You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2009 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 22, 2009.

The following discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events, such as our future clinical and product development, financial performance and regulatory review of our product candidates. Our actual results could differ materially from any future performance suggested in this report as a result of various factors, including those discussed elsewhere in this report, in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and in our other Securities and Exchange Commission reports and filings. All forward-looking statements are based on information currently available to Pharmacyclics; and we assume no obligation to update such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements.

Company Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Our purpose is to create a profitable company by generating income from products we develop, license and commercialize, either with one or several potential collaborators/partners or alone as may best forward the economic interest of our stakeholders. We endeavor to create novel, patentable, differentiated products that have the potential to significantly improve the standard of care for patients in the markets we serve. Presently, we have four product candidates in clinical development and two product candidates in pre-clinical development. It is our business strategy to establish collaborations with large pharmaceutical and biotechnology companies for the purpose of generating present and future income in exchange for adding to their product pipelines. In addition, we strive to generate collaborations that allow us to retain valuable territorial rights and simultaneously fast forward the clinical development and commercialization of our products.

It is our intention to identify product candidates based on exceptional scientific and development expertise, bring these products to a clinical proof of concept in a rapid, cost-effective manner, and then seek development and/or commercialization partners. We are committed to high standards of ethics, scientific rigor, and operational efficiency as we move each of these programs to viable commercialization.

To date, substantially all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenues until we receive the necessary regulatory and marketing approvals to launch one of our products.

We have incurred significant operating losses since our inception in 1991, and as of September 30, 2009 have an accumulated deficit of approximately $367.7 million. The process of developing and commercializing our products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenues to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our achieving profitability depends upon our ability, to successfully complete the development of our products, obtain required regulatory approvals and successfully manufacture and market our products.

PCI-24781 is an orally-bioavailable histone deacetylase (HDAC) inhibitor that is currently in multiple clinical trials, including a Phase I trial in patients with advanced solid tumors and a Phase I/II trial in patients with recurrent lymphomas, with a planned Phase I/II trial in sarcoma (in combination with doxorubicin) scheduled to commence before the end of calendar year 2009. PCI-24781 targets histone deacetylase (HDAC) enzymes and inhibits their function. We have shown that PCI-24781 works by multiple mechanisms including re-expression of tumor suppressors, inhibition of cell cycle and increase in reactive oxygen species, which contribute to tumor cell cytotoxicity. Previous clinical trials have demonstrated that PCI-24781 has favorable pharmacokinetic properties when dosed orally, and inhibits the target enzymes at current clinical doses. Up to date information about the lymphoma clinical trial, including clinical response data, will be reported at the 51st American Society of Hematology ("ASH") annual meeting in December. PCI-24781 has demonstrated a very good safety profile in over 70 patients treated so far, with the main dose-limiting toxicity observed being reversible thrombocytopenia, which we believe is related to the pharmacologic mechanism of action. The duration and severity of the thrombocytopenia has been mitigated using novel dose scheduling strategies that we have developed and tested in the clinic.

In preclinical models, we have identified synergy of PCI-24781 with several approved cancer therapeutics, and some of these combinations may be tested in the clinic, including the combination of PCI-24781 with Doxorubicin in our upcoming sarcoma trial due to begin before the end of calendar year 2009. This trial will also test the novel biomarker RAD51 that we have developed in collaboration with scientists at Stanford University, which may be useful as predictive biomarker in clinical testing by improving patient selection. We are also continuing the development of our first-in-class HDAC8 selective inhibitor for the potential treatment of cancer and inflammatory diseases by optimizing the pharmacokinetics, metabolic stability and in-vivo efficacy of the lead compounds.

In April 2009, the company entered into a collaboration agreement with Servier pursuant to which Pharmacyclics granted to Servier an exclusive license for its Pan-HDAC inhibitors, including PCI-24781, for territories throughout the world excluding the United States. Under the terms of the agreement, Servier acquired the exclusive right to develop and commercialize the Pan-HDAC inhibitor product worldwide except for the United States and will pay a royalty to Pharmacyclics on sales outside of the United States. Pharmacyclics will continue to own all rights within the United States. Servier has committed significant resources to the clinical development of PCI-24781, with two Phase I trials in lymphoma and solid tumors due to commence in Europe in the last quarter of this year.

PCI-27483 is a small molecule inhibitor of Factor VIIa. This drug selectively inhibits Factor VIIa when it is complexed with a protein called tissue factor (TF). In cancer, the Factor VIIa:TF complex is found in abundance in pancreatic, gastric, colon and other tumors, and triggers a host of physiologic processes that facilitate tumor angiogenesis, growth and invasion. The Factor VIIa:TF complex is thought to be the cause of the increased propensity of cancer patients to develop thromboses. Laboratory studies and animal models indicate that inhibitors of Factor VIIa block the growth of tumors that express TF.

We have completed our initial Phase I testing of PCI-27483 in healthy volunteers. The primary objective of the ascending dose Phase I study was to assess the pharmacodynamic and pharmacokinetic profiles of PCI-27483 following a single, subcutaneous injection. In addition, the safety and tolerability of PCI-27483 was evaluated. The drug was well tolerated and no adverse event was observed at any dose level. The International Normalized Ratio (INR) of prothrombin time, a simple laboratory test for coagulation, was used to measure pharmacodynamic effect at dose levels of 0.05, 0.20, 0.80 and 2.0 mg/kg. A mean peak INR of 2.7 was achieved without adverse effects at the highest dose level administered. The target INR range for oral anti-coagulants i.e. Coumadin, is between 2 and 3. The half-life of PCI-27483 was 10 to 12 hours, which compares favorably to the single-dose half-life of the low molecular weight heparin Lovenox (4.5 hours) and Fragmin (3 to 5 hours).

A multicenter Phase I/II study is planned to begin in the fourth quarter of calendar 2009. The target patient population is locally advanced and metastatic pancreatic cancer within two months of diagnosis either receiving or planned to receive gemcitabine therapy. The goals will be to; a) assess the safety of PCI-27483 at pharmacologically active dose levels; b) to assess potential survival benefit and c) obtain initial information of the effects on the incidence of thromboembolic events.

PCI-32765 is an orally active small molecule inhibitor of Bruton's tyrosine kinase (Btk) that is being developed by Pharmacyclics for the treatment of patients with B-cell lymphoma. Btk plays a prominent role in B-cell lymphocyte maturation by mediating B-cell receptor (BCR) signal transduction. In the human genetic immunodeficiency disease X-linked agammaglobulinemia, mutation of the gene that encodes the Btk protein results in reduced BCR signaling and a failure to generate mature B-cells. Recent studies indicate that some large B-cell lymphomas have activation of the kinases downstream of the BCR and that inhibition of this signaling can induce apoptosis. BCR signaling is also thought to promote malignant cell expansion and survival in chronic lymphocytic leukemia. In preclinical models, inhibition of Btk by PCI-32765 led to apoptosis in multiple malignant B-cell lines, and inhibited B-cell lymphoma progression in vivo.

PCI-32765 also blocks B-cell activation and inhibits autoantibody production in vivo. Rheumatoid arthritis (RA) and lupus are two chronic inflammatory diseases characterized by polyclonal B-cell activation and the production of autoantibodies. By selectively inhibiting Btk, PCI-32765 has demonstrated a dose-dependent ability to inhibit disease development in RA and lupus in animal models. In the collagen-induced arthritis mouse model for example, oral administration of PCI-32765 led to a regression of established disease. Btk is also required for signaling in mast cells and basophils, which are involved in allergic inflammation. The activation of mast cells and basophils leads to the release of histamine and other mediators that lead to allergic symptoms, and thus Btk inhibition may also be effective in allergy and other mast cell-mediated diseases. PCI-32765 potently inhibits histamine release from human basophils and orally dosed PCI-32765 blocks mast cell release in vivo in mouse studies.

A multicenter U.S. Phase I trial in B-cell lymphoma is currently enrolling patients. We have developed a proprietary molecular probe that we are using as a biomarker to optimize our treatment regimen in our Phase I trial. The Phase I trial is designed to determine the safety, tolerability and to evaluate effects on pharmacodynamic assays and tumor response. Up to date clinical information about this trial, including clinical response data, will be reported at the 51st ASH annual meeting in December.

MGd, is a radiation and chemotherapy sensitizing agent with a novel mechanism of action. MGd is designed to accumulate selectively in cancer cells. Once inside cancer cells, MGd in combination with radiation induces apoptosis (programmed cell death) by disrupting redox-dependent pathways. MGd is also detectable by magnetic resonance imaging (MRI) and may allow for more precise tumor detection. The National Cancer Institute (NCI) is currently sponsoring two Phase II trials which have and continue to provide valuable developmental insights and directions. One Phase II trial is a multi-center study in newly diagnosed GBM in combination with radiation therapy and temozolomide which completed the planned enrollment of 113 patients in July 2009. Previous studies in malignant gliomas have shown that the combination of MGd and temozolomide has no additional overlapping toxicities when used in combination. The second Phase II trial is a multi-center study evaluating MGd in combination with radiation in children with pontine ("brain stem") gliomas. This 60 patient study completed enrollment in January 2009 with patients currently being followed per the clinical trial protocol.

We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights, and the need for future capital. In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build a U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.

Results of Operations

Research and Development

                                        Three Months Ended
                                           September 30,             Percent
                                       2009            2008          Change

Research and development expenses   $ 3,288,000     $ 3,203,000             3 %

The increase of 3% or $85,000 in research and development expenses for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily due to an increase of $307,000 in outside clinical trial costs associated with our HDAC and Btk programs partially offset by a $123,000 decrease in outside pre-clinical costs associated with our HDAC, Factor VIIa and Btk programs.

Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and device development and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period. The information in the column labeled "Estimated Completion of Phase" is only our estimate of the timing of completion of the current in-process development phase. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Prior to fiscal 1999, we did not track our research and development expenses by specific program and for this reason we cannot accurately estimate our total historical costs on a specific program basis. Direct costs by program and indirect costs are as follows:

                                                        Related R&D Expenses
                                                         Three Months Ended
                                                            September 30,
                                        Phase of
    Program          Description       Development      2009            2008

HDAC Inhibitors   Cancer               Phase I/II    $   632,000     $   231,000

Factor VIIa       Cancer               Phase I/II        526,000         510,000

Btk Inhibitors    Cancer               Phase I         1,004,000         886,000

MGd               Cancer               Phase II           32,000         344,000

                  Total direct costs                   2,194,000       1,971,000
                  Indirect costs                       1,094,000       1,232,000
                  Total research and
                   development expenses              $ 3,288,000     $ 3,203,000




General and Administrative

                                           Three Months Ended
                                              September 30,             Percent
                                          2009            2008          Change

General and adiministrative expenses   $ 1,533,000     $ 3,439,000           -55 %

The decrease of 55% or $1,906,000 in general and administrative expenses for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily due to severance expenses, including stock compensation expense of $1,394,000 and $536,000 of cash-based severance expenses, associated with separation agreements entered into with the company's CEO and CFO in September 2008, partially offset by an increase of $160,000 in legal and consulting expenses.

Interest and Other, Net

                                              Three Months Ended
                                                 September 30,            Percent
                                             2009            2008         Change

Interest income                            $  19,000      $  100,000           -81 %
Interest expense                           $ (43,000 )    $        -            -
Interest and other income (expense), net   $ (24,000 )    $  100,000          -124 %

The decrease of 124% or $ 124,000 in interest and other income (expense), net for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily due to lower interest earned on the company's investments due to lower interest rates and $43,000 of interest expense associated with $6,400,000 in related party loans which were outstanding for part of the first quarter of fiscal 2010.

Liquidity and Capital Resources

Our principal sources of working capital have been private and public equity financings and also proceeds from collaborative research and development agreements, as well as interest income.

As of September 30, 2009, we had approximately $33,874,000 in cash, cash equivalents and marketable securities. Net cash used in operating activities of $3,837,000 during the three months ended September 30, 2009, resulted primarily from our net loss, net of depreciation and amortization, share-based compensation expense, a decrease in accounts receivable and an increase in accrued liabilities. Net cash used in operating activities of $4,276,000 during the three months ended September 30, 2008, resulted primarily from our net loss, net of depreciation and amortization, share-based compensation expense and an increase in accrued liabilities.

Net cash used in investing activities of $10,385,000 in the three months ended September 30, 2009 consisted primarily purchases of marketable securities. Net cash used in investing activities of $1,196,000 in the three months ended September 30, 2008 consisted primarily of the purchase of marketable securities, partially offset by maturities and sales of marketable securities.

Net cash provided by financing activities of $ 21,418,000 for the three months ended September 30, 2009 was primarily due to $27,800,000 in net proceeds from the sale of approximately 22.5 million shares of common stock in a Rights Offering completed in July 2009, partially offset by the repayment of $6,400,000 in loans.

In April 2009, we signed a collaboration and license agreement with Servier. In May 2009, we received an upfront payment from Servier of $11,000,000 less applicable withholding taxes of $550,000, for a net payment of $10,450,000.

In February 2009, we sold approximately 1.5 million shares of unregistered common stock at $0.93 per share for net proceeds of approximately $1.4 million.

In December 2008, we borrowed $5,000,000 from an affiliate of Robert W. Duggan. In March 2009, the loan amount was increased to $6,400,000. In August 2009, pursuant to the terms of the loans, the company repaid the $6,400,000 loans outstanding at June 30, 2009.

In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation (now Celera Corporation) business. Future milestone payments under the agreement, as amended, could total as much as $98 million, although we currently cannot predict if or when any of the milestones will be achieved. In addition, Celera will also be entitled to royalty payments based on annual sales of drugs commercialized from these programs.

Based upon the current status of our product development plans, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. We expect research and development expenses, as a result of on-going and future clinical trials, to consume a large portion of our existing cash resources. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, due to our extensive drug programs we will need to raise substantial additional capital to fund our operations in the future. We are seeking partnership collaborations to help fund the development of our product candidates. We also expect to raise additional funds through the public or private sale of securities, bank debt or otherwise. If we are unable to secure additional funds, whether through partnership collaborations or sale of our securities, we will have to delay, reduce the scope of or discontinue one or more of our product development programs. Our actual capital requirements will depend on many factors, including the following:

· our ability to establish and the scope of any new collaborations;

· the progress and success of clinical trials of our product candidates; and

· the costs and timing of obtaining regulatory approvals.

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 materially. The factors described above will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, we cannot be certain that such additional funding will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to respond to competitive pressures or unanticipated requirements to develop our product candidates and to continue operations, any of which would have a material adverse effect on our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies, Estimates and Judgments

This discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and clinical trial accruals. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ significantly from these estimates under different assumptions or conditions and may adversely affect the financial statements.

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our financial statements and accompanying notes.

Revenue Recognition

We recognize revenue in when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. Revenue under our license and collaboration arrangements is recognized based on the performance requirements of the contract. Amounts received under such arrangements consist of up-front collaboration payments, periodic milestone payments and payments for research activities. Collaboration arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value and whether there is verifiable objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is combined and recognized as a single unit of accounting when criteria for separation are not met.

. . .