- (507,242) (378,280) (50,844) (277,726)
Deposits............................... (190,500) (62,388) 132,759 250,338 (173,614)
Inventories............................ -- (979,158) (578,218) (214,759) (385,798)
Prepaid expenses and advances.......... (1,668) (77,655) (122,237) (109,547) (218,750)
Accounts payable -- trade.............. -- 713,379 995,371 (376,879) (373,775)
Advance payments from customers........ -- 1,063,754 876,679 20,644 (407,240)
Accrued compensation................... 37,922 27,205 294,744 (1,459) 391,424
Other current liabilities.............. 18,869 118,925 467,515 123,706 (7,001)
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities..................... (186,431) (3,493,971) (1,343,094) (805,745) (3,374,066)
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment................................ (5,794) (3,396,992) (5,028,030) (252,437) (3,779,312)
Purchase of marketable securities.......... -- -- (1,937,099) -- 1,342,301
Additions to other long-term assets........ (4,144) (244,100) (116,098) -- (6,116)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (9,938) (3,641,092) (7,081,227) (252,437) (2,443,127)
FINANCING ACTIVITIES:
Proceeds from sale of preferred and
common stock, net of issuance costs...... 2,804,290 4,074,619 7,936,794 (4,587) 9,995,672
Proceeds from exercise of stock options.... -- 2,350 105,008 15,120 268,902
Proceeds from the issuance of long-term
debt..................................... -- 2,837,917 2,913,792 575,741 2,000,000
Payment on long-term debt.................. -- (201,829) (870,781) (209,711) (529,079)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities..................... 2,804,290 6,713,057 10,084,813 376,563 11,735,495
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents........... 2,607,921 (422,006) 1,660,492 (681,619) 5,918,302
Cash and cash equivalents, beginning of
period................................... -- 2,607,921 2,185,915 2,185,915 3,846,407
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period... $ 2,607,921 $ 2,185,915 $ 3,846,407 $ 1,504,296 $ 9,764,709
=========== =========== =========== =========== ===========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest was $0, $90,516 and $301,111 in the fiscal years ended
June 30, 1998, 1999 and 2000, respectively. Cash paid for interest during the
three-month periods ended September 30, 1999 and 2000 was materially consistent
with interest expense for those respective periods.

See accompanying notes.
F-6
<PAGE> 84

ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Operations

Array BioPharma Inc. (the "Company") offers a broad range of products and
services to biotechnology and pharmaceutical companies to bridge the gap between
target discovery and pre-clinical and clinical development of a potential drug
candidate. In addition, the Company has developed an information-driven
technology platform to enable its scientists to make better decisions at each
stage of the drug discovery process. The Company also leverages its capabilities
internally to develop proprietary drug candidates in collaboration with its
customers.

Initial Public Offering

In September 2000, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering ("IPO") is closed under the terms
presently anticipated, all of the convertible preferred stock outstanding at the
time of the IPO will automatically convert into shares of common stock.
Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion
of the preferred stock, is set forth on the balance sheets.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consists of money market accounts, commercial
paper and overnight deposits. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The Company's marketable securities, classified as
available-for-sale securities for purposes of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, consist of high-grade
corporate bonds maturing between July 15, 2000 and June 15, 2003. As of June 30,
2000, there were no unrealized gains or losses related to the Company's
marketable securities.

Inventories

Inventories primarily consisting of individual chemical compounds in the
form of Optimer building blocks, diversity libraries and commercially available
fine chemicals and solvents are stated at the lower of cost (first-in, first-out
basis) or market. The Company designs and produces the chemical compounds
comprising its diversity libraries and Optimer building blocks and begins
capitalizing costs into inventory only after technological feasibility has been
established. Inventories are reviewed periodically, and items considered to be
slow moving or obsolete are reduced to estimated net realizable value through an
appropriate reserve.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Repairs and maintenance
are charged to operations as incurred, and significant expenditures for
additions and improvements are capitalized. Depreciation and amortization of
equipment are computed using the straight-line method based on the following
estimated useful lives:

<TABLE>
<CAPTION>
ESTIMATED
TYPE OF PROPERTY AND EQUIPMENT USEFUL LIFE
------------------------------ -----------
<S> <C>
Computer hardware and software........................... 3 years
Leasehold improvements................................... 4 years
Laboratory and analytical equipment...................... 5 years
Furniture and fixtures................................... 7 years
</TABLE>

F-7
<PAGE> 85
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Long-lived Assets

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
Recoverability is measured by comparison of the assets' carrying amount to
future net undiscounted cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
projected discounted future net cash flows arising from the assets.

Revenue Recognition

Net revenue from product sales is recognized as products are shipped and
revenues from the Company's full-time equivalent contracts are recognized on a
per diem basis as work is performed. Development and fixed fee type contract
revenues are recognized on a percentage of completion basis. In general,
contract provisions include predetermined payment schedules, or the submission
of appropriate billing detail. The Company separately reports product and
service revenue. The Company reports cost of goods sold and cost of revenue from
services as one line item titled cost of revenue in its statement of operations.
Although the Company's current cost accounting system has the functional
capacity to segregate these costs, it has not yet implemented such
functionality, primarily because these costs are derived from similar processes
including research, design and synthesis activities. The Company further
implementing the cost segregation functionality of its cost accounting system
during fiscal year 2001. To date, the Company has not received any milestone,
royalty, license or up-front payments.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents, accounts
receivable and investments in marketable securities. The Company maintains its
cash balances in the form of bank demand deposits and money market accounts with
financial institutions that management believes are creditworthy. Accounts
receivable are typically unsecured and are concentrated in the pharmaceutical
and biotechnology industries. Accordingly, the Company may be exposed to credit
risk generally associated with pharmaceutical and biotechnology companies. The
Company has had no bad debts since inception, and management believes that there
are no losses inherent in the Company's accounts receivable as of June 30, 2000
or September 30, 2000, and therefore, an allowance for doubtful accounts has not
been provided. The Company has no financial instruments with off-balance sheet
risk of accounting loss, such as foreign exchange contracts, option contracts or
other foreign currency hedging arrangements.

During fiscal year 2000, revenue from three of the Company's customers
represented approximately 48%, 11% and 10% of total revenue. During the three
months ended September 30, 2000, revenue from two of the Company's customers
represented approximately 36% and 26% of total revenue.

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising and Promotion Expenses

Advertising and promotion costs are expensed when incurred. The amount
charged against operations for the years ended June 30, 1999 and 2000 was
approximately $18,000 and $70,000, respectively. There were no such expenses
incurred during the period ended June 30, 1998.
F-8
<PAGE> 86
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, and long-term debt. The carrying values of cash,
accounts receivable and accounts payable approximate fair value due to their
short-term nature. The carrying amount of the Company's long-term debt
approximates fair value as these borrowings are at an interest rate comparable
to the current market rate.

Use of Estimates

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

Accounting for Stock-Based Compensation

The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related pronouncements. Under the provisions
of APB 25, no compensation expense is recognized when stock options are granted
with exercise prices equal to or greater than market value on the date of grant.

Segment Information

Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of and Enterprise and Related Information," establishes standards for
the reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment.

The Company sells its products and services directly to pharmaceutical and
biotechnology companies throughout the United States, Europe and Japan.
International revenue represented 8% and 9% of the Company's total revenue
during fiscal years 1999 and 2000, respectively.

Internally Developed Software

The Company accounts for its software and information technology in
compliance with Statement of Position 98-1 (SOP 98-1), Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 defines
the types of computer software project costs that may be capitalized. All other
costs are expensed in the period incurred. In order for costs to be capitalized,
the computer software project must be intended to create a new system or add
identifiable functionality to an existing system. All capitalized costs are
being amortized over a period of 3 to 5 years.

Employee Savings Plan

The Company has a 401(k) plan which allows participants to contribute 1% to
15% of their salary, subject to eligibility requirements and annual limits. All
employees are eligible to participate in the plan on January 1, April 1, July 1,
or October 1. The Company's Board of Directors may, at its sole discretion,
approve matching contributions and profit sharing contributions. No such
matching contributions were made during fiscal 1998, 1999 or 2000.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net
F-9
<PAGE> 87
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
loss for the period by the weighted average number of common and potential
common shares outstanding during the period, if their effect is dilutive.
Potential common shares include incremental shares of common stock issuable upon
the exercise of stock options and warrants and upon the conversion of
convertible preferred stock. The potential shares of common stock have not been
included in the diluted net loss per share calculation because to do so would be
anti-dilutive. Such shares totaled 0 and 1,115,702 for the years ended June 30,
1999 and 2000, respectively, and 490,159 and 1,341,022 for the three-month
periods ended September 30, 1999 and 2000, respectively.

Pro Forma Stockholders' Equity and Pro Forma Net Loss Per Share

Immediately prior to the effective date of the offering, all of the
convertible preferred stock outstanding will automatically convert into common
stock at a one-to-one ratio. The pro forma effects of these transactions are
unaudited and have been reflected in the accompanying unaudited Pro Forma
Stockholders' Equity as of September 30, 2000. Pro forma net loss per share for
the year ended June 30, 2000 and the three month period ended September 30, 2000
is computed using the weighted average number of common shares outstanding
including the pro forma effects of the automatic conversion of the Company's
convertible preferred stock into shares of the Company's common stock effective
upon the closing of the Company's initial public offering as if such conversion
occurred on July 1, 1999, or at the date of original issue, if later. The
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute basic net loss of 8,633,904 shares for the year ended
June 30, 2000 and 10,390,555 for the three month period ended September 30,
2000. The calculation of pro forma diluted net loss per share excludes
incremental common stock issuable upon the exercise of stock options and
warrants as their effect would be anti-dilutive.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be recognized
at fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date until fiscal years beginning after June 15, 2000. The Company has not
engaged in hedging activities or invested in derivative instruments.

In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
101, Revenue Recognition, which provides guidance on the recognition,
presentation and disclosure on revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosure related to revenue recognition policies.
The Company believes that its current revenue recognition policy is in
compliance with SAB 101.

In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB 25
("FIN 44"). This interpretation clarifies (1) the definition of employee for
purposes of applying APB 25; (2) the criteria for determining whether a plan
qualifies as a noncompensatory plan; (3) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award; and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the
F-10
<PAGE> 88
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
extent that this interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 did not impact the
Company's financial statements.

Interim Results (Unaudited)

The balance sheet as of September 30, 2000, the statements of operations
and cash flows for the three months ended September 30, 1999 and 2000, and the
statement of stockholders' equity for the three months ended September 30, 2000
are unaudited. In the opinion of management, the statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of the interim periods. Operating results for the
three months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2001.

2. BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Property, plant and equipment:
Laboratory and analytical equipment........................ $ 2,571,256 $ 5,875,863
Computer hardware and software............................. 692,554 1,369,293
Leasehold improvements..................................... 97,954 751,132
Furniture and fixtures..................................... 41,022 409,866
----------- -----------
3,402,786 8,406,154
Less accumulated depreciation.............................. (530,932) (1,495,397)
----------- -----------
Total property, plant and equipment, net......... $ 2,871,854 $ 6,910,757
=========== ===========
Inventories:
Fine chemicals and solvents................................ $ 393,827 $ 372,562
Optimer building blocks and diversity libraries............ 585,331 1,184,814
----------- -----------
Total inventories................................ $ 979,158 $ 1,557,376
=========== ===========
</TABLE>

3. LEASES

The Company leases office space and equipment under various noncancelable
operating lease agreements. Rental expense was $540,242 and $682,551 for the
years ended June 30, 1999 and 2000, respectively, and was immaterial for the
period ended June 30, 1998. As of June 30, 2000, future minimum rental
commitments, by fiscal year and in the aggregate, for the Company's operating
leases are as follows:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
2001..................................................... $ 854,952
2002..................................................... 317,419
2003..................................................... 248,244
2004..................................................... 7,332
2005..................................................... 4,800
----------
Total minimum lease payments................... $1,432,747
==========
</TABLE>

F-11
<PAGE> 89
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

4. INCOME TAXES

The Company accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes. Under the provisions of Statement No. 109, a
deferred tax liability or asset (net of a valuation allowance) is provided in
the financial statements by applying the provisions of applicable tax laws to
measure the deferred tax consequences of temporary differences that will result
in net taxable or deductible amounts in future years as a result of events
recognized in the financial statements in the current or preceding years.

At June 30, 2000, the Company has federal and state net operating loss
carryforwards for income tax purposes of approximately $8,403,000 which expire
as follows:

<TABLE>
<S> <C>
Fiscal year
2018 $ 49,000
2019 4,468,000
2020 3,886,000
----------
$8,403,000
==========
</TABLE>

The Tax Reform Act of 1986 contains provisions that limit the utilization
of net operating loss and tax credit carryforwards if there has been a "change
of ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carryforwards, and could be triggered by an initial public
offering or by subsequent sales of securities by the Company or its
stockholders.

The components of the Company's deferred tax assets and liabilities as of
June 30 are as follows:

<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,485,891 $ 2,856,869
Organizational costs..................................... 3,575 2,680
----------- -----------
1,489,466 2,859,549
Valuation allowance........................................ (1,425,586) (2,780,379)
----------- -----------
63,880 79,170
Deferred tax liabilities:
Depreciation............................................. (63,880) (79,170)
----------- -----------
Net deferred tax assets and liabilities.................... $ -- $ --
=========== ===========
</TABLE>

The Company has recorded a valuation allowance equal to the excess of
deferred tax assets over deferred tax liabilities as the Company was unable to
determine that it is more likely than not that the deferred tax asset will be
realized.

5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS

Stock Options

In July 1998, the Company's Board of Directors approved the Option Plan
(the "1998 Plan") pursuant to which (including subsequent amendments) a total of
4,837,500 shares of common stock have been reserved for issuance to eligible
employees, consultants and directors of the Company.

F-12
<PAGE> 90
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS -- (CONTINUED)
The 1998 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 stock purchase rights to purchase shares
of the Company's common stock.

The 1998 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 stock
purchase rights 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. A summary of activity in the Plan is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, July 1, 1998
Granted................................................. 1,532,500 $0.235
Exercised............................................... 10,000 0.235
Terminated or expired................................... 26,000 0.235
--------- ------
Balance, June 30, 1999.................................... 1,496,500 0.235
Granted................................................. 1,815,740 0.469
Exercised............................................... 446,840 0.235
Terminated or expired................................... 10,556 0.235
--------- ------
Balance, June 30, 2000.................................... 2,854,844 0.384
Granted (unaudited)..................................... 1,239,836 0.719
Exercised (unaudited)................................... 532,459 0.505
Terminated or expired (unaudited)....................... 443,467 0.589
--------- ------
Balance, September 30, 2000 (unaudited)................... 3,118,754 $0.467
========= ======
</TABLE>

A summary of options outstanding as of June 30, 2000 is as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE SHARES
EXERCISE SHARES UNDER REMAINING WEIGHTED-AVERAGE CURRENTLY WEIGHTED-AVERAGE
PRICE OPTION CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ------------ ---------------- ---------------- ----------- ----------------
(IN YEARS)
<S> <C> <C> <C> <C> <C> <C>
$0.235 1,688,544 8.5 $0.235 366,741 $0.235
0.600 1,166,300 9.5 0.600 133,333 0.600
--------- --- ------ ------- ------
2,854,844 8.9 $0.384 500,074 $0.332
========= === ====== ======= ======
</TABLE>

A summary of options outstanding as of September 30, 2000 (unaudited) is as
follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE SHARES
EXERCISE SHARES UNDER REMAINING WEIGHTED-AVERAGE CURRENTLY WEIGHTED-AVERAGE
PRICE OPTION CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ------------ ---------------- ---------------- ----------- ----------------
(IN YEARS)
<S> <C> <C> <C> <C> <C> <C>
$0.235 1,405,541 8.2 $0.235 249,136 $0.235
0.600 1,672,213 9.7 0.600 32,027 0.600
3.000 41,000 9.9 3.000 20,000 3.000
--------- --- ------ ------- ------
3,118,754 9.0 $0.467 301,163 $0.457
========= === ====== ======= ======
</TABLE>

F-13
<PAGE> 91
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS -- (CONTINUED)
Fair Value Disclosure

As described in Note 1, the Company accounts for its stock compensation
arrangements under the provisions of APB 25, Accounting for Stock Issued to
Employees, and intends to continue to do so.

Pro forma information regarding net loss is required by SFAS 123,
Accounting and Disclosure of Stock-Based Compensation, and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using the minimum value method available to nonpublic
companies under SFAS 123. Under this method, option value is determined as the
excess of the fair value of the stock at the date of grant over the present
value of both the exercise price (lump sum) and the expected dividend payments
(annuity), each discounted at the risk-free rate, over the expected exercise
life of the option. A risk-free interest rate of 5.0% for 1999 and 6.25% for
2000, a dividend yield of 0% for 1999 and 2000, and an expected life of five
years were applied for 1999 and 2000 grants. The weighted average fair value of
options granted during 1999 and 2000 was $0.05 and $1.81 per share,
respectively. As discussed further below, the Company recorded approximately
$1.1 million of stock-based compensation under APB 25 during fiscal year 2000.
The amount of expense reported under APB 25 for fiscal year 2000 exceeded the
pro forma expense calculated under SFAS 123. As a result, the fiscal year 2000
pro forma expense under SFAS 123 was reported as $0.

Option valuation models such as the minimum value method described above
require 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 do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

The following summarized, pro forma results of operations assume the
estimated fair value of the options granted is amortized to expense over the
option vesting period.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net loss................................................... $(4,307,406) $(5,132,403)
Pro forma expense under Statement No. 123................ (76,625) --
----------- -----------
Pro forma net loss....................................... $(4,384,031) $(5,132,403)
=========== ===========
Pro forma basic and diluted net loss per share........... $ (1.50) $ (1.68)
=========== ===========
</TABLE>

Deferred Stock-Based Compensation

As of June 30 and September 30, 2000, the Company has recorded $4,645,851
and $9,926,436 (unaudited) of deferred stock compensation, respectively, in
accordance with APB 25, SFAS 123 and FIN 44, related to stock options granted to
employees. Stock compensation expense is being recognized on a straight-line
basis over the vesting periods of the related options, which is generally four
years, except for performance options. During fiscal year 2000, the Company
granted performance based options with vesting terms contingent upon the
achievement of certain operational milestones. As of June 30, 2000, certain of
these options vested upon meeting the performance criteria and compensation has
been recorded as of this measurement date. Additionally, on July 1, 2000, the
remaining performance based options were canceled and new time accelerated
options were awarded which cliff vest on July 1, 2005. These time accelerated
awards, which were measured on the grant date, are subject to an accelerating of
vesting based on various performance criteria including operational goals, a
successful public offering, or a change of control. The

F-14
<PAGE> 92
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

5. EMPLOYEE AND CONSULTANT STOCK OPTION PLAN AND STOCK WARRANTS -- (CONTINUED)
Company is recognizing compensation related to these time accelerated options
over the vesting period or achievement of the performance criteria, as
appropriate. The Company has accounted for the above options under the
requirements of APB 25 and FIN 44. The Company recognized stock compensation
expense of $1,117,796 and $706,666 for the year ended June 30, 2000 and the
three months ended September 30, 2000 (unaudited), respectively.

Stock Warrants

The Company has issued warrants to purchase shares of the Company's
preferred stock, generally in connection with the Company's equipment financing.
Upon consummation of an IPO, assuming the automatic conversion of the Series A
and Series B preferred stock, these warrants are exercisable into the same
number of shares of common stock. The warrants expire on various dates through
fiscal 2009.

The following table summarizes warrant data at June 30, 2000:

<TABLE>
<S> <C>
Issued and outstanding.................................. 110,750
Exercise price.......................................... $1.00-$5.00
Weighted-average exercise price......................... $3.15
</TABLE>

6. COMMON AND PREFERRED STOCK

Common Stock

On May 18, 1998, the Company completed a private sale of 2,913,367 shares
of its common stock to a group of private investors and founders at a purchase
price of $0.235 per share. The net proceeds to the Company from the sale were
$334,406, plus notes receivable from founders of $350,000. The notes, including
accrued interest at 6.0% per year, totaled $393,750 as of June 30, 2000, and are
payable in full in May 2002. The notes are secured only by the underlying stock
certificates and have been included with related accrued interest as a component
of stockholders' equity. During fiscal years 1999 and 2000, various employees
exercised stock options to purchase 10,000 and 446,840 shares of common stock,
respectively.

Preferred Stock

Concurrent with the May 1998 sale of common stock, the Company sold
2,500,000 shares of Series A convertible preferred stock (Series A preferred),
in a first closing, to a group of private investors at a purchase price of $1.00
per share. The net proceeds to the Company from the sale were $2,469,884. During
August 1998, the Company completed issuance of 4,135,000 shares of Series A
preferred stock, in a second closing, to another group of private investors in
which the net proceeds to the Company were $4,074,619. In November 1999, the
Company issued 3,199,999 shares of Series B convertible preferred stock (Series
B preferred) to substantially the same owners as Series A preferred, at a
purchase price of $2.50 per share. The net proceeds to the Company were
$7,936,794. All of the preferred shares have preferences before common stock in
liquidation equal to the initial preferred purchase price, plus any accrued but
unpaid non-cumulative dividends.

On August 31, 2000, the Company issued 1,666,667 shares of its Series C
convertible preferred stock (Series C preferred) at $6.00 per share to investors
resulting in gross proceeds of $10.0 million. Subsequent to the commencement of
the initial public offering process, the Company reevaluated the fair value of
its Series C preferred stock as of August 31, 2000 and determined it to be $9.00
per share. Accordingly, the incremental fair value of $5.0 million, or $3.00 per
share, is deemed to be the equivalent of a dividend on the Series C preferred.
The Company recorded the deemed dividend at the date of issuance by offsetting
charges

F-15
<PAGE> 93
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

6. COMMON AND PREFERRED STOCK -- (CONTINUED)
and credits to preferred stock, without any effect on total stockholders'
equity. The preferred stock dividend increases the loss applicable to common
stockholders in the calculation of basic net loss per share for fiscal year 2001
and the related interim periods.

The preferred shares are convertible into common on a one-to-one basis
(subject to certain anti-dilution provisions) at the option of the preferred
shareholder and automatically convert in the event of an initial public offering
exceeding $15.0 million. The preferred shares have voting rights, on a per share
basis, equal to the Company's common stock.

7. LONG-TERM DEBT

Long-term debt as of June 30, 2000 is for equipment loan facilities
negotiated with financial institutions. The facilities allow for $2.0 million in
borrowings beyond the $4.7 million outstanding as of June 30, 2000. The
agreements require monthly principal and interest payments over a term of 36 to
42 months, at which time, on certain facilities, a final payment representing
8.0% of the amount borrowed is due.

The interest rate on these borrowings approximates 11.4% at June 30, 2000.
All assets acquired under the equipment loan facilities represent collateral for
the amounts outstanding and the Company must conform to certain loan covenants,
for which the Company was in compliance as of June 30, 2000.

In connection with the negotiated equipment loan facilities during 2000 and
1999, the Company issued warrants to purchase 110,750 shares of its preferred
stock at exercise prices ranging from $1.00 to $5.00 per share. The warrants
expire during, or prior to fiscal year 2009. In accordance with EITF 86-35,
Debenture with Detachable Stock Purchase Warrants, the Company is required to
assess the value of these warrants, and allocate the debt proceeds between the
debt liability and the related warrant. The Company assessed the value of these
warrants using the Black-Scholes methodology, which ascribed a cumulative value
of approximately $145,000 to these warrants. As a result, an allocation between
the warrant and the related loan has been made for these warrant grants. Total
accreted interest expense was $6,683 and $15,053, respectively, during fiscal
years 1999 and 2000.

Aggregate debt maturities as of June 30, 2000 in each of the following
fiscal years are:

<TABLE>
<S> <C>
2001..................................................... $1,723,837
2002..................................................... 1,765,719
2003..................................................... 1,101,392
2004..................................................... 88,151
----------
4,679,099
Less unamortized discount associated with warrants....... (122,839)
----------
$4,556,260
==========
</TABLE>

Subsequent to June 30, 2000, the Company borrowed the remaining $2.0
million on its $4.0 million line of credit.

8. COLLABORATIVE AGREEMENTS

ICOS Corporation. In July 2000, the Company consolidated and expanded its
lead optimization agreements with ICOS into a drug discovery collaboration
agreement for lead optimization on undisclosed targets. Under the agreement,
ICOS has the exclusive worldwide right to develop and market any products
resulting from the collaboration. The Company is compensated based on an annual
rate for each full-time equivalent employee working on an ICOS project and will
receive milestone payments upon achievement of

F-16
<PAGE> 94
ARRAY BIOPHARMA INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)

8. COLLABORATIVE AGREEMENTS -- (CONTINUED)
identified development and commercialization goals for products resulting from
the collaboration. The agreement expires in July 2002 and may be terminated upon
90 days notice by ICOS following the first anniversary of the agreement.

Eli Lilly and Company. In March 2000, the Company entered into a Research
Services Agreement with Eli Lilly to form a chemistry-based research
collaboration. Under the terms of the agreement, up to 30 of the Company's
scientists will provide drug research services in collaboration with Eli Lilly
scientists on identified Eli Lilly drug discovery projects. The Company is
compensated based on an annual rate for each full-time equivalent employee
working on an Eli Lilly project. The Company's agreement with Eli Lilly
terminates in March 2005, but Eli Lilly may terminate the agreement at any time
upon payment of an early termination payment.

Amgen. (Unaudited) In October 2000, the Company entered into a Research and
License Agreement with Amgen. Under the terms of this agreement, the Company
granted Amgen an exclusive license to its existing program to address a target
for diabetes, called PTP1B and the Company initiated a joint research program in
November 2000 to identify, characterize and optimize potential drug candidates
targeting PTP1B. Amgen has the exclusive worldwide right to develop and
commercialize any drugs that target PTP1B developed under this collaboration.
The agreement provides for an initial up-front fee of $1.8 million payable in
November 2000, license fees, quarterly payments for each full-time equivalent
employee working on the PTP1B project, and milestone payments upon achievement
of identified research, development and commercialization goals for products
resulting from the collaboration. To date, the Company has not received any
milestone payments from Amgen. The initial term of the research program is two
years, and Amgen may terminate the research program with six months' written
notice during this term.

Compound Library Agreements. The Company has entered into agreements with
customers, including Celltech Chiroscience through its subsidiary Darwin
Discovery Limited in April 1999, which expires in April 2001, Tularik in June
1999, which Tularik extended in January 2000 and which expires in January 2002,
and DuPont in August 2000, which expires in December 2005, providing
nonexclusive access on a per-compound fee basis to compounds in the Company's
Diversity Library for their internal lead generation efforts. The agreements
generally have terms of one to two years. These customers have the option to
gain exclusive rights to compounds they intend to commercialize upon payments of
either a one-time activation fee or annual fees. The Company retains all
ownership of the intellectual property rights to the compounds and to the
Company's Diversity Library, and to any inventions made by its scientists
working under these agreements. These agreements are terminable only upon breach
or insolvency of a party. At June 30, 2000, the Company had a net customer
deposit related to these agreements of approximately $122,000.

F-17
<PAGE> 95

6,000,000 SHARES

[Array BioPharma Logo]

COMMON STOCK

---------------------
PROSPECTUS

, 2000
---------------------

LEHMAN BROTHERS

DEUTSCHE BANC ALEX. BROWN

LEGG MASON WOOD WALKER
(INCORPORATED)

LOGO
<PAGE> 96

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table shows the various fees and expenses, other than the
underwriting discounts and commissions, payable by Registrant in connection with
the sale of the common stock being registered under this registration statement.
All amounts shown are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.

<TABLE>
<S> <C> <C>
Registration fee............................................ $ 16,395
NASD filing fee............................................. 7,700
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 140,000
Blue Sky fees and expenses (including legal fees)........... 5,000
Transfer agent and registrar fees and expenses.............. 2,500
Miscellaneous............................................... 33,405
--------
Total............................................. $900,000
========
</TABLE>

The Registrant will bear all expenses shown above.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Upon completion of this offering, the Bylaws of Registrant will provide for
the indemnification of Registrant's directors and officers to the fullest extent
authorized by, and subject to the conditions set forth in the Delaware General
Corporation Law (the "DGCL"), except that Registrant will indemnify a director
or officer in connection with a proceeding (or part thereof) initiated by the
person only if the proceeding (or part thereof) was authorized by Registrant's
Board of Directors. The indemnification provided under the Bylaws includes the
right to be paid by Registrant, the expenses (including attorneys' fees) for any
proceeding for which indemnification may be had in advance of its final
disposition, provided that the payment of those expenses (including attorneys'
fees) incurred by a director or officer in advance of the final disposition of a
proceeding may be made only upon delivery to Registrant of an undertaking by or
on behalf of the director or officer to repay all amounts so paid in advance if
it is ultimately determined that the director or officer is not entitled to be
indemnified. Under the Bylaws of Registrant, if Registrant does not pay a claim
for indemnification within 60 days after it has received a written claim, the
director or officer may bring an action to recover the unpaid amount of the
claim and, if successful, the director or officer also will be entitled to be
paid the expense of prosecuting the action to recover these unpaid amounts.

As permitted by the DGCL, Registrant's Certificate of Incorporation will
provide that directors of Registrant shall not be liable to Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to unlawful payment of dividends or unlawful
stock purchase or redemption or (iv) for any transaction from which the director
derived an improper personal benefit. As a result of this provision, Registrant
and its stockholders may be unable to obtain monetary damages from a director
for breach of his or her duty of care.

Under the Bylaws, Registrant will have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of Registrant, or is or was serving at the request of Registrant as a
director, officer, employee, partner or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, against any liability asserted against the person or incurred by the
person in that capacity, or arising out of the person's fulfilling one of these
capacities, and
II-1
<PAGE> 97

related expenses, whether or not Registrant would have the power to indemnify
the person against the claim under the provisions of the DGCL. Registrant has in
force as of date of this offering director and officer liability insurance on
behalf of its directors and officers in the amount of $2 million.

The Underwriting Agreement provides that the underwriters must, under
specified circumstances, indemnify Registrant's directors, officers and
controlling persons against specified liabilities, including liabilities under
the Securities Act of 1933, as amended. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following information relates to securities issued or sold by
Registrant within the last three years. All such securities were offered and
sold in reliance upon the exemption from registration under Section 3(b) or
Section 4(2) of the Securities Act, including offers and sales under Regulation
D or Rule 701 of the Securities Act.

The sales of securities were made without the use of an underwriter and the
certificates evidencing the shares bear a restrictive legend permitting the
transfer thereof only upon registration of the shares or an exemption under the
Securities Act.

(1) On February 6, 1998, Registrant issued in total 1,000 shares of its common
stock to Kevin Koch, K.C. Nicolaou, Anthony Piscopio and David Snitman in
connection with its incorporation for an aggregate purchase price of $400.

(2) On May 18, 1998, Registrant entered into a Preferred and Common Stock
Purchase Agreement, as amended on August 7, 1998, with certain accredited
investors pursuant to which Registrant issued between May 19, 1998 and
January 15, 1999 a total of 6,635,000 shares of Series A preferred stock for
an aggregate purchase price of $6,635,000 and 2,912,367 shares of common
stock for an aggregate purchase price of $684,406.

(3) From July 1, 1998 to June 30, 2000, Registrant granted options to purchase
an aggregate of 3,348,240 shares of common stock to employees, directors and
consultants under its 1998 Stock Option Plan dated July 1, 1998, as amended.
As of June 30, 2000, 456,840 shares have been purchased for an aggregate
purchase price of $107,358. In addition, 500,074 shares were fully vested
and 36,556 shares have been cancelled.

(4) On October 9, 1998, Registrant entered into a Loan and Security Agreement
with Silicon Valley Bank and, in connection with the loan, Registrant issued
the bank a warrant to purchase 40,000 shares of Series A preferred stock at
an initial exercise price of $1.00 per share.

(5) On February 26, 1999, Registrant entered into a Master Note and Security
Agreement with Leasing Technologies International, Inc. and in connection
with the line of credit, Registrant issued Leasing Technologies
International, Inc. a warrant to purchase 13,750 shares of Series A
preferred stock at an initial exercise price of $3.00 per share.

(6) On March 26, 1999, Registrant entered into a Loan and Security Agreement
with Silicon Valley Bank and in connection with the loan, Registrant issued
the bank a warrant to purchase 7,000 shares of Series B preferred stock at
an initial exercise price of $2.50 per share.

(7) On November 16, 1999, Registrant entered into a Series B Preferred Stock
Purchase Agreement with certain accredited investors for the issuance of
3,199,999 shares of Series B preferred stock for an aggregate purchase price
of approximately $8,000,000.

(8) On May 17, 2000, Registrant entered into a Loan and Security Agreement with
Silicon Valley Bank and, in connection with the loan, Registrant issued the
bank a warrant to purchase 50,000 shares of Series B preferred stock at an
initial exercise price of $5.00 per share.

II-2
<PAGE> 98

(9) On August 31, 2000, Registrant entered into a Series C Preferred Stock
Purchase Agreement with certain accredited investors for the issuance of
1,666,667 shares of Series C preferred stock for an aggregate purchase price
of approximately $10,000,000.

The issuances of securities described in paragraph (3) above were deemed to
be exempt from the registration requirements of the Securities Act in reliance
on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
by an issuer pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701.

The issuances described in paragraphs (1), (2) and (4) through (9) above
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) and pursuant to Regulation D, Rule 506 of the Securities Act.

The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to
information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

II-3
<PAGE> 99

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9- -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10- -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11- -- Revised Employment Agreement by and between Registrant
and Robert E. Conway dated November 16, 1999
10.12 -- Form of Employment Agreement dated September 1, 2000 by
and between Registrant and each of Laurence Burgess,
Jonathan Josey, Anthony D. Piscopio, David L. Snitman,
Kevin Koch, Michael Carruthers and Joanna Money
10.13- -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14- -- Promissory Note and Pledge Agreement of KC Nicolaou to
Registrant dated May 18, 1998
10.15- -- Promissory Note and Pledge Agreement of Anthony D.
Piscopio to Registrant dated May 18, 1998, as amended
10.16- -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.17- -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.18- -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.19- -- First Amendment to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated April 2000
10.20- -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.21- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.22- -- Warrant to Purchase 40,000 Shares of Series A Preferred
Stock issued to Silicon Valley Bank, issue date October
9, 1998
10.23- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.24- -- Warrant to Purchase Shares of Series Preferred Stock
issued to Silicon Valley Bank, issue date March 31, 1999
10.25- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.26- -- Warrant to Purchase Stock issued to Silicon Valley Bank,
issue date May 17, 2000
10.27- -- Master Note and Security Agreement by and between
Registrant and Leasing Technologies International, Inc.
dated February 26, 1999
10.28- -- Warrant to Purchase 13,750 Shares of Series A Preferred
Stock issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.29+ -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
</TABLE>

II-4
<PAGE> 100

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30+ -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.31+ -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.32+ -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.33+ -- Diversity Library Screening Agreement between Registrant
and Tularik Inc. dated June 10, 1999, as amended
10.34+ -- Research Services Agreement between Registrant and Eli
Lilly and Company dated March 22, 2000, as amended
10.35+ -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
10.36+ -- Research and License Agreement between Registrant and
Amgen Inc. dated October 26, 2000
16.1- -- List of Subsidiaries
23.1 -- Consent of Independent Auditors -- Ernst & Young LLP
23.2 -- Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1- -- Power of Attorney (included on signature page)
27.1- -- Financial Data Schedule
</TABLE>

---------------

+ Confidential treatment applied for.

- Previously filed.

(b) Financial Statement Schedules:

All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrant
pursuant to the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or

II-5
<PAGE> 101

(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE> 102

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Amendment No. 2 to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Boulder, State of Colorado, on November 16, 2000.

Array BioPharma Inc.

By: /s/ ROBERT E. CONWAY
----------------------------------
Robert E. Conway
Chief Executive Officer

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROBERT E. CONWAY Chief Executive Officer and November 16, 2000
----------------------------------------------------- Director (Principal
Robert E. Conway Executive Officer)

* Chairman of the Board of November 16, 2000
----------------------------------------------------- Directors
Kyle Lefkoff

/s/ MICHAEL CARRUTHERS Chief Financial Officer November 16, 2000
----------------------------------------------------- (Principal Financial and
Michael Carruthers Accounting Officer)

* Director November 16, 2000
-----------------------------------------------------
Francis J. Bullock, Ph.D.

* Director November 16, 2000
-----------------------------------------------------
Marvin H. Caruthers, Ph.D.

* Director November 16, 2000
-----------------------------------------------------
Kirby L. Cramer

* Director November 16, 2000
-----------------------------------------------------
Kevin Koch, Ph.D.

* Director November 16, 2000
-----------------------------------------------------
Robert W. Overell, Ph.D.

/s/ DAVID L. SNITMAN, PH.D. Director November 16, 2000
-----------------------------------------------------
David L. Snitman, Ph.D.

* By his signature below, the undersigned, pursuant to duly authorized powers of attorney filed with
the Securities and Exchange Commission, has signed this Amendment No. 2 to the registration
statement on behalf of the persons indicated.

/s/ ROBERT E. CONWAY
-----------------------------------------------------
Robert E. Conway
</TABLE>

II-7
<PAGE> 103

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement
3.1- -- Amended and Restated Certificate of Incorporation of
Array BioPharma Inc.
3.2- -- Form of Amended and Restated Certificate of Incorporation
of Array BioPharma Inc. to be effective upon the closing
of the offering being made pursuant to this Registration
Statement
3.3- -- Amended and Restated Bylaws of Array BioPharma Inc.
3.4- -- Form of Amended and Restated Bylaws of Array BioPharma
Inc. to be effective upon the closing of the offering
being made pursuant to this Registration Statement
4.1- -- Specimen certificate representing the common stock
5.1 -- Opinion of Hogan & Hartson L.L.P. with respect to
legality of the common stock
10.1- -- 1998 Stock Option Plan effective July 1, 1998, as amended
10.2- -- Form of Amended and Restated Stock Option and Incentive
Plan to be effective upon the closing of the offering
being made pursuant to this Registration Statement
10.3 -- Form of Employee Stock Purchase Plan to be effective upon
the closing of the offering being made pursuant to this
Registration Statement
10.4- -- Preferred and Common Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated May 18, 1998
10.5- -- Amendment to Preferred and Common Stock Purchase
Agreement dated August 7, 1998
10.6- -- Series B Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.7- -- Series C Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated August 31, 2000
10.8- -- Lease Agreement by and between Registrant, as Tenant, and
Amgen Inc., as Landlord, dated July 1998
10.9- -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10- -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11- -- Revised Employment Agreement by and between Registrant
and Robert E. Conway dated November 16, 1999
10.12 -- Form of Employment Agreement dated September 1, 2000 by
and between Registrant and each of Laurence Burgess,
Jonathan Josey, Anthony D. Piscopio, David L. Snitman,
Kevin Koch, Michael Carruthers and Joanna Money
10.13- -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14- -- Promissory Note and Pledge Agreement of KC Nicolaou to
Registrant dated May 18, 1998
10.15- -- Promissory Note and Pledge Agreement of Anthony D.
Piscopio to Registrant dated May 18, 1998, as amended
10.16- -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
</TABLE>

<PAGE> 104

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17- -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.18- -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.19- -- First Amendment to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated April 2000
10.20- -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on
the signature pages thereto dated August 31, 2000
10.21- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.22- -- Warrant to Purchase 40,000 Shares of Series A Preferred
Stock issued to Silicon Valley Bank, issue date October
9, 1998
10.23- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.24- -- Warrant to Purchase Shares of Series Preferred Stock
issued to Silicon Valley Bank, issue date March 31, 1999
10.25- -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.26- -- Warrant to Purchase Stock issued to Silicon Valley Bank,
issue date May 17, 2000
10.27- -- Master Note and Security Agreement by and between
Registrant and Leasing Technologies International, Inc.
dated February 26, 1999
10.28- -- Warrant to Purchase 13,750 Shares of Series A Preferred
Stock issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.29+ -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
10.30+ -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.31+ -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.32+ -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.33+ -- Diversity Library Screening Agreement between Registrant
and Tularik Inc. dated June 10, 1999, as amended
10.34+ -- Research Services Agreement between Registrant and Eli
Lilly and Company dated March 22, 2000, as amended
10.35+ -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
10.36+ -- Research and License Agreement between Registrant and
Amgen Inc. dated October 26, 2000
16.1- -- List of Subsidiaries
</TABLE>

<PAGE> 105

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Independent Auditors -- Ernst & Young LLP
23.2 -- Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1- -- Power of Attorney (included on signature page)
27.1- -- Financial Data Schedule
</TABLE>

---------------

+ Confidential treatment applied for.

- Previously filed.