<PAGE>   1
 
   
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1996
    
                                                      REGISTRATION NO. 333-11105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
   
                                AMENDMENT NO. 4
    
                                       TO
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                            ------------------------
 
                                  ARQULE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
  <S>                             <C>                                <C>
            DELAWARE                          2834                         04-3221586
  (STATE OR OTHER JURISDICTION    (PRIMARY STANDARD INDUSTRIAL          (I.R.S. EMPLOYER
      OF INCORPORATION OR         CLASSIFICATION CODE NUMBER)        IDENTIFICATION NUMBER)
          ORGANIZATION)
</TABLE>

 
                            ------------------------
                               200 BOSTON AVENUE
                          MEDFORD, MASSACHUSETTS 02155
                                 (617) 395-4100
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
                                 ERIC B. GORDON
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                                  ARQULE, INC.
                               200 BOSTON AVENUE
                          MEDFORD, MASSACHUSETTS 02155
                                 (617) 395-4100
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
                            ------------------------

<TABLE>

                                   COPIES TO:
 
          <S>                                           <C>
              MICHAEL LYTTON, ESQ.                        LAWRENCE S. WITTENBERG, ESQ.
            LYNNETTE C. FALLON, ESQ.                         GEORGE W. LLOYD, ESQ.
               PALMER & DODGE LLP                       TESTA, HURWITZ & THIBEAULT, LLP
               ONE BEACON STREET                               HIGH STREET TOWER
          BOSTON, MASSACHUSETTS 02108                           125 HIGH STREET
                 (617) 573-0100                           BOSTON, MASSACHUSETTS 02110
                                                                 (617) 248-7000
</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.  / /
                            ------------------------

<TABLE>
   

                        CALCULATION OF REGISTRATION FEE
    
=====================================================================================================
   
- -----------------------------------------------------------------------------------------------------
<CAPTION>

                                                                           MAXIMUM
TITLE OF EACH CLASS                           AMOUNT         MAXIMUM       AGGREGATE       AMOUNT OF
OF SECURITIES TO BE                            TO BE     OFFERING PRICE    OFFERING      REGISTRATION
REGISTERED                                 REGISTERED(1)    PER SHARE      PRICE(1)         FEE(2)
- -----------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>          <C>               <C>
    

   
Common Stock, $.01 par value per share....   2,875,000       $12.00       $34,500,000       $12,402
    
 
=====================================================================================================
<FN>

   
(1) Includes shares which the Underwriters may purchase to cover
over-allotments, if any.
    
   
(2) Calculated pursuant to Rule 457 under the Securities Act of 1933. Of this
    amount $10,311 was paid on August 29, 1996 with the initial filing.
    
</TABLE>

                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE 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 SECTION 8(a), MAY
DETERMINE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>   2
 
   
PROSPECTUS
    
- --------------
 
   
                                2,500,000 Shares
    
 
                                  ArQule, Inc.

                                    [LOGO]

                                  Common Stock
 
   
     All of the 2,500,000 shares of Common Stock offered hereby are being sold
by ArQule, Inc. Prior to this offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol ARQL.
    
 
                               ------------------
 
            THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 5.
 
                               ------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
  AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
    THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
      COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
       ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
   

<TABLE>
============================================================================================
<CAPTION>
                                        PRICE TO           UNDERWRITING          PROCEEDS TO
                                         PUBLIC             DISCOUNT(1)          COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                  <C>
Per Share.........................        $12.00               $0.84               $11.16
- -------------------------------------------------------------------------------------------------
Total(3)..........................      $30,000,000         $2,100,000           $27,900,000
============================================================================================
<FN>
    
 
(1) See "Underwriting" for indemnification arrangements with the several
    Underwriters.
 
   
(2) Before deducting expenses payable by the Company estimated at $800,000.
    
 
   
(3) The Company has granted to the Underwriters a 30-day option to purchase up
    to 375,000 additional shares of Common Stock solely to cover
    over-allotments, if any. If all such shares are purchased, the total Price
    to Public, Underwriting Discount and Proceeds to Company will be
    $34,500,000, $2,415,000 and $32,085,000, respectively. See "Underwriting."
    
</TABLE>

 
   
                               ------------------
    
 
   
     The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about October 21, 1996, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
    
 
   
HAMBRECHT & QUIST
    
 
                  OPPENHEIMER & CO., INC.
 
                                    VECTOR SECURITIES INTERNATIONAL, INC.
 
   
October 16, 1996
    

<PAGE>   3
[GRAPH]

The above graphical representation displays the integration of the major
elements of ArQule's Combinatorial Drug Design and Development Platform.

[GRAPH]

A three-dimensional structure of ArQule's AQ148 HIV-1 Protease exhibitors,
bound in the enzyme active site, and developed utilizing elements of ArQule's
combinatorial Drug Design and Development Platform.

 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
     AMAP[Trademark], Directed Array[Trademark] and Mapping Array[Trademark] 
are trademarks of the Company for which there are pending applications for 
registration in the U.S. Patent and Trademark Office.

<PAGE>   4
 

                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus.
 
     ArQule, Inc. (the "Company" or "ArQule") has created a new technology
platform for the discovery and production of novel chemical compounds with
commercial potential. The Company's initial focus is on providing these novel
compounds to the pharmaceutical and biotechnology industries. The Company has
developed a proprietary technology for the identification and optimization of
drug development candidates. This technology uses a modular building block
approach to the development of compounds, together with structure-guided drug
design, high speed parallel chemical synthesis and information technology, to
rapidly develop large, diverse collections of compounds that have the potential
to be biologically active. To date, the Company has entered into collaborative
arrangements with Roche Bioscience, Pharmacia Biotech AB, Abbott Laboratories
and Solvay Duphar B.V., and has formed joint discovery programs with several
biotechnology companies. ArQule believes that its technology will allow its
collaborative partners to accelerate the drug discovery process by several
years, permitting them to realize significant cost reductions and the earlier
recovery of research and development expenditures for successful drugs.
 
     Using its proprietary "automated molecular assembly plant" (AMAP(TM))
system and structure-activity relationship ("SAR") data regarding biological
targets and molecular components, ArQule produces significant quantities of pure
small organic compounds in logically structured spatially addressable arrays.
Unlike most current approaches to compound development, ArQule's compound arrays
are created by using structure-guided and rational drug design tools to
systematically assemble molecular components with properties the Company's
scientists believe are likely to exhibit biological activity. ArQule's compound
arrays are designed around certain core structures or themes. Each compound in
the array is different from the adjacent compounds as a result of a single
structural modification. Each ArQule array omits compounds that are closely
analogous to other compounds in the array, using representative diversity to
create a logical representation of a virtual library of hundreds of times as
many compounds as are in the array. Drug developers are able to realize
significant savings by screening the thousands of compounds in each ArQule array
rather than the millions of compounds they represent.
 
     ArQule manufactures and delivers two types of arrays of synthesized
compounds to its pharmaceutical and biotechnology partners: (i) Mapping
Array(TM) compound sets, which are arrays of novel, diverse small molecule
compounds used for screening and (ii) Directed Array(TM) compound sets, which
are arrays of compounds that are closely related, often referred to as "analogs"
of a particular lead compound. Both Mapping Array and Directed Array sets are
shipped in industry-standard 96-well microtiter plates that are compatible with
most drug developers' screening protocols. Under its Mapping Array program,
ArQule ships a minimum of 100,000 compounds per year in 15 to 20 separate
Mapping Array sets, each consisting of 3,000 to 10,000 individual compounds
based on a different theme or core structure chosen by ArQule.
 
     ArQule conducts drug discovery programs primarily with partners in the
pharmaceutical and biotechnology industries. To date, ArQule has entered into
collaborative arrangements with Roche Bioscience, Pharmacia Biotech AB, Abbott
Laboratories and Solvay Duphar B.V., and has formed joint discovery programs
with several biotechnology companies. In exchange for non-exclusive access to
ArQule's Mapping Array program, the Company's pharmaceutical partners pay ArQule
a combination of up-front and annual subscription fees. In addition, these
companies agree to pay a fixed amount for Directed Array sets, as well as to
make payments upon the achievement of certain milestones and to pay royalties
upon the commercialization of drugs developed from ArQule compounds. In exchange
for providing the arrays to the Company's biotechnology partners, the Company
receives joint ownership of any potential drugs identified by the biotechnology
partner.
 
     ArQule's integrated technologies also present the Company with
opportunities in a number of biological and non-biological fields outside of
drug discovery. These opportunities include the production of separations media
for the purification of therapeutic proteins, novel agricultural chemicals,
industrial catalysts and the development of nano-scale polymeric structures for
specialized mechanical applications.
 
                                        3

<PAGE>   5
- ------------------------------------------------------------------------------- 


<TABLE>
                                  THE OFFERING

   
<S>                                                  <C>
Common Stock offered by the Company................  2,500,000 shares
Common Stock to be outstanding after the
  offering.........................................  9,476,487 shares(1)
Use of proceeds....................................  To fund research and product development
                                                     programs and for general corporate and
                                                     working capital purposes.
Proposed Nasdaq National Market symbol.............  ARQL
</TABLE>

    


<TABLE>
 
                                             SUMMARY FINANCIAL INFORMATION
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<CAPTION>
                                                   PERIOD FROM INCEPTION                         SIX MONTHS 
                                                   (MAY 6, 1993) THROUGH      YEAR ENDED            ENDED
                                                       DECEMBER 31,          DECEMBER 31,          JUNE 30,
                                                   ---------------------   -----------------   ----------------
                                                           1993             1994      1995      1995      1996
                                                           ----             ----      ----      ----      ----
                                                                                                 (UNAUDITED)
<S>                                                       <C>              <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Revenue........................................         $    --          $    85   $ 3,330   $ 1,521   $2,975
  Loss from operations...........................          (1,456)          (4,067)   (1,966)     (890)    (907)
  Net loss.......................................         $(1,465)         $(4,206)  $(2,252)  $(1,069)  $ (754)
  Unaudited pro forma net loss per share(2)......                                    $ (0.33)            $(0.10)
  Shares used in computing unaudited pro forma
    net loss per share(2)........................                                      6,853              7,443
 
   
<CAPTION>
                                                                               JUNE 30, 1996
                                                                 ------------------------------------------
                                                                 ACTUAL    PRO FORMA(3)   AS ADJUSTED(3)(4)
                                                                 -------   ------------   -----------------
                                                                                (UNAUDITED)
<S>                                                              <C>          <C>              <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable securities.............  $ 6,367      $ 6,367          $33,467
  Working capital..............................................    1,394        1,394           28,494
  Total assets.................................................   11,848       11,848           38,948
  Capital lease obligations, less current portion..............    1,426        1,426            1,426
  Series B mandatorily redeemable convertible preferred
    stock......................................................    6,898           --               --
  Total stockholders' equity (deficit).........................   (1,622)       5,276           32,376
    
<FN> 
- ------------------------------
 
(1) Excludes 1,135,920 shares issuable upon the exercise of options outstanding
    as of June 30, 1996 with a weighted average exercise price of $2.21 per
    share.
 
(2) Unaudited pro forma net loss per share is determined by dividing Net loss by
    Shares used in computing unaudited pro forma net loss per share. For
    information regarding Shares used in computing unaudited pro forma net loss
    per share, see Notes 2 and 10 of Notes to Financial Statements.
 
(3) Reflects the conversion of all outstanding shares of preferred stock into
    6,219,948 shares of Common Stock upon the closing of this offering and the
    issuance of 234,992 shares of Common Stock upon the cashless exercise of
    outstanding warrants immediately prior to the effectiveness of the
    registration statement of which this Prospectus is a part. See Notes 8 and
    10 of Notes to Financial Statements.
 
   
(4) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
    offered hereby, after deducting the underwriting discount and offering
    expenses, at the initial public offering price of $12.00 per share and the
    application of the estimated net proceeds therefrom as set forth in "Use of
    Proceeds."
    
</TABLE>


                            ------------------------
 
     Except as otherwise noted, all information in this Prospectus assumes (i) a
one-for-two reverse stock split of the Common Stock effected on October 4, 1996,
(ii) the conversion of all outstanding shares of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock into an aggregate of 6,219,948
shares of Common Stock immediately prior to the closing of this offering (after
giving effect to the reverse stock split), (iii) the issuance of 234,992 shares
of Common Stock upon the cashless exercise of outstanding warrants immediately
prior to the effectiveness of the registration statement of which this
Prospectus is a part and (iv) no exercise of the Underwriters' over-allotment
option. The shares of Common Stock offered hereby involve a high degree of risk.
Investors should carefully consider the information set forth under "Risk
Factors."
- --------------------------------------------------------------------------------
 
                                        4

<PAGE>   6
 

                                  RISK FACTORS
 
     An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
 
     Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability.  The Company has had a limited operating history. For the
year ended December 31, 1994, the year ended December 31, 1995 and the six
months ended June 30, 1996, the Company had net losses of approximately $4.2
million, $2.3 million and $0.8 million, respectively. As of June 30, 1996, the
Company had an accumulated deficit of approximately $8.7 million. The Company's
expansion of its operations and enhancements to its technology will result in
significant expenses over the next several years that may not be offset by
significant revenues. The Company expects that revenues for the foreseeable
future and the Company's ability to achieve profitability will be dependent upon
the ability of the Company to enter into additional collaborative arrangements
with customers. To date, all revenue received by the Company has been from
up-front fees and research and development funding paid pursuant to
collaborative agreements with the Company's collaborative partners. The Company
has not realized any revenues from the achievement of milestones or royalties
from the discovery, development or sale of a commercial product by one of the
Company's collaborative partners, and there can be no assurance that any such
revenues will be realized. The Company is unable to predict when, or if, it will
become profitable. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
 
     Unproven Business Strategy.  The Company's modular building block approach
to chemistry has not yet resulted in the commercialization of a product. The
Company uses chemical building blocks for the purpose of rapidly identifying,
optimizing and obtaining proprietary rights to as many compounds with commercial
potential as possible. The pricing and nature of the Company's compound sets are
such that there may only be a limited number of companies that are potential
customers for such sets. The Company's ability to succeed is dependent upon the
acceptance by potential customers of the Company's approach to chemistry and
compound analysis as an effective tool in the discovery and development of
compounds with commercial potential. Due to the highly proprietary nature of the
activities being conducted, the central importance of these activities to their
drug discovery and development efforts, and the desire to obtain maximum patent
and other proprietary protection on the results of their internal programs,
pharmaceutical and biotechnology companies have historically conducted lead
compound identification and optimization within their own research departments.
There can be no assurance that the Company's present or future collaborators
will not pursue existing or alternative technology, either independently or in
collaboration with others, in preference to that of the Company or that the
Company will be able to attract future collaborators on acceptable terms or
develop a sustainable, profitable business. See "Business."
 
     Competition and the Risk of Obsolescence of Technology.  Competition among
the many organizations actively attempting to identify and optimize compounds
for development in the pharmaceutical industry and in other areas is intense. In
the pharmaceutical industry, ArQule competes with the research departments of
pharmaceutical companies, biotechnology companies, combinatorial chemistry
companies and research and academic institutions. Many of these competitors have
greater financial and human resources, and more experience in research and
development, than the Company. Historically, pharmaceutical companies have
maintained close control over their research activities, including the
synthesis, screening and optimization of chemical compounds. Many of these
pharmaceutical companies, which represent the greatest potential market for
ArQule's products and services, have developed or are developing internal
combinatorial chemistry and other methodologies to improve productivity,
including major investments in robotics technology to permit the automated
parallel synthesis of compounds. In addition, ArQule competes with biotechnology
and combinatorial chemistry companies that offer a range of products and
services. Academic institutions, governmental agencies and other research
organizations are also conducting research in areas in which the Company
 
                                        5

<PAGE>   7
 
is working, either on their own or in collaboration with others. The Company
anticipates that it will face increased competition in the future as new
companies enter the market and advanced technologies, including more
sophisticated information technologies, become available. The Company's
technological approaches may be rendered obsolete or uneconomical by advances in
existing technological approaches or the development of different approaches by
one or more of the Company's competitors. See "Business--Competition."
 
     Limited Sales and Marketing Experience; Expansion of Sales Activities. To
date, the Company has sold its products to its collaborative partners primarily
through the efforts of its senior management. The Company's senior management
has limited experience in marketing products similar to those of the Company. In
order to achieve significant long-term growth in revenues and its overall
strategic goals, the Company intends to hire at least one or two dedicated sales
and marketing personnel. There can be no assurance that the Company will be able
to achieve anticipated expansion of its business, attract a significant number
of new collaborative partners as customers or build an efficient and effective
sales and marketing organization. In the event the Company is unable to achieve
any one or more of the foregoing goals, the Company's business, financial
condition and results of operations could be materially adversely affected. In
addition to the risks inherent in the Company's efforts to market its own
products, the Company's revenues from royalties and milestone payments from its
collaborative partners is substantially dependent upon the marketing efforts of
such collaborative partners as discussed below under "Risk Factors--Dependence
on Third Parties."
 
     Dependence on Third Parties.  The Company's strategy for the development
and commercialization of its products and services involves the formation of
collaborative arrangements with third parties, initially pharmaceutical and
biotechnology companies. To date, the Company has entered into numerous such
arrangements. There can be no assurance that the Company's existing
collaborations will not be terminated under certain circumstances by its
collaborators and any such terminations could have a material adverse effect on
the Company. There can be no assurance that the Company will be able to
establish additional collaborative arrangements, that any such arrangements will
be on terms favorable to the Company, or that current or future collaborative
arrangements will ultimately be successful. Further, ArQule's receipt of
revenues from collaborative arrangements is affected by the timing of efforts
expended by third parties. The Company's products and services will only result
in commercialized pharmaceutical products generating milestone payments and
royalties after significant preclinical and clinical development efforts, the
receipt of the requisite regulatory approvals, and the integration of
manufacturing capabilities and successful marketing efforts. With the exception
of certain aspects of preclinical development, the Company does not currently
intend to perform any of these activities. Therefore, the Company will be
dependent upon the expertise of, and dedication of sufficient resources by,
third parties to develop and commercialize products. Should a collaborative
partner fail to develop or commercialize a compound or product to which it has
obtained rights from the Company, the Company may not receive any future
milestone payments or royalties associated with such compound or product.
Furthermore, there can be no assurance that any such development or
commercialization would be successful or that disputes will not arise over the
application of payment provisions to such drugs. There can be no assurance that
current or future collaborative partners will not pursue alternative
technologies or develop alternative products, either on their own or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by collaborative arrangements
with the Company. See "Business--ArQule's Drug Discovery Programs."
 
     Dependence on Key Employees.  The Company is highly dependent on the
principal members of its scientific and management staff, in particular, Dr.
Joseph C. Hogan, Jr. and Dr. David L. Coffen. The loss of one or more members of
its staff could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
person life insurance on the life of any employee. The Company's future success
also will depend in part on its ability to identify, hire and retain additional
qualified personnel, including individuals with doctorates in basic sciences.
There is intense competition for such personnel in the areas of the Company's
 
                                        6

<PAGE>   8
 
activities, and there can be no assurance that the Company will be able to
continue to attract and retain personnel with the advanced technical
qualifications necessary for the development of the Company's business. Failure
to attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Employees" and "Management."
 
     Future Capital Needs; Uncertainty of Additional Funding.  There can be no
assurance that the net proceeds from this offering, together with the Company's
existing capital resources and revenue from operations, will be adequate to fund
the Company's operations through December 1998. The Company may be required to
raise additional capital over a period of several years in order to conduct its
operations. Such capital may be raised through additional public or private
equity financings, as well as collaborative arrangements, borrowings and other
available sources. The Company's capital requirements depend on numerous
factors, including entering into additional collaborative arrangements,
competing technological and market developments, changes in the Company's
existing collaborative relationships, the cost of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights, the purchase
of additional capital equipment, the progress of the Company's drug discovery
programs and the progress of the Company's collaborators' milestone and
royalty-producing activities. The Company does not currently plan to
independently develop, manufacture or market any drugs it discovers. Should the
Company, however, choose to develop any such drugs, the Company will require
substantial funds to conduct research and development, preclinical studies and
clinical trials and to market any pharmaceutical products that may be developed
from such drugs. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all. If adequate funds
are not available, the Company may be required to curtail operations
significantly or to obtain funds by entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets. To the extent that additional capital is raised through the sale of
equity or securities convertible into equity, the issuance of such securities
could result in dilution to the Company's existing stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
     Dependence on Scale Up and Management of Growth.  The Company's success
will depend on the expansion of its operations and the management of these
expanded operations. To be cost-effective in its delivery of services and
products, the Company must enhance productivity through further automation of
its processes and improvements to its technology. The Company also must
successfully structure and manage multiple additional collaborative
relationships. There can be no assurance that the Company will be successful in
its engineering efforts to further automate its processes or that the Company
will be successful in managing and meeting the staffing requirements of
additional collaborative relationships. Failure to achieve any of these goals
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--ArQule's Drug Discovery
Programs" and "--Employees."
 
   
     Control By Management and Existing Stockholders.  Upon completion of this
offering, the Company's significant stockholders, executive officers, directors
and affiliated entities together will beneficially own approximately 68.1% of
the outstanding shares of Common Stock (65.5% if the Underwriters'
over-allotment option is exercised in full). As a result, these stockholders,
acting together, will be able to control most matters requiring approval by the
stockholders of the Company, including the election of directors. Such a
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices. See "Principal Stockholders."
    
 
     Dependence on Patents and Proprietary Rights.  ArQule has one issued patent
and has filed a number of patent applications. There can be no assurance that
patent applications filed by ArQule will result in patents being issued, that
the claims of such patents will offer significant protection of the Company's
technology, or that any patents issued to or licensed by ArQule will not be
challenged, narrowed, invalidated or circumvented. The Company believes its
success will depend in large part on
 
                                        7

<PAGE>   9
 
its ability, and the ability of its licensees and its licensors, to obtain
patents for its technologies and the compounds and other products, if any,
resulting from the application of such technologies, to defend such patents once
obtained and to maintain trade secrets, both in the United States and in foreign
countries. In the absence of such patents, the Company may be unable to prevent
others from utilizing the Company's technology and may need to rely upon
expertise developed during pre-commercial implementation of the technology,
which may not provide the same level of competitive advantages. The commercial
success of the Company will also depend upon avoiding the infringement of
patents issued to others and maintaining the technology licenses upon which
certain of the Company's current products are, or any future products under
development might be, based.
 
     Some of the Company's competitors have, or are affiliated with companies
having, substantially greater resources than the Company, and such competitors
may be able to sustain the costs of complex patent litigation to a greater
degree and for longer periods of time than the Company. Uncertainties resulting
from the initiation and continuation of any patent or related litigation could
have a material adverse effect on the Company's ability to compete in the
marketplace pending resolution of the disputed matters. To date, one patent has
been issued to the Company. There can be no assurance that other patents will
issue to the Company or its licensors as a result of their pending applications
or that, if issued, such patents will contain claims sufficiently broad to
afford protection against competitors with similar technology. Moreover, there
can be no assurance that the Company or its customers will be able to obtain
significant patent protection for lead compounds or pharmaceutical products
based upon the Company's technology. There can be no assurance that any patents
issued to the Company or its collaborative partners, or for which the Company
has license rights, will not be challenged, narrowed, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. Litigation, which could result in substantial cost to
the Company, may be necessary to enforce the Company's patent and license
rights, to enforce or defend an infringement claim, or to determine the scope
and validity of others' proprietary rights. If competitors of the Company
prepare and file patent applications in the United States or abroad that claim
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of invention, or opposition proceedings in a foreign
patent office, both of which could result in substantial cost to the Company,
even if the outcome is favorable to the Company. An adverse outcome could
subject the Company to significant liabilities to third parties, and require the
Company to cease using the technology or to license disputed rights from third
parties, which licenses may not be available at reasonable cost.
 
     A number of pharmaceutical and biotechnology companies, and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies or patent applications. Such conflicts could also
limit the scope of the claim of any patents that the Company may be able to
obtain, or result in the rejection of the Company's patent applications. The
Company currently has certain licenses to patents and patent applications from
third parties, and in the future may require additional licenses from other
parties. There can be no assurance that: (i) such licenses will be obtainable on
commercially reasonable terms, if at all; (ii) the patents underlying such
licenses will be valid and enforceable; (iii) patents having commercially
valuable claims will issue from any licensed patent applications; or (iv) the
proprietary nature of any other technology underlying such licenses will remain
proprietary.
 
     The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies on certain proprietary trade secrets and
know-how that are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
collaborators, there can be no assurance that (i) the agreements will not be
breached; (ii) the Company would have adequate remedies for any breach; or (iii)
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors. See "Business--Patents and Proprietary
Rights."
 
                                        8

<PAGE>   10
 
     No Prior Public Market for Common Stock; Possible Volatility of Stock
Price.  Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering. The market prices
for securities of comparable companies have been highly volatile and the market
has experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential results with respect
to products or compounds under development by the Company or its collaborative
partners, regulatory developments in both the United States and foreign
countries, public concern as to the efficacy of new technologies, general market
conditions, as well as quarterly fluctuations in the Company's revenues and
financial results and other factors, may have a significant impact on the market
price of the Common Stock. In particular, the realization of any of the risks
described in these "Risk Factors" could have a dramatic and adverse impact on
such market price. See "Underwriting."
 
     Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware
Law.  The Company's Certificate of Incorporation as it is proposed to be amended
and restated concurrently with the closing of this offering (the "Restated
Certificate") authorizes the Board of Directors to issue, without stockholder
approval, up to 1,000,000 shares of preferred stock ("Preferred Stock") with
voting, conversion and other rights and preferences that could adversely affect
the voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay for shares of the
Company's Common Stock. The Restated Certificate provides for staggered terms
for the members of the Board of Directors. A staggered Board of Directors and
certain provisions of the Company's By-laws (the "By-laws") and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. The Company, for example, will be
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder. These
provisions may have the effect of delaying or preventing a change of control of
the Company without action by the stockholders and, therefore, could adversely
affect the price of the Company's Common Stock. See "Management," "Description
of Capital Stock--Preferred Stock" and "--Anti-Takeover Measures."
 
     Potential Liability Regarding Hazardous Materials.  The research and
development processes of the Company involve the controlled use of hazardous
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. The risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. In addition,
there can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
 
     Government Regulation.  Although the manufacture, transportation and
storage of the Company's products are subject to the laws and regulations
regarding hazardous materials discussed in the preceding risk factor, the sale
of the Company's products is not subject to significant government regulations.
However, the Company's future profitability is dependent on the sales of
pharmaceuticals and other products developed from the Company's compounds by its
customers and collaborators. Regulation by governmental entities in the United
States and other countries will be a significant
 
                                        9

<PAGE>   11
 
factor in the production and marketing of any pharmaceutical products that may
be developed by a customer or collaborative partner of the Company. The nature
and the extent to which such regulation may apply to the Company's customers or
its collaborative partners will vary depending on the nature of any such
pharmaceutical products. Virtually all pharmaceutical products developed by the
Company's customers or its collaborative partners will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human pharmaceutical products are subject to rigorous preclinical and clinical
testing and other approval procedures by the U.S. Food and Drug Administration
(the "FDA") and by foreign regulatory authorities. Various federal and, in some
cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources. Generally, in order to gain FDA approval, a company first must
conduct preclinical studies in the laboratory and in animal models to gain
preliminary information on a compound's efficacy and to identify any safety
problems. The results of these studies are submitted as a part of an
Investigational New Drug application ("IND") that the FDA must review before
human clinical trials of an investigational drug can start. In order to
commercialize any products, the Company or its customers or its collaborative
partners will be required to sponsor and file an IND and will be responsible for
initiating and overseeing the clinical studies to demonstrate the safety and
efficacy that are necessary to obtain FDA approval of any such products.
Clinical trials are normally done in three phases and generally take two to five
years, but may take longer, to complete. After completion of clinical trials of
a new product, FDA and foreign regulatory authority marketing approval must be
obtained. If the product is classified as a new drug, a New Drug Application
("NDA") must be filed and approved before commercial marketing of the drug. The
testing and approval processes require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
NDAs submitted to the FDA can take several years to obtain approval. Even if FDA
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. For marketing outside the United States,
the Company will also be subject to foreign regulatory requirements governing
human clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. See
"Business--Government Regulation."
 
   
     Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price.  Future sales of Common Stock in the public market following this
offering could adversely affect the market price of the Common Stock. Upon
completion of this offering, the Company will have 9,476,487 shares of Common
Stock outstanding, assuming no exercise of currently outstanding options. Of
these shares, the 2,500,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. Of the 6,976,487 remaining shares, approximately 151,972
shares of Common Stock will be eligible for sale under Rules 144 and 701 on the
ninety-first day after the effectiveness of this offering. Stockholders of the
Company, holding in the aggregate 6,824,515 shares of Common Stock, have agreed,
subject to certain limited exceptions, not to sell or otherwise dispose of any
of the shares held by them as of the date of this Prospectus for a period of 180
days after the date of this Prospectus (the "lock-up period") without the prior
written consent of the representatives of the Underwriters of this offering. At
the end of such lock-up period, an additional 5,916,781 shares of Common Stock
(plus approximately 223,726 shares issuable upon exercise of vested options)
will be eligible for immediate resale, subject to compliance with Rule 144 and
Rule 701. The remainder of the approximately 907,734 shares of Common Stock held
by existing stockholders will become eligible for sale at various times over a
period of less than two years and could be sold earlier if the holders exercise
any available registration
    
 
                                       10

<PAGE>   12
 
rights. The holders of 6,219,948 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning at the end of the lock-up
period. If such holders, by exercising their demand registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's Common
Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital. In addition, approximately 180 days
after the date of this Prospectus, the Company expects to file a registration
statement on Form S-8 registering a total of approximately 2,845,000 shares of
Common Stock subject to outstanding stock options or reserved for issuance under
the Company's stock option plans. See "Management--Stock Plans," "Shares
Eligible for Future Sale" and "Underwriting."
 
     Broad Management Discretion in Use of Proceeds.  The Company's management
will have broad discretion to allocate proceeds of this offering to uses that it
believes are appropriate. There can be no assurance that the proceeds of this
offering can or will be invested to yield a positive return. See "Use of
Proceeds."
 
   
     Immediate and Substantial Dilution.  Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution
estimated at $8.58 in the net tangible book value of their investment from the
initial public offering price. Additional dilution will occur upon exercise of
outstanding options. See "Dilution" and "Shares Eligible for Future Sale."
    
 
     Absence of Dividends.  The Company has never paid dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for the
development of its business.
 
                                       11

<PAGE>   13
 

                                  THE COMPANY
 
   
     ArQule was incorporated in Delaware in December 1993 and is the successor
to a partnership formed on May 6, 1993. The Company's principal executive
offices are located at 200 Boston Avenue, Medford, Massachusetts 02155, and its
telephone number is (617) 395-4100. The Company is a subsidiary of ArQule
Partners, L.P. (the "Partnership"), which owns 61.57% of the shares of Common
Stock of the Company before this offering and will own 45.33% of the shares of
Common Stock after this offering.
    
 
     The partners of the Partnership have agreed to dissolve the Partnership and
distribute the shares held by it 180 days after the effective date of this
offering. Sevin Rosen Fund IV L.P., Atlas Venture Fund II, L.P. and Atlas
Venture Europe B.V., which are direct significant stockholders of the Company
(collectively, the "Venture Fund Investors"), Legomer Investors, Inc. ("LII"),
Legomer Technologies, Inc. ("LTI"), Dr. Joseph C. Hogan, Jr., Chairman of the
Board, Senior Vice President of Research and Development and Chief Scientific
Officer of the Company, and certain other individuals are partners of the
Partnership and will receive shares of Common Stock of the Company upon such
Partnership distribution. The Venture Fund Investors hold all of the outstanding
shares of LII. Dr. Hogan holds 50% of the outstanding stock of LTI. See
"Principal Stockholders."
 

                                USE OF PROCEEDS
 
   
     The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting the underwriting discount and offering expenses, are
estimated to be $27.1 million ($31.3 million if the Underwriters' over-allotment
option is exercised in full), at an initial public offering price of $12.00 per
share.
    
 
     The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock in
order to facilitate future access by the Company to public equity markets as
well as to create liquidity for its existing stockholders. The Company intends
to use the net proceeds of the offering, together with the Company's existing
cash, cash equivalents, short-term investments and cash generated from
operations, for research and development, working capital and general corporate
purposes. Such general corporate purposes may include acquisitions of other
businesses, technologies or products. The Company is not in any negotiations
with respect to any such acquisitions. The amount and timing of the Company's
actual expenditures for the purposes described above will depend upon a number
of factors, including the Company's ability to enter into additional
collaborative or licensing arrangements, as well as the timing and terms of such
arrangements. In addition, the Company's research and development expenditures
will vary as programs are expanded or abandoned and as a result of variability
in funding from its collaborative partners. The Company's management will have
broad discretion to allocate the net proceeds of this offering to uses that it
believes are appropriate. There can be no assurance that the proceeds of this
offering can or will be invested to yield a positive return.
 
     The Company currently believes the net proceeds of the offering, together
with the Company's existing cash, cash equivalents, short-term investments, cash
generated from operations and research funding from corporate collaborators,
will enable the Company to maintain its current and planned operations at least
through December 1998. However, there can be no assurance that this will be the
case. See "Risk Factors--Future Capital Needs; Uncertainty of Additional
Funding" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
 
     Pending use as set forth above, the net proceeds of the offering will be
invested primarily in interest-bearing, investment-grade securities.
 

                                DIVIDEND POLICY
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business.
 
                                       12

<PAGE>   14
 

                                 CAPITALIZATION

<TABLE>
   
     The following table sets forth, as of June 30, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to (a) the conversion of all issued and outstanding
preferred stock into 6,219,948 shares of Common Stock and (b) the issuance of
234,992 shares of Common Stock upon the cashless exercise of outstanding
warrants, and (iii) the pro forma capitalization of the Company as adjusted to
reflect (a) the sale of the 2,500,000 shares of Common Stock offered hereby,
after deducting the underwriting discount and offering expenses, at the initial
public offering price of $12.00 per share and the application of the estimated
net proceeds therefrom as set forth in "Use of Proceeds" and (b) the filing of
the Restated Certificate to increase the number of authorized shares of Common
Stock and to authorize 1,000,000 shares of undesignated preferred stock. This
table should be read in conjunction with the financial statements, related notes
and other financial information included herein.
    
 
   
<CAPTION>
                                                                        JUNE 30, 1996
                                                         -------------------------------------------
                                                         ACTUAL        PRO FORMA         AS ADJUSTED
                                                         -------     --------------      -----------
                                                                     (IN THOUSANDS)
                                                                     
<S>                                                      <C>             <C>               <C>
Capital lease obligations, less current portion........  $ 1,426         $ 1,426           $ 1,426
                                                         -------         -------           -------
Series B mandatorily redeemable convertible
  preferred stock......................................    6,898              --                --
                                                         -------         -------           -------
Stockholders' equity (deficit):

  Preferred stock, $0.01 par value, 15,000,000 shares
     authorized actual and pro forma, 1,000,000 shares
     authorized as adjusted:

     Series A convertible preferred stock, 10,624,429
       shares issued and outstanding actual, none
       issued and outstanding pro forma and as
       adjusted........................................    2,628              --                --

  Common stock, $0.01 par value, 20,000,000 shares
     authorized actual and pro forma, 30,000,000
     authorized as adjusted; 523,047 shares issued and
     outstanding actual, 6,977,987 shares issued and
     outstanding pro forma, 9,477,987 shares issued and
     outstanding as adjusted(1)........................        5              70                95

  Additional paid-in capital...........................    4,435          13,896            40,971

  Accumulated deficit..................................   (8,690)         (8,690)           (8,690)
                                                         -------         -------           -------
     Total stockholders' equity (deficit)..............   (1,622)          5,276            32,376
                                                         -------         -------           -------
          Total capitalization.........................  $ 6,702         $ 6,702           $33,802
                                                         =======         =======           =======
    
<FN> 
- ------------------------------
(1) Excludes 1,135,920 shares issuable upon the exercise of options outstanding
    as of June 30, 1996 with a weighted average exercise price of $2.21 per
    share.
</TABLE>

 
                                       13

<PAGE>   15
 
                                    DILUTION

<TABLE>
   
     The pro forma net tangible book value of the Company as of June 30, 1996
was $5,276,000 or approximately $0.76 per share. Pro forma net tangible book
value per share represents the total tangible assets of the Company, less total
liabilities, divided by 6,977,987 shares of Common Stock outstanding after
giving effect to the conversion of all outstanding shares of convertible
preferred stock into 6,219,948 shares of Common Stock upon the completion of
this offering and the issuance of 234,992 shares of Common Stock upon the
cashless exercise of outstanding warrants immediately prior to the effectiveness
of the registration statement of which this Prospectus is a part. Assuming the
receipt by the Company of the net proceeds from the sale of the 2,500,000 shares
of Common Stock offered hereby at an initial public offering price of $12.00 per
share, the pro forma net tangible book value of the Company as of June 30, 1996
would have been $32,376,000, or $3.42 per share. This represents an immediate
increase in the pro forma net tangible book value of $2.66 per share to existing
stockholders of the Company and an immediate dilution of $8.58 per share to new
investors purchasing Common Stock in this offering. The following table
illustrates the per share dilution to be incurred by new investors as of June
30, 1996:
    
 
   
    <S>                                                                   <C>       <C>
    Initial public offering price.......................................            $12.00
      Pro forma net tangible book value per share at June 30, 1996......  $0.76
      Increase per share attributable to new investors..................   2.66
                                                                          -----
    Pro forma net tangible book value per share after the offering......              3.42
                                                                                    ------
    Dilution per share to new investors.................................            $ 8.58
                                                                                    ======
</TABLE>

    
 
   

<TABLE>
     The following table sets forth, on a pro forma basis as of June 30, 1996
(after giving effect to the conversion of all outstanding preferred stock into
6,219,948 shares of Common Stock upon the completion of this offering and for
the issuance of 234,992 shares of Common Stock upon the cashless exercise of
outstanding warrants immediately prior to the effectiveness of the registration
statement of which this Prospectus is a part), the differences between the
existing stockholders and the new investors with respect to the number of shares
of Common Stock acquired from the Company, the total consideration paid and the
average price per share (at the initial public offering price of $12.00 per
share):
    
 
   
<CAPTION>
                                           SHARES                      TOTAL
                                          PURCHASED                CONSIDERATION
                                    ---------------------     -----------------------     AVERAGE PRICE
                                     NUMBER       PERCENT       AMOUNT        PERCENT       PER SHARE
                                    ---------     -------     -----------     -------     -------------
<S>                                 <C>            <C>        <C>              <C>            <C>
Existing stockholders.............  6,977,987       73.6%     $13,737,000       31.4%         $ 1.97
New investors.....................  2,500,000       26.4       30,000,000       68.6           12.00
                                    ---------      -----      -----------      -----
          Total...................  9,477,987      100.0%     $43,737,000      100.0%
                                    =========      =====      ===========      ===== 
</TABLE>

    
 
     The above information excludes an aggregate of 1,135,920 shares of Common
Stock issuable upon the exercise of options outstanding as of June 30, 1996 with
a weighted average exercise price of $2.21 per share. To the extent that such
options are exercised, there will be further dilution to new investors.
 
                                       14

<PAGE>   16
 
                            SELECTED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
     The following data, insofar as it relates to the period from inception (May
6, 1993) through December 31, 1993 and for the years 1994 and 1995, have been
derived from the Company's audited financial statements, including the balance
sheet as of December 31, 1994 and 1995 and the related statements of operations
and of cash flows for the two years ended December 31, 1995 and for the period
from inception (May 6, 1993) through December 31, 1993 and notes thereto
appearing elsewhere herein. The selected data presented below at June 30, 1996
and for the six months ended June 30, 1995 and 1996 have been derived from, and
are qualified by reference to, the Company's unaudited financial statements also
appearing herein. Such unaudited financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim period. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The data should be read in conjunction with the
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus. The historical results are not necessarily indicative of the
results of operations to be expected in the future.
 
<CAPTION>
                                                             PERIOD FROM INCEPTION                                 SIX MONTHS
                                                             (MAY 6, 1993) THROUGH         YEAR ENDED                ENDED
                                                                 DECEMBER 31,             DECEMBER 31,              JUNE 30,
                                                             ---------------------     -------------------     ------------------
                                                                     1993               1994        1995        1995        1996
                                                                     ----               ----        ----        ----        ----
                                                                                                                  (UNAUDITED)
<S>                                                                 <C>                <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Revenue:
    Compound development revenue...........................         $    --            $    85     $ 2,330     $   521     $2,975
    License option fees....................................              --                 --       1,000       1,000         --
                                                                    -------            -------     -------     -------     ------
        Total revenue......................................              --                 85       3,330       1,521      2,975
                                                                    -------            -------     -------     -------     ------
  Costs and expenses:
    Cost of revenue........................................              --                 --       1,644         392      1,935
    Research and development...............................             769              2,806       2,095       1,213      1,119
    General and administrative.............................             687              1,346       1,557         806        828
                                                                    -------            -------     -------     -------     ------
        Total costs and
          expenses.........................................           1,456              4,152       5,296       2,411      3,882
                                                                    -------            -------     -------     -------     ------
  Loss from operations.....................................          (1,456)            (4,067)     (1,966)       (890)      (907)
  Interest income (expense)................................              (9)              (139)       (286)       (179)       153
                                                                    -------            -------     -------     -------     ------
  Net loss.................................................         $(1,465)           $(4,206)    $(2,252)    $(1,069)    $ (754)
                                                                    =======            =======     =======     =======     ======
  Unaudited pro forma net loss per share(1)................                                        $ (0.33)                $(0.10)
                                                                                                   =======                 ======
  Shares used in computing unaudited pro forma net loss per
    share(1)...............................................                                          6,853                  7,443
                                                                                                   =======                 ======
 
   
<CAPTION>
                                                                                  DECEMBER 31,                 JUNE 30, 1996
                                                                           --------------------------     -----------------------
                                                                            1993     1994      1995       ACTUAL   AS ADJUSTED(2)
                                                                           ------   -------   -------     -------  --------------
                                                                                                                (UNAUDITED)
<S>                                                                        <C>      <C>       <C>         <C>          <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable securities.......................  $  595   $   425   $ 7,791     $ 6,367      $33,467
  Working capital........................................................     275    (2,108)    5,074       1,394       28,494
  Total assets...........................................................   1,538     2,321    10,190      11,848       38,948
  Capital lease obligations, less current portion........................     376       962       911       1,426        1,426
  Series B mandatorily redeemable convertible preferred stock............      --        --     6,888       6,898           --
  Total stockholders' equity (deficit)...................................     771    (1,203)   (1,000)     (1,622)      32,376
    

<FN> 
- ------------------------------
 
(1) Unaudited pro forma net loss per share is determined by dividing the Net
    loss by Shares used in computing unaudited pro forma net loss per share. For
    information regarding Shares used in computing unaudited pro forma net loss
    per share, see Notes 2 and 10 of Notes to Financial Statements.
 
   
(2) Reflects the conversion of all outstanding shares of preferred stock into
    6,219,948 shares of Common Stock upon the closing of this offering and the
    issuance of 234,992 shares of Common Stock upon the cashless exercise of
    outstanding warrants immediately prior to the effectiveness of the
    registration statement of which this Prospectus is a part. See Notes 8 and
    10 of Notes to Financial Statements. Also gives effect to the sale of
    2,500,000 shares of Common Stock offered by the Company hereby, after
    deducting the underwriting discount and offering expenses, at the initial
    public offering price of $12.00 per share and the application of the
    estimated net proceeds therefrom as set forth in "Use of Proceeds."
    
</TABLE>

 
                                       15

<PAGE>   17
 

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     ArQule is engaged in the discovery and development of novel chemical
compounds with commercial potential with an initial focus on the pharmaceutical
and biotechnology industries. ArQule manufacturers and delivers two types of
arrays of synthesized compounds to its pharmaceutical and biotechnology
partners: (i) Mapping Array compound sets, which are arrays of novel, diverse
small molecule compounds used for screening and (ii) Directed Array compounds
sets, which are arrays of analogs of a particular lead compound (identified from
a Mapping Array set or otherwise), synthesized for the purpose of optimizing
such lead compounds.
 
     The Company currently generates revenue through compound development and
through license option fees. Compound development revenue relates to revenue
from collaborative agreements, which provide for the development and delivery of
Mapping Array and Directed Array sets. License option fee revenue represents
payments made to the Company for the option to license certain ArQule compounds.
The Company's revenue to date is primarily attributable to three major corporate
collaborations: Pharmacia Biotech AB, which was entered into in March 1995;
Abbott Laboratories, which was entered into in June 1995; and Solvay Duphar
B.V., which was entered into in November 1995. Under these collaborations, the
Company has received payments of $9.3 million through June 30, 1996 ($1.0
million for license option fees; $8.3 million for compound development), of
which $6.2 million has been recognized as revenue ($1.0 million for license
option fees; $5.2 million for compound development). The Company recognizes
revenue under its corporate collaborations as related work is performed and
arrays are delivered. Payments received from corporate partners prior to the
completion of the related work are recorded as deferred revenue. License option
fees are recognized as the options are granted because such fees are
nonrefundable and the Company has no further obligations to fulfill. Cost of
revenue represents the actual costs incurred in connection with the development,
production and delivery of compounds. The Company is entitled to receive
milestone and royalty payments if products generated under the collaborations
are developed. The Company has entered into joint discovery agreements with a
number of biotechnology companies to which it has provided Mapping Array and
Directed Array sets in exchange for joint ownership of resulting drug
candidates. These agreements have not yet yielded any significant revenue for
the Company.
 
     The Company has not been profitable since inception and has incurred a
cumulative net loss of $8.7 million through June 30, 1996. Losses have resulted
principally from costs incurred in research and development activities related
to the Company's efforts to develop its technologies and from the associated
administrative costs required to support these efforts. The Company's ability to
achieve profitability is dependent on its ability to market its Mapping Array
and Directed Array sets to pharmaceutical and biotechnology companies and the
joint development and commercialization of products in which it has an economic
interest.
 
RESULTS OF OPERATIONS
 
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
 
     Revenue.  The Company's revenue for the six month period ended June 30,
1996 increased $1.5 million to $3.0 million from $1.5 million for the same
period in 1995. This was attributable to a $2.5 million increase in compound
development revenue related to the performance of work and the delivery of
Mapping Array and Directed Array sets under the Company's collaborative
agreements. The Company began recognizing revenue from the Pharmacia, Abbott and
Solvay collaborations in March, June and November 1995, respectively. This
increase in compound development revenue was partially offset by a $1.0 million
license option fee related to the Pharmacia collaborative agreement recognized
during the six month period ended June 30, 1995. No similar option payment was
received during the six month period ended June 30, 1996.
 
     Cost of revenue.  The Company's cost of revenue for the six month period
ended June 30, 1996 increased $1.5 million to $1.9 million from $0.4 million for
the six month period ended June 30, 1995.
 
                                       16

<PAGE>   18
 
This increase was primarily attributable to the costs of additional scientific
personnel and the necessary supplies and overhead expenses related to the
performance of the work and the delivery of the Mapping Array and Directed Array
sets pursuant to its collaborative agreements. The Company anticipates that cost
of revenue, in connection with increasing compound development revenue, will
increase over the next several years.
 
     Research and development expenses.  The Company's research and development
expenses for the six month period ended June 30, 1996 decreased $0.1 million to
$1.1 million from $1.2 million for the same period in 1995. This decrease was
the result of the Company's increased use of its scientific personnel to produce
compounds delivered pursuant to its collaborative agreements. The Company has
the ability to direct its scientific personnel to work either on its
collaborative agreements or on its internal research and development projects as
the needs arise. The Company expects research and development spending to
increase over the next several years as the Company further expands its
chemistry discovery and development programs.
 
     General and administrative expenses.  The Company's general and
administrative expenses for the six month period ended June 30, 1996, $0.8
million, were relatively unchanged from the same period in 1995. These expenses
will likely increase in future periods to support the projected growth of the
Company.
 
     Net interest income (expense).  The Company's net interest income for the
six month period ended June 30, 1996 was $0.2 million, which compared to a net
expense of $0.2 million for the same period in 1995. Higher interest income in
1996 resulted primarily from the Company holding higher cash balances following
an equity investment by Solvay. See "Business--ArQule's Drug Discovery
Programs."
 
     Net loss.  The Company's net loss for the six month period ended June 30,
1996 decreased $0.3 million to $0.8 million from $1.1 million for the same
period in 1995. The decrease is primarily attributable to additional revenue
generated from corporate collaborations during 1996.
 
YEARS ENDED DECEMBER 31, 1995 AND 1994
 
     Revenue.  The Company's revenue for the year ended December 31, 1995
increased to $3.3 million from $0.1 million for the same period in 1994. This
increase was attributable to compound development revenue related to the
performance of work and the delivery of Mapping Array and Directed Array sets
under the Company's collaborative agreements which were entered into during
1995. The Company also recognized a $1.0 million license option fee related to
the Pharmacia collaborative agreement entered into in 1995.
 
     Cost of revenue.  The Company's cost of revenue for the year ended December
31, 1995 was $1.6 million, reflecting costs associated with the development,
production and delivery of compounds pursuant to the corporate collaborations
entered into in 1995. There was no cost of revenue in 1994 as there were no
collaborative agreements during this year and as the Company's efforts were
directed towards the research and development of its technology.
 
     Research and development expenses.  The Company's research and development
expenses for the year ended December 31, 1995 decreased $0.7 million to $2.1
million from $2.8 million for the same period in 1994. This decrease was the
result of the Company focusing, in 1995, on producing compounds delivered
pursuant to its collaborative agreements.
 
     General and administrative expenses.  The Company's general and
administrative expenses for the year ended December 31, 1995 increased $0.3
million to $1.6 million from $1.3 million for the same period in 1994. This
increase was primarily due to costs associated with increased business
development activities and administrative support, which accompanied the
Company's expansion during 1995.
 
                                       17

<PAGE>   19
 
     Net interest expense.  The Company's net interest expense for the year
ended December 31, 1995 was $0.3 million, which compared to $0.1 million for the
same period in 1994. This increase was primarily attributable to increased use
of capital equipment lease financing.
 
     Net loss.  The Company's net loss for the year ended December 31, 1995
decreased $1.9 million to $2.3 million from $4.2 million for the same period in
1994. The decrease was primarily attributable to the increase in revenue
generated from the three corporate collaborations.
 
YEAR ENDED DECEMBER 31, 1994 AND EIGHT MONTH PERIOD ENDED DECEMBER 31, 1993
 
     Revenue.  The Company's revenue for the year ended December 31, 1994 was
$0.1 million. The Company was founded in May 1993, and it did not generate
revenue until 1994.
 
     Research and development expenses.  The Company's research and development
expenses for the year ended December 31, 1994 increased $2.0 million to $2.8
million from $0.8 million for the eight month period ended December 31, 1993.
This increase primarily reflects the expansion and development of the Company's
combinatorial chemistry technologies and a full year of operations in 1994.
 
     General and administrative expenses.  The Company's general and
administrative expenses for the year ended December 31, 1994 increased $0.6
million to $1.3 million from $0.7 million for the eight month period ended
December 31, 1993, primarily reflecting a full year of operations in 1994.
 
     Net interest expense.  The Company's net interest expense for the year
ended December 31, 1994 was $0.1 million which compared to $9,000 for the eight
month period ended December 31, 1993. This increase was primarily attributable
to the Company's use of capital equipment lease financing.
 
     Net loss.  The Company's net loss for the year ended December 31, 1994
increased $2.7 million to $4.2 million from $1.5 million for the eight month
period ended December 31, 1993. This increase was primarily attributable to the
Company's scale-up of research and development activities.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At June 30, 1996, the Company held cash and cash equivalents and marketable
securities with a value of $6.4 million. The Company's working capital at June
30, 1996 was $1.4 million. The Company has funded operations to date with sales
of preferred stock and common stock totaling $13.6 million, payments from
corporate collaborators totaling $9.3 million, and the utilization of capital
equipment lease financing totaling $3.1 million. The Company has maintained a
master lease agreement since February 1994. Under the terms of this agreement,
the Company has funded certain capital expenditures with lease terms ranging
from 40 to 42 months in duration. As of June 30, 1996, the Company had utilized
$2.6 million of the available $5.0 million financing facility.
 
     Net cash used in financing activities for the six months ended June 30,
1996 was $0.3 million, primarily reflecting financing of capital equipment. Net
cash provided by financing activities for the year ended December 31, 1995 was
$7.2 million, largely due to a $7.0 million equity investment by Solvay. Net
cash provided by financing activities for the year ended December 31, 1994 was
$3.8 million, resulting mainly from capital contributions and proceeds from
bridge financing.
 
     Net cash provided by operating activities for the six month period ended
June 30, 1996 and for the year ended December 31, 1995 was $1.3 million and $0.5
million, respectively. The positive cash flow from operating activities
primarily reflects additional payments received from the three corporate
collaborators. Net cash used in operating activities for the year ended December
31, 1994 was $3.6 million, largely due to the Company's scale-up of research and
development activities prior to generating significant revenue.
 
     Net cash used in investing activities during the six month period ended
June 30, 1996 was $1.4 million, resulting primarily from additional capital
equipment purchases. Net cash used in investing activities for the year ended
December 31, 1995 was $5.1 million as compared to $0.4 million for the year
ended December 31, 1994. This increase primarily reflects purchases of
marketable securities.
 
                                       18

<PAGE>   20
 
     Management estimates that the proceeds from this offering, together with
the Company's existing cash equivalents, short-term investments, cash generated
from operations and research funding from corporate collaborators, will enable
the Company to maintain its current and planned operations at least through
December 1998. The Company's cash requirements may vary materially from those
now planned depending upon the results of its drug discovery and development
strategies, the ability of the Company to enter into any corporate
collaborations in the future and the terms of such collaborations, the results
of research and development, the need for currently unanticipated capital
expenditures, competitive and technological advances, and other factors. There
can be no assurance that the Company will be able to obtain additional customers
for the Company's products and services, or that such products and services will
produce revenues adequate to fund the Company's operating expenses. If the
Company experiences increased losses, the Company may have to seek additional
financing from public or private sale of its securities, including equity
securities. There can be no assurance that additional funding will be available
when needed or on acceptable terms.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of ". In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation." Both SFAS No. 121 and No. 123
are effective for the Company for the year ending December 31, 1996. The Company
has adopted these standards as required, and has adopted SFAS No. 123 through
disclosure only. The adoption of these statements is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
 
                                       19

<PAGE>   21
 

 
                                   BUSINESS
 
OVERVIEW
 
     ArQule has created a new technology platform for the discovery and
production of novel chemical compounds with commercial potential. The Company's
initial focus is on providing these novel compounds to the pharmaceutical and
biotechnology industries. The Company has developed a proprietary technology for
the identification and optimization of drug development candidates. This
technology uses a modular building block approach to the development of
compounds, together with structure-guided drug design, high speed parallel
chemical synthesis and information technology, to rapidly develop large, diverse
collections of compounds that have the potential to be biologically active. To
date, the Company has entered into collaborative arrangements with Roche
Bioscience, Pharmacia Biotech AB, Abbott Laboratories and Solvay Duphar B.V.,
and has formed joint discovery programs with several biotechnology companies.
ArQule believes that its technology will allow its collaborative partners to
accelerate the drug discovery process by several years, permitting them to
realize significant cost reductions and the earlier recovery of research and
development expenditures for successful drugs.
 
INDUSTRY BACKGROUND
 
     The potential market for ArQule's proprietary modular building block
technology is comprised of all consumers of novel chemical compounds, including
developers of drugs, separations media, agricultural products, industrial
catalysts, specialty materials and other industrial products. The Company's
initial business focus has been on the pharmaceutical and biotechnology
industries.
 
     Traditional Drug Discovery and Its Limitations.  Drugs are chemical
compounds that modulate the activity of biological targets associated with
particular disease states to achieve a desired therapeutic effect. The discovery
and development of drugs has traditionally been a lengthy, expensive and often
unsuccessful process. Typically, it takes 12 to 15 years from the original
concept of modulating the activity of a particular biological target to the
market introduction of a drug that performs such a function. The average cost of
bringing a new drug to market has been estimated to be in excess of $300
million.
 
     The first major step in the drug discovery process is the identification of
one or more compounds that interact with a biological target, such as an enzyme,
receptor or other protein, that is associated with a disease state. To identify
such a compound, collections of compounds are tested or screened for activity
with respect to the biological target. A compound that interacts with a target
is referred to as a hit, and a hit with characteristics making it suitable as a
potential drug is referred to as a lead compound.
 

<TABLE>

                                           TRADITIONAL DRUG DISCOVERY PROCESS
<CAPTION>
                              
<S>               <C>            <C>          <C>           <C>            <C>             <C>
                                                      Secondary  
                         Development                  Assays and
                          of Assays                  Other Tests                  Preclinical                  
                    Incorporating Target          (6 to 12 months)                Development
                               |                          |                             |
                               |                          |                             |
                               |                          |                             |
                               |                          |                             |    
                               |                          |                             |
____________      ___________  | __________   ___________ | ____________   ____________ |  ______________
                               |                          |                             |     Clinical
   Unmet            Relevant   |                          |     Lead           Drug     |      Trials/
Therapeutic _____  Biological _|_   Assays ___     Hit   _|__ Compound  ___ Development_|_    Regulatory
   Need       |      Target                                              |   Candidate         Approval
____________  |   ___________    __________   ___________   ____________ | ____________    ______________
              |                       |                                  | 
              |                  _____|____                              | 
              |                   Natural/                               |
              |                   Synthetic                              |
              |                    Product                               | 
           Cellular               Libraries                             Lead       
          Molecular              __________                          Optimization
           Biology                   |                             (average 2 years)
                                     |
                                     |
                                     |
                                 Screening
                            (6 months to 2 years)
                              


__________________________________ Average Time to Market: 12 to 15 years__________________________________
                                        Average Cost: $300+ million
                              
</TABLE>

       
        
                                       20

<PAGE>   22
 
     Historically, drug developers have obtained collections of chemical
compounds for screening from natural product sources and by synthesis. These
collections are often neither sufficiently diverse to be likely to result in a
hit nor preselected to include compounds with promising structures or desirable
drug characteristics. This random screening approach has yielded a relatively
small percentage of hits and only a relatively small portion of those hits have
resulted in lead compounds.
 
     The second major step in the drug discovery process is the optimization of
a lead compound by the sequential synthesis and testing of variations, or
analogs, of a lead compound to identify promising drug development candidates. A
drug development candidate is a lead compound that in preclinical studies
demonstrates pharmacological efficacy, lack of toxicity, potency, selectivity
and other desirable characteristics such as oral availability, cell penetration
and stability. Using traditional medicinal chemistry, lead optimization has
required an average of two years of synthesizing hundreds of analogs of a lead
compound and has been the most expensive and time consuming part of the drug
development process prior to clinical testing. The synthesis of a single
compound analog takes approximately 7 to 10 days and costs approximately $7,500.
As a result, a chemist is usually able to synthesize only 100 to 200 analogs per
year. On average, as many as 6,000 chemical compounds may be synthesized per
successful drug at a cost of approximately $45 million in chemistry costs.
 
     Drug Development in Transition.  Lower profit margins, shorter product
lives, the proliferation of generic drugs, managed care and cost containment
initiatives, combined with scientific and technological advances, have created
powerful incentives for drug developers to explore new technologies to discover
novel drugs more quickly and cost effectively. The growing biotechnology and
gene discovery (genomics) industries are rapidly identifying numerous new
biological targets and developing highly sensitive assays incorporating these
targets. Advances in robotics have led to automated high throughput screening
systems, allowing biologists to assay large numbers of chemical compounds
against novel targets. These developments have resulted in increased demand for
large and diverse collections of novel compounds.
 
     In addition, in recent years, structure-guided and rational drug design
approaches have allowed scientists, using structure activity-relationship
("SAR") data about biological targets, to design compounds that are likely to
show activity with respect to a biological target. These developments, together
with the developments referred to in the preceding paragraph, have resulted in a
proliferation of hits, generating demand for tools to rapidly create analogs of
hits and optimize lead compounds.
 
     Current Combinatorial Chemistry Technology and Its
Limitations.  Combinatorial chemistry is the rapid creation of hundreds of
thousands of chemical compounds, most of which do not exist in nature, for the
purpose of rapidly identifying hits through random screening. Current
combinatorial chemistry has been successful in producing large numbers of
compounds and correspondingly large numbers of hits. However, current
combinatorial chemistry techniques have been less successful in generating lead
compounds and, ultimately, drug development candidates for some or all of the
following reasons:
 
     - Time-Consuming Isolation of Hits.  In certain combinatorial chemistry
       applications, large numbers of chemical compounds are synthesized and
       screened in mixtures. Hits must therefore be isolated from the mixtures,
       which is a costly, slow, labor-intensive process.
 
     - Lack of Structural and SAR Information.  Once a hit is isolated, many
       current combinatorial techniques fail to facilitate the identification of
       the structure of the hit or to provide SAR data to guide the lead
       optimization process.
 
     - Incompatibility with Drug Developers' Screening Protocols.  Many
       combinatorial compounds are produced in a format that is incompatible
       with standard screening protocols of drug developers. In addition, once a
       hit is found and the compound is isolated, significant additional work
       must often be performed by the combinatorial chemistry company to
       determine the structure of the compound. Drug developers relying on this
       format may therefore be required to transfer hits to the combinatorial
       chemistry company.
 
                                       21

<PAGE>   23
 
     - Limitations of Solid Phase Chemistry.  Several combinatorial chemistry
       techniques involve the production of compounds using solid phase
       chemistry in which compounds are attached to small beads. Because many
       compounds with desirable chemistries cannot be synthesized using solid
       phase chemistry, collections of compounds based exclusively on solid
       phase chemistry may have limited diversity.
 
     - Limited Compound Quantities.  Certain current combinatorial chemistry
       techniques produce very small quantities of each compound, which limits
       further testing once a lead compound is found and precludes archiving of
       compounds for future testing against additional targets.
 
     - Scale-Up Limitations.  Many current combinatorial chemistry techniques
       involve laboratory methods that cannot be easily translated into large
       scale manufacturing processes. This creates the possibility that active
       compounds will be identified that are difficult or impractical to produce
       in quantities necessary for clinical trials or commercial production.
 
     - Unproductive Screening.  Because certain combinatorial chemistry
       techniques involve the screening of random compounds without preselection
       for desirable drug characteristics, suitable lead compounds often can be
       identified only after many unproductive screenings. In addition, testing
       of mixtures frequently produces equivocal or false positive screening
       results because the observed activity with a biological target is caused
       by several compounds within the mixture rather than the interaction of an
       individual compound with a target, leading to further unproductive
       screening.
 
     Although recent developments in combinatorial chemistry have shortened the
time between identifying a biological target and obtaining a hit in the target
assay, the proliferation of hits has not led to a commensurate increase in lead
compounds. In addition, current combinatorial chemistry techniques have not
significantly improved the lead optimization process and, therefore, have not
significantly shortened the time it takes to produce a drug development
candidate from a lead compound.
 
THE ARQULE REVOLUTION
 
     ArQule believes its modular building block technology overcomes many of the
limitations of current combinatorial chemistry approaches by accelerating the
identification and optimization of lead compounds.
 
     Many organic molecules, including amino acids, peptides, nucleosides,
carbohydrates, steroids and alkaloids, may be viewed as comprised of structural
components, consisting of a scaffold, or core structure, around which a set of
substituent groups and connectors (bonds) is varied. ArQule's scientists have
developed proprietary methods for selecting and combining molecular components,
or building blocks, to produce arrays of compounds that possess properties they
believe will exhibit activity in biological systems.
 
     Using SAR data regarding biologically active compounds and modular
molecular components, ArQule's synthetic and computational chemists work
together to rapidly design compound arrays that include all combinations of a
set of selected building blocks around a common core structure or theme.
ArQule's arrays are created by using structure-guided and rational drug design
tools to systematically select and assemble molecular building blocks with
properties the Company's scientists believe are likely to exhibit biological
activity. Each compound in the array is different from the adjacent compound as
a result of a single structural modification. Each ArQule array omits compounds
that are closely analogous to other compounds in the array, using representative
diversity to create a logical representation of a virtual library of hundreds of
times as many compounds as are in the array. Drug developers are able to realize
significant savings by screening the thousands of compounds in each ArQule array
rather than the millions of compounds they represent. In addition, the SAR data
of compounds within the array provides a navigational tool for lead optimization
by indicating the most promising investigational direction for analoging.
 
                                       22

<PAGE>   24
 
     In order to enhance the effectiveness of this modular building block
technology, ArQule integrates the following tools:
 
        - structure-guided drug design;
 
        - a proprietary "automated molecular assembly plant" (AMAP) system for
          high speed parallel synthesis, purification and structural
          verification of chemical compounds; and
 
        - proprietary computer applications that facilitate the integration of
          all of the Company's proprietary technologies.

  Graphical representation displaying the integration of ArQules Combinational
                      Drug Design and Development Platform
 
     Structure-Guided Drug Design.  ArQule's scientists believe that the
likelihood of generating a drug development candidate can be substantially
increased if the collection of compounds used for screening is created using
three-dimensional structural and SAR data. The Company designs its arrays based
on chemical structures that are believed to be biologically active and also on
SAR data regarding a particular target and a particular lead compound. Using
this data, as well as knowledge of the chemical reactions that are feasible
using high speed parallel synthesis, ArQule's scientists design logically
arranged arrays of diverse compounds that can easily be synthesized. The Company
believes that this approach will accelerate the lead discovery and optimization
process by increasing the probability of identifying a lead compound that will
result in a drug development candidate.
 
     The AMAP High Speed Parallel Synthesis System.  Using its "automated
molecular assembly plant" (AMAP) system, ArQule synthesizes, purifies and
verifies structural information for individual compounds through automated high
speed parallel synthesis. The AMAP system is capable of synthesizing thousands
of compounds per day, each in milligram quantities adequate for multiple
screens, analyzing such compounds for structural integrity and purity,
registering the structural data in a relational database, and delivering the
compounds in a 96-well microtiter plate format for high throughput screening.
 
     Integrated Proprietary Computer Applications ("Informatics").  ArQule has
developed a proprietary information system which incorporates (i) databases of
the molecular structures of building blocks and the compounds in its arrays,
(ii) multi-dimensional matrix geometry which provides guidance for the creation
of the Company's spatially addressable arrays of compounds containing systematic
variations of modular building blocks, (iii) instructions for the robotics
involved in the AMAP parallel synthesis production process, (iv) resulting
databases of structural information regarding the compounds produced in any
particular array which can be supplied in a format compatible with customers'
own data registration systems and (v) databases of SAR data regarding particular
compounds and their molecular components contained in an array generated when
these compounds are screened against biological targets. This integrated
information system enables ArQule to gather and apply data on an ongoing basis
to enhance the efficiency of the production process and to design compounds
based on a growing knowledge of the structure and activity of its molecular
components.
 
                                       23

<PAGE>   25
 
ADVANTAGES OF ARQULE'S COMBINATORIAL DRUG DISCOVERY AND DEVELOPMENT PLATFORM
 
     The Company believes the integration of its technological capabilities
offers a unique combinatorial drug discovery and development platform. This
platform offers the following significant advantages over current combinatorial
chemistry approaches:
 
     - Elimination of Isolation Issues.  Unlike combinatorial chemistry
       processes involving the production of synthesized compounds in mixtures,
       ArQule's AMAP system produces one compound per well, with each well
       containing a known compound with a high level of purity.
 
     - Enhanced Structural and SAR Data.  ArQule produces arrays using
       preselected modular building blocks that its scientists believe are
       likely to produce lead compounds with desirable characteristics, and, in
       the case of Directed Array sets, based upon the SAR data of the target
       and/or lead compound. As a result, the Company believes the success rate
       for drugs developed using its arrays will be improved and the risk of
       downstream clinical failure will be reduced. The wealth of SAR data
       available with respect to compounds in its arrays will also facilitate
       the development of analogs for the further optimization of active
       compounds.
 
     - Compatibility with Drug Developers' Screening Protocols.  ArQule's
       compounds are delivered to its collaborators in 96-well microtiter plates
       containing one known compound per well. This delivery format is
       compatible with most existing screening protocols and permits the owner
       of the assay to screen compounds in its own laboratories, thereby having
       complete control over the screening process.
 
     - Solution and Solid Phase Chemistry.  ArQule's compounds may be produced
       using either solution or solid phase chemistry, permitting the creation
       of a broad range of novel chemical compounds.
 
     - Significant Compound Quantities.  ArQule's compounds are delivered to its
       collaborators in milligram quantities, permitting the collaborator to
       engage in extensive testing of a lead compound or to screen compounds
       against multiple biological targets without having to obtain additional
       samples from the Company.
 
     - Ease of Scale-Up.  ArQule's compounds are produced using fully
       reproducible and scalable manufacturing processes.
 
     - Reduction in Unproductive Screening.  By creating logical arrays of
       compounds based on known structural and SAR data and eliminating
       compounds that are closely analogous to others in the array, ArQule
       believes that fewer compounds will need to be screened prior to
       identifying compounds with activity. In addition, because ArQule delivers
       single compounds for screening, such compounds do not generate the false
       positives and false negatives associated with screening mixtures of
       compounds.
 
     ArQule believes these significant advantages will allow its collaborative
partners to accelerate the drug discovery process by several years by shortening
the time required to identify a lead compound and to optimize that compound into
a drug development candidate. This acceleration should permit drug developers to
realize significant cost reductions and the earlier recovery of research and
development expenditures for successful drugs.
 
ARQULE'S PRODUCTS
 
     ArQule's integrated technologies result in the production of significant
quantities of pure small molecule compounds contained in a logically structured
spatially-addressable array. ArQule provides its pharmaceutical and
biotechnology collaborative partners with two types of arrays of synthesized
compounds: (i) Mapping Array compound sets, which are arrays of novel, diverse,
small molecule compounds used for screening against biological targets and (ii)
Directed Array compound sets, which are arrays of analogs of a particular lead
compound synthesized for the purpose of optimizing that lead compound.
 
                                       24

<PAGE>   26
 
     Mapping Array Sets.  ArQule's Mapping Array sets are designed around
certain core structures or themes selected by ArQule. ArQule provides its
collaborative partners with a subscription to an annual Mapping Array program
comprised of a minimum of 100,000 compounds in 15 to 20 Mapping Array sets each
containing between 3,000 and 10,000 individual compounds. The Mapping Array
program is provided to subscribers without limitation as to the targets against
which the compounds may be screened. ArQule believes this approach will maximize
the number of targets against which its Mapping Array sets are tested, thereby
maximizing the potential for identifying activity for each compound in the
array. Initially, the Company provides its Mapping Array sets on a
non-exclusive, subscription fee basis for screening purposes only. If a compound
shows activity in a subscriber's assay, the subscriber may license that compound
from the Company for development purposes on an exclusive basis, unless such
compound has already been licensed to another collaborative partner. The Company
does not provide any structural information regarding the compounds in the
Mapping Array sets until a particular compound is licensed.
 
     Directed Array Sets.  Upon request, the Company provides Directed Array
sets in order to optimize lead compounds. In a Directed Array set, the Company
uses its modular building block technology to create analogs of a lead compound
identified by the collaborator, either independently or as a result of screening
a Mapping Array set. Directed Array sets are logical representations of a
virtual library of compounds closely analogous to a lead compound. Successive
Directed Array sets are generated in order to identify the compound or compounds
within a virtual library having the greatest biological activity and most
desirable drug development characteristics. When delivering a Directed Array
set, the Company provides the collaborator with structural information for each
compound in the array, and each compound is owned by the collaborator either
individually or jointly with ArQule, subject to the payment of fixed fees,
milestones and royalties to the Company.
 
BUSINESS STRATEGY
 
     ArQule's goal is to become the leader in the development of novel chemical
compounds with commercial potential, with an initial focus on the pharmaceutical
and biotechnology industries. Key elements of the Company's strategy include:
 
     - Collaborations with Pharmaceutical Companies.  ArQule has sought
       collaborations with large pharmaceutical companies who have established
       manufacturing, marketing and sales resources and a strong commitment to
       the development of pharmaceutical products. ArQule offers to each of its
       collaborative partners access to its Mapping Array program for an annual
       subscription fee and, if requested, customized Directed Array sets for a
       fixed fee. In addition, the Company is entitled to payments upon the
       achievement of certain milestones and royalties upon the
       commercialization of drugs developed by the collaborator from ArQule
       compounds. The Company plans to pursue additional collaborations
       aggressively to gain access to additional targets and development
       expertise, and to generate additional revenue.
 
     - Joint Discovery Programs with Biotechnology Companies.  Biotechnology
       companies represent important potential collaborators for joint discovery
       and development efforts using ArQule's Mapping Array and Directed Array
       sets and the biotechnology company's proprietary biological targets and
       assays. ArQule provides Mapping Array and Directed Array sets to
       biotechnology companies in exchange for joint ownership of any lead
       compounds that exhibit activity in the proprietary assays developed by
       the biotechnology company collaborators. ArQule seeks collaborators with
       promising drug development programs in a broad range of therapeutic
       areas.
 
     - Extension of Chemistry Tools to Areas Other than Drug Discovery.  The
       Company intends to extend its integrated technologies to a wide variety
       of applications outside the field of drug discovery, including
       bioseparations and protein purification, industrial catalysts and novel
       agricultural chemicals, as well as to the development of polymeric
       structures for non-biological applications.
 
                                       25

<PAGE>   27
 
     - Continued Investment in Proprietary Chemistry Technology.  ArQule intends
       to continue its aggressive investment in proprietary chemistry
       technologies through internal development and licensing of third party
       technologies. ArQule will also continue to invest in improving the cost-
       effectiveness of its products through automation and information
       technologies.
 
ARQULE'S DRUG DISCOVERY PROGRAMS
 
     Pharmaceutical Company Collaborations.  To date, the Company has entered
into the following major collaborations with pharmaceutical companies:
 
     Roche Bioscience.  In September 1996, the Company entered into a
collaborative agreement with Roche Bioscience ("Roche Bioscience"), a division
of Syntex (U.S.A.) Inc. and indirect subsidiary of Roche Holding Ltd., pursuant
to which the Company will synthesize Directed Array sets from compounds provided
to the Company by Roche Bioscience, developed by the Company internally and/or
developed by the Company as a part of the collaboration (the "Roche Bioscience
Agreement"). Absent early termination, Roche Bioscience will pay the Company
approximately $12.1 million over three years. The parties may jointly agree to
increase the number of Directed Array sets to be provided by the Company under
the Roche Bioscience Agreement, which may result in increased payments to the
Company. Roche Bioscience is also obligated to make additional payments upon the
achievement of certain milestones and to pay royalties on sales of drugs that
may result from the relationship. The Roche Bioscience Agreement expires in
September 1999 and is terminable by Roche Bioscience on or after September 1998
on six months' advance notice. Assuming such termination occurs on September 30,
1998, the Company will have received payments of approximately $8.4 million from
Roche Bioscience and no further payments, other than milestone payments and
royalties, will be due to the Company. To date, Roche Bioscience has paid the
Company an aggregate of $2.0 million under the Roche Bioscience Agreement.
 
     Solvay Duphar B.V.  In November 1995, the Company entered into a
collaborative agreement with Solvay Duphar B.V. ("Solvay") pursuant to which
Solvay has subscribed to the Company's Mapping Array program and has the right
to request customized Directed Array sets (the "Solvay Agreement"). To date, the
Company has provided Solvay with several Mapping Array and Directed Array sets.
Absent early termination, Solvay agreed to pay the Company a minimum of $17.5
million over five years. Solvay is also obligated to make additional payments
upon the achievement of certain milestones and to pay royalties on sales of
drugs that may result from the relationship. The Solvay Agreement expires in
November 2000. Solvay has the right to terminate the Mapping Array program on
twelve months' written notice at any time subject to its payment of a
termination fee of approximately $1.0 million. Solvay may also terminate the
delivery of Directed Array sets on six months' written notice at any time
subject to its payment of a termination fee equal to a certain percentage of the
aggregate research payments made by Solvay in the year in which notice is given.
If Solvay gave notice to terminate both programs on the date of this Prospectus,
as of the effective termination dates, Solvay would have paid the Company $3.5
million, not including the termination fees. No further payments would be due
from Solvay other than milestone or royalty payments. To date, Solvay has paid
the Company an aggregate of $3.5 million under the Solvay Agreement. In
connection with this collaboration, an affiliate of Solvay, Physica B.V., made a
$7.0 million equity investment in the Company. See "Certain Transactions." Under
the Solvay Agreement, Solvay has the right to license, on an exclusive basis,
lead compounds identified from a Mapping Array set that are active against
specified biological targets and that have not previously been committed to
another of ArQule's collaborative partners or to an internal program of the
Company. Solvay also has the right to use certain of ArQule's technologies
internally.
 
     Abbott Laboratories.  In June 1995, the Company entered into a
collaborative agreement with Abbott Laboratories ("Abbott") pursuant to which
Abbott has subscribed to the Company's Mapping Array program and has the right
to request customized Directed Array sets (the "Abbott Agreement"). To date, the
Company has provided several Mapping Array and Directed Array sets. In August
1996, the Abbott Agreement was amended to provide for the Company to supply
Abbott with additional
 
                                       26

<PAGE>   28
 
Mapping Array sets and to eliminate restrictions on the period during which
Abbott may screen the Mapping Array sets. The Abbott Agreement, as amended,
expires in June 1997, subject to Abbott's right to extend the term of the Abbott
Agreement for three additional one year terms. If Abbott exercises its right to
extend the Abbott Agreement for its full term, Abbott will pay the Company a
minimum of $11.0 million over a five year period. If Abbott fails to exercise
its right to extend the Abbott Agreement beyond the initial term, Abbott would
have paid the Company $4.4 million and no further payments would be due from
Abbott other than payments upon the achievement of certain milestones and to pay
royalties on the sale of drugs that may result from the relationship. To date,
Abbott has paid the Company an aggregate of $3.8 million under the Abbott
Agreement.
 
     Pharmacia Biotech AB.  In March 1995, the Company entered into a
collaborative agreement with Pharmacia Biotech AB ("Pharmacia"), a wholly-owned
subsidiary of Pharmacia & Upjohn, Inc., to allow Pharmacia to evaluate the
utility of the Company's technology for the development of products in the
fields of bioseparations, synthesis of biomolecules and cell culture (the
"Pharmacia Agreement"). On the same date, the Company and Pharmacia also signed
an agreement under which Pharmacia has an option to acquire an exclusive,
worldwide license to develop and commercialize specified compounds generated by
the Company in additional fields covered under the Pharmacia Agreement, subject
to the payment by Pharmacia of additional fees and the negotiation and execution
by the parties of a license agreement containing commercially reasonable terms
(the "Option Agreement"). To date, Pharmacia has paid the Company an aggregate
of $2.0 million under the Pharmacia Agreement and the Option Agreement.

<TABLE>
 
     Joint Discovery Programs with Biotechnology Companies.  ArQule has
initiated joint programs for lead generation and optimization with a number of
biotechnology companies. Some of ArQule's biotechnology collaborators and their
areas of focus are listed below:
 
<CAPTION>
                           COMPANY                            AREA OF FOCUS
          ------------------------------------------  -----------------------------
          <S>                                         <C>
          Aurora Biosciences, Inc.                    Mammalian Cell-Based Assays
          Cadus Pharmaceuticals Corporation           Signal Transduction
          Cubist Pharmaceuticals, Inc.                Infectious Diseases
          ICAgen, Inc.                                Ion Channel Receptors
          Scriptgen Pharmaceuticals, Inc.             RNA/Protein Interaction
          SUGEN, Inc.                                 Signal Transduction
          T Cell Sciences, Inc.                       T Cell Activation/Inhibition
</TABLE>

 
     In the United States, small biotechnology companies have been highly
successful in the discovery of biological targets associated with disease
states. Many of these companies, however, lack both (i) large libraries of
chemical compounds to screen against identified targets and (ii) the
sophisticated chemistry expertise required to optimize compounds once a lead
compound has been identified. Under the Company's typical arrangement with a
biotechnology company, ArQule provides Mapping Array sets for screening without
collecting upfront fees, and the biotechnology company executes a preliminary
material transfer agreement. If the collaborator detects an active compound
within a Mapping Array set, and that compound has not been previously committed
to a third party or to an internal ArQule program, the Company and the
collaborator establish a joint discovery program and execute the research
collaboration agreement that is attached to the material transfer agreement. If
the parties are unable to negotiate the scope of a joint discovery program
within a certain period, ArQule has the right to license such compound to any
third party.
 
     Although ArQule's formal research collaboration agreement varies from
transaction to transaction, it typically establishes a joint drug development
program for the lead compound and a particular target, and gives ArQule shared
control over the program.
 
                                       27

<PAGE>   29
 
APPLICATIONS OF THE COMPANY'S TECHNOLOGY TO OTHER INDUSTRIES
 
     ArQule's integrated technology platform permits the rapid design and
optimization of chemical compounds having specific properties. This presents the
Company with opportunities to address a wide variety of non-drug discovery
applications, including both biological and non-biological applications. An
example of a biological application is the Company's collaboration with
Pharmacia to produce highly selective separations media for the commercial scale
purification of therapeutic proteins. Another potential biological application
for the Company's technologies is the synthesis of novel agricultural chemicals.
 
     Potential non-biological applications include the development of industrial
catalysts and nano-scale polymeric structures for specialized mechanical
applications. In general, non-biological applications cannot be evaluated using
mixtures produced by current combinatorial chemistry techniques because such
applications are not characterized by the sensitivity and selectivity exhibited
by biological ligand-target interactions. In addition, non-biological targets
require substantial quantities of individual compounds to use in rapid iterative
experimental cycles. ArQule believes its technologies can satisfy the needs of
non-biological applications by producing large quantities of pure compounds of
known structures that may be directly translated to large scale manufacturing
procedures.
 
MARKETING AND SALES
 
     The Company markets its products directly to customers through
participation in trade conferences and seminars and publications in scientific
and trade journals.
 
     To date, the Company has sold its products to its collaborative partners
primarily through the efforts of its senior management. The Company's senior
management has limited experience in marketing products similar to those of the
Company. In order to achieve significant long-term growth in revenues and its
overall strategic goals, the Company intends to hire at least one or two
dedicated sales and marketing personnel. There can be no assurance that the
Company will be able to achieve anticipated expansion of its business, attract a
significant number of new collaborative partners as customers or build an
efficient and effective sales and marketing organization. In the event the
Company is unable to achieve any one or more of the foregoing goals, the
Company's business, financial condition and results of operations could be
materially adversely affected. In addition to the risks inherent in the
Company's efforts to market its own products, the Company's revenues from
royalties and milestone payments from its collaborative partners is
substantially dependent upon the marketing efforts of such collaborative
partners.
 
RESEARCH AND DEVELOPMENT
 
     ArQule intends to continue its aggressive investment in its proprietary
technologies through internal development and licensing of third party
technologies in order to increase the diversity and improve other
characteristics of compounds offered. The Company will also continue to invest
in improving the cost-effectiveness of its products through automation and
information technologies. The Company is actively pursuing research projects
aimed at identifying and developing new chemistries to improve and expand on its
Mapping Array and Directed Array programs. These projects involve research
conducted by the Company, collaborations with other researchers and the
acquisition of chemistries and other technologies developed by universities and
other academic institutions.
 
PATENTS AND PROPRIETARY RIGHTS
 
     ArQule has one issued patent and has filed a number of patent applications.
There can be no assurance that patent applications filed by ArQule will result
in patents being issued, that the claims of such patents will offer significant
protection of the Company's technology, or that any patents issued to or
licensed by ArQule will not be challenged, narrowed, invalidated or
circumvented. The Company may also be subject to proceedings that result in the
revocation of patent rights previously owned by or licensed to ArQule, as a
result of which the Company may be required to obtain licenses from others to
continue to develop, test or commercialize its products. There can be no
assurance that
 
                                       28

<PAGE>   30
 
ArQule will be able to obtain such licenses on acceptable terms, if at all. In
addition, there may be pending or issued patents held by parties not affiliated
with ArQule that relate to the technology utilized by ArQule. As a result,
ArQule may need to acquire licenses, to assert infringement, or contest the
validity, of such patents or other similar patents which may be issued. ArQule
could incur substantial costs in defending itself against patent infringement
claims, interference proceedings, opposition proceedings or other challenges to
its patent rights made by third parties, or in bringing such proceedings or
enforcing any patent rights of its own.
 
     The Company also relies upon trade secrets, know how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by ArQule could have a material adverse effect on its
business.
 
COMPETITION
 
     Many organizations are actively attempting to identify and optimize
compounds for potential pharmaceutical development. The Company's services and
products face competition based on a number of factors, including size,
diversity and ease of use of libraries of compounds, speed and costs of
identifying and optimizing potential lead compounds and patent position. ArQule
competes with the research departments of pharmaceutical companies,
biotechnology companies, combinatorial chemistry companies and research and
academic institutions. Many of these competitors have greater financial and
human resources and more experience in research and development than the
Company. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
established biotechnology companies. In addition to competition for customers,
these companies and institutions also compete with the Company in recruiting and
retaining highly qualified scientific and management personnel.
 
     Historically, pharmaceutical companies have maintained close control over
their research activities, including the synthesis, screening and optimization
of chemical compounds. Many of these companies, which represent a significant
potential market for ArQule's products and services, are developing in-house
combinatorial chemistry and other methodologies to improve productivity,
including major investments in robotics technology to permit the automated
parallel synthesis of compounds. In addition, these companies may already have
large collections of compounds previously synthesized or ordered from chemical
supply catalogs or other sources against which they may screen new targets.
Other sources of compounds include extracts from natural products such as plants
and microorganisms and compounds created using rational drug design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company is working either on their own
or through collaborative efforts.
 
     The Company anticipates that it will face increased competition in the
future as new companies enter the market and advanced technologies become
available. The Company's processes may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or more
of the Company's competitors. The existing approaches of the Company's
competitors or new approaches or technology developed by the Company's
competitors may be more effective than those developed by the Company.
 
                                       29

<PAGE>   31
 
     There can be no assurance that the Company's competitors will not develop
more effective or more affordable technology or products, or achieve earlier
product development and commercialization than the Company, thus rendering the
Company's technologies and/or products obsolete, uncompetitive or uneconomical.
See "Risk Factors -- Competition and the Risk of Obsolescence of Technology."
 
GOVERNMENT REGULATION
 
     Although the manufacture, transportation and storage of the Company's
products are subject to certain laws and regulations discussed in the last
paragraph of this Section, the sale of the Company's products is not subject to
significant government regulations. However, the Company's future profitability
is dependent on the sales of pharmaceuticals and other products developed from
the Company's compounds by its customers and collaborators. Regulation by
governmental entities in the United States and other countries will be a
significant factor in the production and marketing of any pharmaceutical
products that may be developed by a customer of the Company, or in the event the
Company decides to develop a drug beyond the preclinical phase. The nature and
the extent to which such regulation may apply to the Company's customers will
vary depending on the nature of any such pharmaceutical products. Virtually all
pharmaceutical products developed by the Company's customers will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human pharmaceutical products are subject to rigorous preclinical
and clinical testing and other approval procedures by the FDA and by foreign
regulatory authorities. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources.
 
     Generally, in order to gain FDA approval, a company first must conduct
preclinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, the Company or its customer will be
required to sponsor and file an IND and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety and efficacy that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and generally take two to five years, but may take
longer, to complete. After completion of clinical trials of a new product, FDA
and foreign regulatory authority marketing approval must be obtained. If the
product is classified as a new drug, the Company or its customer will be
required to file an NDA and receive approval before commercial marketing of the
drug. The testing and approval processes require substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. NDAs submitted to the FDA can take several years to obtain approval.
Even if FDA regulatory clearances are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions. For marketing outside the United
States, the Company will also be subject to foreign regulatory requirements
governing human clinical trials and marketing approval for pharmaceutical
products. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
 
     The research and development processes of the Company involve the
controlled use of hazardous materials. The Company is subject to federal state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any liability could
exceed the resources of the Company. In addition, there can be no assurance that
the
 
                                       30

<PAGE>   32
 
Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future.
 
EMPLOYEES
 
     As of July 31, 1996, ArQule employed 51 people of whom 23 have Ph.D.
degrees. Of these, 31 were engaged in operations, 12 were engaged in research
and development and 6 were engaged in marketing and general administration. None
of ArQule's employees are covered by collective bargaining agreements. ArQule
believes its employee relations are good.
 
FACILITIES
 
     ArQule's research facilities include approximately 34,800 square feet of
laboratory and office space in Medford, Massachusetts pursuant to two lease
agreements. These leases extend through July 30, 2000, at which time the Company
has an option to renew the leases for an additional five year period.
 
     ArQule believes its current facilities are adequate for its current
operations. The Company believes that suitable additional space will be
available to it, when needed, on commercially reasonable terms.
 
LEGAL PROCEEDINGS
 
     Two individuals have asserted that they are entitled to compensation from
certain of the Company's stockholders and/or the Company equal to approximately
five percent of the equity interests in the Company for services in connection
with the initial financing of the Partnership in 1993. The Company intends to
vigorously defend any claim brought by such individuals and believes that it has
meritorious defenses to such claims. However, no assurance can be given that
such individuals will not be successful in any litigation relating to such
claims.
 
     Except as stated above, ArQule is not a party to any other legal
proceedings.
 
                                       31

<PAGE>   33
 

                                   MANAGEMENT
 
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

<TABLE>
 
     The following table sets forth certain information regarding the executive
officers, key employees and directors of the Company as of August 15, 1996:
 
<CAPTION>
NAME                               AGE     POSITION
- ----                               ---     --------
<S>                                <C>     <C>
Eric B. Gordon...................  49      President, Chief Executive Officer and Director

Joseph C. Hogan, Jr., Ph.D. .....  55      Chairman of the Board, Senior Vice President of
                                           Research and Development, Chief Scientific Officer
                                           and Director

David L. Coffen, Ph.D. ..........  58      Vice President of Chemistry

James R. Fitzgerald, Jr. ........  51      Vice President, Chief Financial Officer and
                                           Treasurer

John M. Sorvillo, Ph.D. .........  42      Vice President of Business Development

Steven L. Gallion, Ph.D. ........  39      Director of Computational Chemistry

Adrian de Jonge, Ph.D.(1)........  41      Director

Stephen M. Dow(2)................  41      Director

Allan R. Ferguson(1)(2)..........  54      Director

<FN> 
- ------------------------------
(1) Member of the Audit Committee.
 
(2) Member of the Compensation Committee.
</TABLE>
 

     Eric B. Gordon has been the President and Chief Executive Officer of the
Company since January 1996. From 1987 until he joined the Company, Mr. Gordon
served in various capacities with Pasteur Merieux Connaught, a pharmaceutical
company, most recently as Vice President, Treasurer and CFO and since 1993 as
Chief Executive Officer of Virogenetics Corporation, its wholly-owned
subsidiary. Mr. Gordon received his A.M.P. from the Wharton School of Business
of the University of Pennsylvania and his B.S. in Accounting and Finance from
Syracuse University.
 
     Joseph C. Hogan, Jr., Ph.D. is a founder of the Company and has served as
the Chief Scientific Officer and Senior Vice President of Research and
Development since its inception. Dr. Hogan has served as the Chairman of the
Board since January 1996. From 1990 until he founded the Company, Dr. Hogan was
the founder and president of Applied Modular Chemistries, Inc., a chemistry
company. Dr. Hogan received his M.S. and B.S. in Chemistry from Boston College
and his Ph.D. from Boston College and the Max Planck Institut fuer
Kohlenforschung, Muelheim/Ruhr, Germany.
 
     David L. Coffen, Ph.D. has been the Vice President of Chemistry since July
1995. From 1971 until he joined the Company, Dr. Coffen was employed by
Hoffman-LaRoche Inc., a pharmaceutical company, in a variety of positions, most
recently as Vice President of Molecular Sciences. Dr. Coffen received his Ph.D.
in Synthetic Organic Chemistry from the Massachusetts Institute of Technology
and his B.S. in Chemistry from the University of Toronto.
 
     James R. Fitzgerald, Jr. joined the Company in July 1996 as the Chief
Financial Officer. From 1988 until he joined the Company, Mr. Fitzgerald was the
Chief Financial Officer of Hoyts Cinemas Corporation, an owner and operator of
cinemas. Mr. Fitzgerald received his M.B.A. and his B.A. in Economics from
Northeastern University.
 
     John M. Sorvillo, Ph.D. joined the Company in December 1995 as Vice
President of Business Development. Prior to joining the Company, Dr. Sorvillo
had provided consulting services to the Company since August 1995. From 1985
until he joined the Company, Dr. Sorvillo was employed by Oncogene Science,
Inc., a biotechnology company, in a variety of positions, most recently as Vice
President and General Manager. Dr. Sorvillo attended the Massachusetts Institute
of Technology
 
                                       32

<PAGE>   34
 
Program for Senior Executives. He received his Ph.D. in Immunology from the New
York University Medical Center and his B.A. in Biology from the City University
of New York, Hunter College.
 
     Steven L. Gallion, Ph.D. joined the Company in 1994 as Research Fellow in
Computational Chemistry. In 1995, he become the Company's Director of
Computational Chemistry. Prior to joining the Company, he was employed by Marion
Merrell Dow, Inc., a pharmaceutical company, as Senior Associate Scientist of
Theoretical Chemistry from 1993 to 1994 and Associate Scientist of Theoretical
Chemistry from 1992 to 1993. From 1989 to 1992, he was Director of Product
Development of Amber Systems, Inc., a molecular modeling software company. He
received his Ph.D. in Physical Chemistry from the University of Georgia and his
B.S. in Chemistry from Southhampton College of Long Island University.
 
     Adrian de Jonge, Ph.D. has been a director of the Company since November
1995. Dr. de Jonge is the Vice President of Research of Solvay's Pharmaceuticals
Division and has held such position since 1994. From 1987 through 1993, Dr. de
Jonge was employed by Solvay in a variety of positions, most recently as Sector
Manager of Drug Discovery.
 
     Stephen M. Dow has been a director of the Company since its inception.
Since 1983, he has been a general partner of Sevin Rosen Funds, a venture
capital investment firm. Mr. Dow serves as a director of Citrix Systems, Inc.
and several privately held companies.
 
     Allan R. Ferguson has been a director of the Company since its inception.
He has been a general partner of Atlas Venture since 1993 and managing partner
of Aspen Ventures since 1991, both venture capital firms. From 1986 through
1991, Mr. Ferguson was the President of 3i Ventures, a venture capital firm.
Prior to his venture capital experience, Mr. Ferguson held senior level
positions in operations at Johnson & Johnson and Damon Biotech. Mr. Ferguson
serves as a director of AutoImmune Inc. and several privately held companies.
 
     The Company's Restated Certificate, to be filed concurrently with the
closing of this offering, provides for a classified board of directors
consisting of three classes, with each class being as nearly equal in number as
possible. The term of one class expires and their successors are elected for a
term of three years at each annual meeting of the Company's stockholders. The
Company has designated two class I directors (Messrs. Dow and Gordon), two class
II directors (Mr. Ferguson and Dr. Hogan) and one class III director (Dr. de
Jonge). These class I, class II and class III directors will serve until the
annual meetings of stockholders to be held in 1997, 1998 and 1999, respectively,
and until their respective successors are duly elected and qualified, or until
their earlier resignation or removal. The Restated Certificate provides that
directors may be removed only for cause by a majority of stockholders. See
"Description of Capital Stock--Anti-Takeover Measures." There are no family
relationships among any of the directors or executive officers.
 
BOARD COMMITTEES
 
     The Company has standing Audit and Compensation Committees of the Board of
Directors. The Audit Committee consists of Mr. Ferguson and Dr. de Jonge. The
primary function of the Audit Committee is to assist the Board of Directors in
the discharge of its duties and responsibilities by providing the Board with an
independent review of the financial health of the Company and of the reliability
of the Company's financial controls and financial reporting systems. The Audit
Committee reviews the general scope of the Company's annual audit, the fee
charged by the Company's independent accountants and other matters relating to
internal control systems.
 
     The Compensation Committee of the Board of Directors determines the
compensation to be paid to all executive officers of the Company, including the
Chief Executive Officer. The Compensation Committee's duties include the
administration of the Company's Amended and Restated 1994 Equity Incentive Plan
(the "Equity Plan") and the 1996 Employee Stock Purchase Plan. The Compensation
Committee is currently composed of Messrs. Dow and Ferguson.
 
                                       33

<PAGE>   35
 
SCIENTIFIC ADVISORY BOARD
 
     The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. Members also evaluate
the Company's research program, recommend personnel to the Company and advise
the Company on technology matters. The Scientific Advisory Board has met
collectively and in smaller groups, and its members have also been available
individually to advise the Company on specific scientific and technical issues.
Scientific Advisory Board members are compensated on a time and expenses basis
and have received shares of Common Stock of the Company. In the future,
Scientific Advisory Board members also may receive options to purchase shares of
Common Stock of the Company. The Company has entered into consulting agreements
with a number of the Scientific Advisory Board members.
 
     No member of the Scientific Advisory Board is employed by the Company, and
members may have other commitments to or consulting or advisory contracts with
their employers or other entities that may conflict or compete with their
obligations to the Company. Accordingly, such persons are expected to devote
only a small portion of their time to the Company. The members of the Company's
Scientific Advisory Board are:
 
     William D. Carlson, M.D., Ph.D. is the Director of Cardiovascular Research
for Harvard Community Health Plan, Associate Physician at Brigham and Women's
Hospital and Assistant Professor of Medicine at Harvard University Medical
School. He is widely known for his work in drug development and structural
biology including the renin-angiotensin and osteogenic growth factor systems. He
received his Ph.D. in Molecular Biophysics and Biochemistry from Yale University
and his M.D. from Yale Medical School.
 
     George L. Kenyon, Ph.D. is the Dean of the School of Pharmacy and Professor
of Chemistry and Pharmaceutical Chemistry at the University of California, San
Francisco. He is widely known for his work in the mechanisms of enzymatic
action, and synthetic and mechanistic chemistry and the development of
structure-based approaches to the rational design of enzymatic inhibitions. He
received his Ph.D. in Organic Chemistry from Harvard University.
 
     Irwin D. Kuntz, Ph.D. is the Acting Director of the Molecular Design
Institute, Chairman of the Graduate Group in Biophysics, and Professor in the
Department of Pharmaceutical Chemistry at the University of California, San
Francisco. He is widely known for his pioneering work in computational
chemistry. He received his Ph.D. in Physical Chemistry from the University of
California, Berkley.
 
     Gregory Petsko, Ph.D. is the Lucille P. Markey Professor of Biochemistry
and Chemistry, and Director of the Rosenteil Basic Medical Sciences Research
Center at Brandeis University. He is widely known for his work in the
development of protein crystallography and its application to exploring
fundamental aspects of protein folding. He received his Ph.D. in Molecular
Biology from Oxford University.
 
     Dagmar Ringe, Ph.D. is the Lucille P. Markey Associate Professor and Chair
of the Graduate Program in Biophysics at Brandeis University. She is
internationally recognized for her contributions to the use of x-ray
crystallography to explore fundamental aspects of drug binding behavior. She
received her Ph.D. in Organic Chemistry from Boston University.
 
     William R. Roush, Ph.D. is a Distinguished Professor of Chemistry at
Indiana University. He is widely known for his basic studies and applications
for a wide variety of synthetic chemical reactions. He received his Ph.D. in
Chemistry from Harvard University.
 
     K. Barry Sharpless, Ph.D. is the William M. Keck Professor of Chemistry at
The Scripps Research Institute. He is widely known for his pioneering work in
asymmetric chemical synthesis. He received his Ph.D. in Organic Chemistry from
Stanford University.
 
                                       34

<PAGE>   36
 
1996 DIRECTOR STOCK OPTION PLAN
 
     All of the directors who are not employees of the Company (the "Eligible
Directors") are currently eligible to participate in the Company's 1996 Director
Stock Option Plan (the "Director Plan"). Upon the adoption of the Director Plan
and upon the election of an Eligible Director, such director or directors, as
applicable, are automatically granted an option to purchase 7,500 shares of
Common Stock (the "Initial Options"). The Initial Options become exercisable
with respect to 2,500 shares on the date of the Company's next annual meeting of
stockholders following the date of grant and on the date of each annual meeting
of stockholders thereafter. In addition, options under the Director Plan are
automatically granted once a year, at the annual meeting of stockholders of the
Company, to Eligible Directors elected or reelected at the meeting. Each such
Eligible Director receives an option to purchase 3,500 shares of Common Stock
(the "Annual Options") for each year of the term of office to which the director
is elected (normally, 10,500 shares for election to a three-year term of
office). The Annual Options become exercisable with respect to 3,500 shares on
the date on which the Annual Option was granted and on the date of each annual
meeting of stockholders thereafter, so long as the optionee is then a director
of the Company. The Initial Options and Annual Options have a term of ten years,
and an exercise price payable in cash or shares of Common Stock. The Director
Plan was adopted by the Board of Directors in August 1996 and, therefore,
Initial Options for 7,500 shares were issued to each of Mr. Dow, Mr. Ferguson
and Dr. de Jonge. The exercise price for the Initial Options granted on the date
of the adoption of the Plan was $11.00, the fair market value on such date as
determined by the Board of Directors. The exercise price for the Initial Options
and the Annual Options granted after the Company's Common Stock is quoted on the
Nasdaq National Market will equal the last sale price for the Common Stock on
the business day immediately preceding the date of grant, as reported on the
Nasdaq National Market.
 

EXECUTIVE COMPENSATION


<TABLE>
 
     The following table sets forth certain information with respect to the
annual and long-term compensation paid or accrued by the Company for services
rendered to the Company in all capacities for the fiscal year ended December 31,
1995 by its Chief Executive Officer (both current and former), the current Chief
Financial Officer and another executive officer of the Company whose total
salary exceeded $100,000 (the "Named Executive Officer").
 
                           SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                                 LONG-TERM
                                                                                COMPENSATION
                                                                                ------------
                                                                                   NUMBER
                                                                                     OF
                                                        ANNUAL COMPENSATION      SECURITIES
                                                        -------------------      UNDERLYING
NAME AND PRINCIPAL POSITION                              SALARY       BONUS       OPTIONS
- ---------------------------                             --------      -----     ------------
<S>                                                     <C>            <C>             <C>
Eric B. Gordon(1).....................................        --       --              --
  President and Chief Executive Officer
Joseph C. Hogan, Jr., Ph.D. ..........................  $150,000       --              --
  Chairman of the Board, Senior Vice President of
  Research and Development and Chief Scientific
  Officer
James R. Fitzgerald, Jr.(2) ..........................        --       --              --
  Vice President, Chief Financial Officer and
  Treasurer
Seth L. Harrison, M.D.(3).............................    56,000(4)    --              --
  Former Chief Executive Officer

<FN> 
- ------------------------------
(1) Mr. Gordon commenced employment with the Company in January 1996. Terms of
    his employment are described under "--Executive Employment Agreements."
(2) Mr. Fitzgerald commenced employment with the Company in July 1996. Terms of
    his employment are described under "-- Executive Employment Agreements."
(3) Dr. Harrison has not been employed by the Company since July 1995.
(4) This amount was paid to Dr. Harrison by Sevin Rosen Bayless Management
    Company and the Company then reimbursed Sevin Rosen Bayless Management
    Company for this payment. In addition, pursuant to the terms of a severance
    agreement with Dr. Harrison, the Company accelerated the vesting of 8,334
    shares of Common Stock.
</TABLE>
 
                                       35

<PAGE>   37
 
     Options.  Neither Dr. Seth L. Harrison nor Dr. Joseph C. Hogan, Jr. have
ever been issued options to purchase shares of Common Stock of the Company.
 
STOCK PLANS
 
     Amended and Restated 1994 Stock Option Equity Plan.  The Company's Equity
Plan authorizes the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonqualified stock options for the purchase of an aggregate of 2,600,000 shares
(subject to adjustment for stock splits and similar capital changes) of Common
Stock to employees of the Company and, in the case of non-qualified stock
options, to consultants of the Company or any Affiliate (as defined in the
Equity Plan) capable of contributing to the Company's performance. The Board of
Directors has appointed the Compensation Committee to administer the Equity
Plan. As of June 30, 1996, 1,135,920 shares of Common Stock were subject to
outstanding options granted under the Equity Plan, leaving 1,464,080 shares
available for issuance upon future grants under the Equity Plan.
 
     1996 Employee Stock Purchase Plan.  The Company has also adopted an
employee stock purchase plan (the "Purchase Plan") under which employees may
purchase shares of Common Stock at a discount from fair market value. There are
120,000 shares of Common Stock reserved for issuance under the Purchase Plan. To
date, no shares of Common Stock have been issued under the Purchase Plan. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Rights to purchase Common Stock under
the Purchase Plan are granted at the discretion of the Compensation Committee,
which determines the frequency and duration of individual offerings under the
Plan and the dates when stock may be purchased. Eligible employees participate
voluntarily and may withdraw from any offering at any time before stock is
purchased. Participation terminates automatically upon termination of
employment. The purchase price per share of Common Stock in an offering is 85%
of the lesser of its fair market value at the beginning of the offering period
or on the applicable exercise date and may be paid through payroll deductions,
periodic lump sum payments or a combination of both. The Purchase Plan
terminates on August 14, 2006.
 
401(k) PLAN
 
     The Company has a 401(k) savings and retirement plan (the "401(k) Plan")
which covers substantially all employees of the Company. The 401(k) Plan allows
participants to agree to certain salary deferrals which the Company allocates to
the participants' plan account. These amounts may not exceed statutorily
mandated annual limits set forth in the Code. The Company currently does not
match employee contributions to the 401(k) Plan but may do so in the future.
 
EXECUTIVE EMPLOYMENT AGREEMENTS
 
     The Company has entered into employment agreements with Mr. Gordon and Mr.
Fitzgerald. The Company agreed to employ Mr. Gordon as President and Chief
Executive Officer of the Company, effective January 2, 1996, at an annual salary
of $225,000. In connection with this agreement, Mr. Gordon was granted options
to acquire 387,434 shares of Common Stock at $0.80 per share, which vest over
four years, and options to acquire 77,486 shares of Common Stock at $0.80 per
share, which vest on the earlier of the achievement of certain milestones or
five years. Mr. Gordon has also been provided with moving and relocation
allowances. The agreement provides for continued employment until termination by
either party. If Mr. Gordon is terminated by the Company without cause, the
agreement provides that he will be entitled to receive his base salary, plus any
benefits to which he is entitled and any options granted to Mr. Gordon which
would have otherwise vested, for a period of up to six months following such
termination of employment. In July 1996, the Company also made a loan in the
principal amount of $250,000 to Mr. Gordon. The principal amount of the loan
will be repaid in three annual installments beginning three years from the date
of this offering and bears interest at the
 
                                       36

<PAGE>   38
 
lowest applicable federal rate of interest as published by the Internal Revenue
Service. See "Certain Transactions."
 
     Under Mr. Fitzgerald's Agreement, the Company has agreed to employ Mr.
Fitzgerald as Vice President and Chief Financial Officer of the Company,
effective July 9, 1996, at an annual salary of $150,000. In connection with the
agreement, Mr. Fitzgerald was granted options, which vest over four years, to
acquire 50,000 shares of Common Stock at $6.00 per share. The agreement provides
for continued employment until termination by either party. If Mr. Fitzgerald is
terminated without cause by the Company during the first year of the agreement,
he will be entitled to receive his base salary, plus any benefits to which he is
entitled and any options granted to Mr. Fitzgerald which would have otherwise
vested, for a period of up to six months.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers various
incentive compensation and benefit plans. See "Management--Stock Plans." The
Compensation Committee currently consists of Stephen M. Dow and Allan R.
Ferguson. Mr. Dow is a general partner of Sevin Rosen Funds, a venture capital
firm and a principal stockholder of the Company. Mr. Ferguson is a general
manager of Atlas Venture, a venture capital firm and a principal stockholder of
the Company. See "Principal Stockholders" and "Certain Transactions."
 
                                       37

<PAGE>   39
 

                              CERTAIN TRANSACTIONS
 
     In December 1993, in exchange for the transfer to the Company of
substantially all of the assets and liabilities of ArQule Partners, L.P., a
Delaware limited partnership (the "Partnership"), the Company issued 1,500
shares of its Common Stock to the Partnership, at which time the Partnership
became the sole stockholder of the Company. In November 1994, the Company
declared a stock dividend of 3,332.33 shares of its Common Stock on each
outstanding share of Common Stock held by the Partnership as of October 17,
1994. After certain transfers of Common Stock by the Partnership, in November
1994 all the remaining outstanding shares of Common Stock then held by the
Partnership were surrendered to the Company in exchange for shares of Series A
Convertible Preferred Stock, $0.01 par value per share (the "Series A Preferred
Stock"), which will convert into 4,295,500 shares of Common Stock concurrently
with the closing of this offering.
 
     In November 1993, the Company made a loan in the amount of $63,000 to
Joseph C. Hogan, Jr., Ph.D., Chairman and Chief Scientific Officer of the
Company, which loan is represented by a promissory note due and payable in
November 1996, and which bears interest at the lowest applicable federal rate of
interest as published by the Internal Revenue Service. The entire principal and
accrued interest is currently outstanding.
 
     During the period from August 1994 through February 1995, Sevin Rosen Fund
IV L.P., Atlas Venture Fund, II, L.P. and Atlas Venture Europe Fund B.V. made a
series of bridge loans to the Company in the aggregate amount of $2,400,000 (the
"Bridge Loans") in exchange for promissory notes and warrants to purchase an
aggregate of 155,300, 58,229 and 26,471 shares of Common Stock, respectively,
exercisable at $0.25 per share until the earlier of the effective date of an
initial public offering or various dates through December 31, 1999 (the "Bridge
Warrants"). In November 1995, the principal amount of the promissory notes
representing the Bridge Loans was converted into shares of Series A Preferred
Stock, which will convert into an aggregate of 960,000 shares of Common Stock
concurrently with the closing of this offering. It is anticipated that the
Bridge Warrants will be exercised on a cashless basis prior to the closing of
this offering.
 
     In November 1995, the Company issued 1,800,000 shares of Series B
Convertible Preferred Stock, $.01 par value per share (the "Series B Preferred
Stock"), to Physica B.V. for cash at a purchase price of $3.89 per share. Such
shares of Series B Preferred Stock will convert into 900,000 shares of Common
Stock concurrently with the closing of this offering. Physica B.V. is an
affiliate of Solvay Duphar B.V., with whom the Company has a major corporate
collaboration. See "Business--ArQule's Drug Discovery Programs."
 
     Also in November 1995, the Company made a loan in the amount of $120,000 to
Dr. Hogan. The loan is represented by a promissory note and is secured by shares
of Common Stock issuable to Dr. Hogan upon dissolution of the Partnership. The
loan bears interest at the lowest applicable federal rate of interest as
published by the Internal Revenue Service. The original principal amount of the
loan is forgiven at a rate of 25% per year on each anniversary date of the note
as long as Dr. Hogan is employed by the Company. The entire principal and
accrued interest is currently outstanding.
 
     In April 1996, all accrued interest outstanding on the Bridge Loans through
November 1995 in the aggregate amount of $142,000 was converted into shares of
Series A Preferred Stock, which will convert into an aggregate of 56,714 shares
of Common Stock concurrently with the closing of this offering. In addition, in
consideration of the waiver by Physica B.V. of its anti-dilution rights under
the Company's Amended and Restated Certificate of Incorporation and its right of
first refusal with respect to such shares of Series A Preferred Stock, the
Company issued to Physica B.V. additional shares of Series B Preferred Stock,
which will convert into 7,734 shares of Common Stock concurrently with the
closing of this offering.
 
     In July 1996, the Company made a loan in the amount of $250,000 to Eric B.
Gordon, the President, Chief Executive Officer and a director of the Company,
which loan is secured by shares of Common Stock issuable to Mr. Gordon upon the
exercise of options. The loan is represented by a promissory note which is due
and payable in three equal annual installments beginning three years from the
date of this offering and which bears interest at the lowest applicable federal
rate of interest as published by the Internal Revenue Service. The entire
principal and accrued interest is currently outstanding.
 
                                       38

<PAGE>   40
 
                             PRINCIPAL STOCKHOLDERS


<TABLE>
 
     The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of August 15, 1996, by
(i) persons known by the Company to be beneficial owners of more than 5% of the
Common Stock, (ii) the Chief Executive Officer (both current and former) and the
Named Executive Officer, (iii) each director of the Company and (iv) all current
executive officers and directors as a group:
 
   
<CAPTION>
                                                                                 PERCENTAGE OF SHARES
                                                                                 BENEFICIALLY OWNED(1)
                                                                                 ---------------------
                                                         NUMBER OF SHARES         BEFORE       AFTER
BENEFICIAL OWNERS(2)(3)                                BENEFICIALLY OWNED(1)     OFFERING     OFFERING
- -----------------------                                ---------------------     --------     --------
<S>                                                          <C>                   <C>          <C>
Atlas Venture(4).....................................        1,355,738             19.43%       14.31%
  222 Berkeley Street
  Boston, MA 02116

Physica B.V.(5)......................................          907,734             13.01%        9.58%
  C.J. van Houtenlaan, 36
  1381 CD Weiss
  The Netherlands

Sevin Rosen Fund IV L.P.(6)..........................        2,362,833             33.87%       24.93%
  13455 Noel Road, Suite 1670
  Dallas, TX 75240

Adrian de Jonge, Ph.D.(7)............................          907,734             13.01%        9.58%

Stephen M. Dow(8)....................................        2,362,833             33.87%       24.93%

Allan R. Ferguson(9).................................        1,355,738             19.43%       14.31%

Eric B. Gordon(10)...................................           38,743                 *            *

Seth L. Harrison, M.D.(11)...........................          128,689              1.84%        1.36%

Joseph C. Hogan, Jr., Ph.D.(12)......................        1,208,194             17.32%       12.75%

All current executive officers and directors as a
  group (6 persons)(13)..............................        5,873,242             83.72%       61.98%
    
<FN> 
- ------------------------------
  *  Indicates less than 1%.
 
   
 (1) Reflects the conversion, prior to or contemporaneously with the closing of
     this offering, of all outstanding shares of preferred stock of the Company
     into an aggregate of 6,219,948 shares of Common Stock of the Company and
     the issuance of 234,992 shares of Common Stock upon the cashless exercise
     of outstanding warrants. The number of shares of Common Stock deemed
     outstanding after this offering includes the 2,500,000 shares of Common
     Stock of the Company being offered for sale by the Company in this
     offering. The persons and entities named in the table have sole voting and
     investment power with respect to the shares beneficially owned by them,
     except as noted below. Share numbers include shares of Common Stock
     issuable pursuant to the outstanding options and warrants that may be
     exercised within 60 days after August 15, 1996.
    
 
 (2) Except as otherwise indicated above, the address of each stockholder
     identified above is c/o the Company, 200 Boston Avenue, Medford, MA 02155.
 
   
 (3) ArQule Partners, L.P., which holds 4,295,500 shares of Common Stock,
     representing 61.57% before the offering and 45.33% after the offering, has
     not been included in this table. The partners of the Partnership have
     agreed to dissolve the Partnership. The general partners have, pursuant and
     subject to the Second Amended and Restated Agreement of the Limited
     Partnership, as amended, delegated to an Investment Committee voting and
     investment discretion over the shares held by the Partnership. Messrs. Dow,
     Ferguson, Joseph C. Hogan, III and Dr. Hogan are members of the Investment
     Committee of the Partnership. Each of Messrs. Dow, Ferguson,
    
</TABLE>

 
                                       39

<PAGE>   41
 
   
     Elizabeth Hogan and Dr. Hogan disclaims beneficial ownership of the shares
     held by the Partnership, except to the extent of his proportionate
     pecuniary interest in the Partnership. See "The Company" and footnotes (4),
     (6) and (12).
    
 
   
 (4) Consists of (i) 303,258 shares owned by Atlas Venture Fund II, L.P., (ii)
     138,274 shares owned by Atlas Venture Europe Fund B. V. (collectively,
     "Atlas Venture"), (iii) 628,300 shares estimated to be distributed by the
     Partnership to Atlas Venture Fund II, L.P., and (iv) 285,906 shares
     estimated to be distributed by the Partnership to Atlas Venture Europe Fund
     B.V. The voting and investment discretion over the shares owned by Atlas
     Venture Fund II, L.P. is exercised by the general partners of Atlas Venture
     Associates II, L.P., its general partner. The general partners of Atlas
     Venture Associates II, L.P. are Allan R. Ferguson, Barry J. Fidelman,
     Jean-Francois Formela and Christopher J. Spray. Because of this
     relationship, Allan R. Ferguson, a director of the Company, shares voting
     and investment discretion over such shares. Atlas Venture Europe Fund B.V.
     is a corporation wholly-owned by Atlas InvesteringsGroep N.V. ("AIG"). The
     voting and investment discretion over the shares owned by Atlas Venture
     Europe Fund B.V. is exercised by the managing directors of AIG, Michiel A.
     de Haan and Evert H. Smid. Three officers of AIG, Gerard H. Montanus, Hans
     Bosman and Jaap van Hellemond, share voting and investment discretion with
     these two managing directors over the shares held by Atlas Venture Europe
     Fund B.V. The numbers of shares of Common Stock attributed to Atlas Venture
     in clauses (iii) and (iv) are estimates of the number of shares that will
     be distributed to Atlas Venture upon the dissolution of the Partnership
     assuming (a) the fair market value per share at the time of dissolution is
     equal to the initial public offering price of $12.00 and (b) the further
     pro rata distribution by LII, a general partner of the Partnership, to its
     stockholders (which include Atlas Venture) of the ArQule shares distributed
     to it by the Partnership. See "The Company." The actual number of shares
     received by each partner in the Partnership will depend on the per share
     valuation at the time of the distribution.
    
 
 (5) The voting and investment discretion over the shares owned by Physica B.V.
     is exercised by the sole director of Physica B.V., J.W.F. van Ingen.
 
   
 (6) Consists of (i) 810,174 shares owned by Sevin Rosen Fund IV L.P. ("Sevin
     Rosen") and (ii) 1,552,659 shares estimated to be distributed by the
     Partnership to Sevin Rosen. The voting and investment discretion over the
     shares owned by Sevin Rosen is exercised by the general partner of SRB
     Associates IV L.P., its general partner. The general partners of SRB
     Associates L.P. are Stephen M. Dow, Jon W. Bayless, Charles H. Phipps,
     Dennis J. Gorman, and John V. Jaggers. Because of this relationship,
     Stephen M. Dow, a director of the Company, shares voting and investment
     discretion over such shares. The number of shares of Common Stock
     attributed to Sevin Rosen is an estimate of the number of shares that will
     be distributed to Sevin Rosen upon the dissolution of the Partnership
     assuming (a) the fair market value per share at the time of dissolution is
     equal to the initial public offering price of $12.00 and (b) the further
     pro rata distribution by LII, to its stockholders (which include Sevin
     Rosen) of the ArQule shares distributed to it by the Partnership. See "The
     Company." The actual number of shares received by each partner in the
     Partnership will depend on the per share valuation at the time of the
     distribution.
    
 
 (7) Consists of 907,734 shares of Common Stock owned by Physica B.V. Dr. de
     Jonge is Vice President of Research of Solvay's Pharmaceuticals Division,
     an affiliate of Physica B.V. Dr. de Jonge disclaims beneficial ownership of
     the shares held by Physica B.V.
 
 (8) Consists of 2,362,833 shares owned by or attributed to Sevin Rosen. Mr. Dow
     is a general partner of SRB Associates IV L.P. which is the general partner
     of Sevin Rosen. Mr. Dow disclaims beneficial ownership of the shares owned
     by or attributed to Sevin Rosen, except to the extent of his pecuniary
     interest therein. See footnote (6).
 
 (9) Consists of 1,355,738 shares owned by or attributed to Atlas Venture. Mr.
     Ferguson is a general partner of Atlas Venture Associates II, L.P., which
     is the general partner of Atlas Venture Fund II, L.P. Mr. Ferguson
     disclaims beneficial ownership of the shares owned by or attributed to
     Atlas Venture, except to the extent of his pecuniary interest therein. See
     footnote (4).
 
                                       40

<PAGE>   42
 
(10) Represents shares of Common Stock subject to options that become
     exercisable upon the closing of this offering.
 
   
(11) Includes 41,189 shares estimated to be distributed by the Partnership to
     Dr. Harrison. The number of shares attributed to Dr. Harrison is an
     estimate of the number of shares that will be distributed to him upon the
     dissolution of the Partnership assuming the fair market value per share at
     the time of dissolution is equal to the initial public offering price of
     $12.00. See "The Company." The actual number of shares received by each
     partner in the Partnership will depend on the per share valuation at the
     time of the distribution.
    
 
   
(12) Consists of 1,208,194 shares estimated to be distributed by the Partnership
     to Dr. Hogan. The number of shares attributed to Dr. Hogan is an estimate
     of the number of shares that will be distributed to Dr. Hogan (187,500
     shares) and to a limited partnership of which certain of Dr. Hogan's family
     members are beneficiaries (1,020,835 shares) upon the dissolution of the
     Partnership assuming (a) the fair market value per share at the time of
     dissolution is equal to the initial public offering price of $12.00 and
     (ii) the further pro rata distribution by LTI, a general partner of the
     Partnership, to its stockholders (which include Dr. Hogan) of the ArQule
     shares distributed to it by the Partnership. See "The Company." The actual
     number of shares received by each partner in the Partnership will depend on
     the per share valuation at the time of the distribution.
    
 
(13) Includes 38,743 shares of Common Stock subject to options that are either
     presently exercisable or will become exercisable within 60 days after
     August 15, 1996. See footnotes (7), (8), (9), (10) and (12).
 
                                       41

<PAGE>   43
 

                          DESCRIPTION OF CAPITAL STOCK
 
   
     Upon the closing of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $0.01 par value per
share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, after
giving effect to the filing of the Company's Restated Certificate. As of the
date of this Prospectus, the Company had 32 shareholders. Upon the closing of
this offering, the Company will have 9,476,487 shares of Common Stock
outstanding.
    
 
     The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate, the
form of which is included as an exhibit to the Registration Statement, and by
the provisions of applicable law.
 
COMMON STOCK
 
     Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive dividends when, as and if declared by
the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution or winding up of the Company, holders of Common Stock
share ratably in the assets of the Company available for distribution to its
stockholders, subject to the preferential rights of any then outstanding shares
of Preferred Stock. The Common Stock outstanding upon the effective date of the
Registration Statement, and the shares offered by the Company hereby, upon
issuance and sale, will be fully paid and nonassessable.
 
PREFERRED STOCK
 
     The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting or
conversion rights that could adversely affect the voting power of the holders of
Common Stock and the issuance of Preferred Stock could be used, under certain
circumstances, to render more difficult or discourage a hostile takeover of the
Company. No shares of Preferred Stock will be outstanding immediately following
the closing of the offering and the Company has no present plans to issue any
shares of Preferred Stock.
 
ANTI-TAKEOVER MEASURES
 
     In addition to the Board of Directors' ability to issue shares of Preferred
Stock, the Restated Certificate and the By-laws of the Company contain several
other provisions that are commonly considered to discourage unsolicited takeover
bids. The Restated Certificate includes provisions classifying the Board of
Directors into three classes with staggered three-year terms and prohibiting
stockholder action by written consent. Under the Restated Certificate and
By-laws, the Board of Directors may enlarge the size of the Board and fill any
vacancies on the Board. The By-laws provide that nominations for directors may
not be made by stockholders at any annual or special meeting unless the
stockholder intending to make a nomination notifies the Company of its intention
a specified period in advance and furnishes certain information. The By-laws
also provide that special meetings of the Company's stockholders may be called
only by the President or the Board of Directors and require advance notice of
business to be brought by a stockholder before the annual meeting.
 
     In February 1988, a law regulating corporate takeovers (the "Anti-Takeover
Law") took effect in Delaware. In certain circumstances, the Anti-Takeover Law
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging in a "business combination"
(which includes a merger or sale of more than 10% of the corporation's assets)
 
                                       42

<PAGE>   44
 
with an "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date on
which such stockholder became an "interested stockholder" subject to certain
exceptions, unless the transaction is approved by the board of directors and the
holders of at least 66 2/3% of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder). The statutory ban does
not apply if, upon consummation of the transaction in which any person becomes
an interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation (excluding shares held by persons
who are both directors and officers or by certain employee stock plans). A
Delaware corporation subject to the Anti-Takeover Law may "opt out" of the
Anti-Takeover Law with an express provision either in its certificate of
incorporation or by-laws resulting from a stockholders' amendment approved by at
least a majority of the outstanding voting shares; such an amendment is
effective following expiration of twelve months from adoption. The Company is a
Delaware corporation that is subject to the Anti-Takeover Law and has not "opted
out" of its provisions.
 
     The foregoing provisions of Delaware law and the Restated Certificate and
By-laws could have the effect of discouraging others from attempting a hostile
takeover of the Company and, as a consequence, they may also inhibit temporary
fluctuations in the market price of the Common Stock that might result from
actual or rumored hostile takeover attempts. Such provisions may also have the
effect of preventing changes in the management of the Company. It is possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
 
TRANSFER AGENT
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
 
                                       43

<PAGE>   45
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
   
     Upon completion of this offering, the Company will have 9,476,487 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of any other outstanding options. Of these shares, the
2,500,000 shares sold in this offering will be freely tradable, without
restriction or further registration under the Securities Act, except for shares
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act.
    
 
     The remaining 6,976,487 outstanding shares of Common Stock are owned by
existing stockholders and are deemed "Restricted Shares" under Rule 144. These
may not be resold, except pursuant to an effective registration statement or an
applicable exemption from registration. Of these remaining shares, approximately
151,972 shares of Common Stock will be eligible for sale under Rules 144 and 701
on the ninety-first day after the effectiveness of this offering. Stockholders
of the Company, holding in the aggregate 6,824,515 shares of Common Stock, have
agreed to enter into the 180-day lock-up agreements described below. At the end
of such 180-day period, an additional 5,916,781 shares of Common Stock will be
eligible for sale under Rules 144 and 701. The remaining Restricted Shares will
become eligible from time to time thereafter upon the expiration of the minimum
two-year holding period prescribed by Rule 144.
 
     In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. All sales of shares of the Company's Common Stock, including Restricted
Shares, held by affiliates of the Company must be sold under Rule 144, subject
to the foregoing volume limitations and other restrictions.
 
     The Commission has proposed an amendment to Rule 144 which would reduce the
holding period required for shares subject to Rule 144 from two years to one
year. If this proposal is adopted as of the expected closing of this offering,
an additional 907,734 shares of Common Stock would become eligible for sale by
existing stockholders to the public after the expiration of the 180-day lock-up
period.
 
     The Company's directors and executive officers and certain of its
stockholders have agreed that they will not, without the prior consent of the
representatives of the Underwriters, offer to sell, sell, contract to sell,
grant any option to sell or otherwise dispose of or require the Company to file
with the Commission a registration statement under the Act to register any
shares of Common Stock or securities convertible or exchangeable for shares of
Common Stock or warrants or other rights to acquire shares of Common Stock
during the 180-day period following the effective date of the Registration
Statement.
 
     The Company plans to file registration statements under the Securities Act
to register 2,600,000, 125,000 and 120,000 shares of Common Stock issuable under
the Equity Plan, the Director Plan and the Stock Purchase Plan, respectively,
180 days after the date of this Prospectus. Upon registration, such shares will
be eligible for immediate resale upon exercise, subject, in the case of
affiliates, to the volume, manner of sale and notice requirements of Rule 144.
 
     No prediction can be made as to the effect, if any, that market sales of
additional shares or the availability of such additional shares for sale will
have on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of Common Stock in the public market may have an adverse impact on the
market price for the Common Stock. See "Risk Factors-Dilution."
 
                                       44

<PAGE>   46
 
REGISTRATION RIGHTS
 
     The holders of the 6,219,948 shares of Common Stock to be issued on
conversion of the Series A Preferred Stock and Series B Preferred Stock (the
"Registrable Shares") are entitled to certain rights with respect to
registration under the Securities Act of the Registrable Shares. If the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, such holders are
entitled to notice of such registration and are entitled to include such
Registrable Shares in the registration. The rights are subject to certain
conditions and limitations, among them, the right of the underwriters of a
registered offering to limit the number of shares included in such registration.
Holders of Registrable Shares benefiting from these rights may also require the
Company to file at its expense a registration statement under the Securities Act
with respect to their shares of Common Stock and, subject to certain conditions
and limitations, the Company is required to use its best efforts to effect such
registration. Furthermore, such holders may, subject to certain conditions and
limitations, require the Company to file additional registration statements on
Form S-3 with respect to such Registrable Shares. In connection with this
offering, such holders waived their right to have shares of Common Stock
registered under the Securities Act as part of this offering.
 
                                       45

<PAGE>   47
 

                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Oppenheimer & Co., Inc. and Vector Securities International, Inc., have
severally agreed to purchase from the Company the following respective numbers
of shares of Common Stock:
 
   

<TABLE>
<CAPTION>
                                                                                      NUMBER OF
NAME                                                                                   SHARES
- ----                                                                                  ---------
<S>                                                                                  <C>
Hambrecht & Quist LLC...........................................................       553,334
Oppenheimer & Co., Inc. ........................................................       553,333
Vector Securities International, Inc. ..........................................       553,333
Alex. Brown & Sons Incorporated.................................................        80,000
Cowen & Company.................................................................        80,000
Dillon, Read & Co. Inc..........................................................        80,000
Lehman Brothers Inc.............................................................        80,000
Montgomery Securities...........................................................        80,000
UBS Securities LLC..............................................................        80,000
Adams, Harkness & Hill, Inc. ...................................................        40,000
Arnhold and S. Bleichroeder, Inc................................................        40,000
First Southwest Company.........................................................        40,000
Genesis Merchant Group Securities...............................................        40,000
Gerard Klauer Mattison & Co., LLC...............................................        40,000
Needham & Company, Inc..........................................................        40,000
Pennsylvania Merchant Group, Ltd. ..............................................        40,000
Punk, Ziegel & Knoell...........................................................        40,000
Van Kasper & Company............................................................        40,000
                                                                                     ---------
     Total......................................................................     2,500,000
                                                                                     =========
</TABLE>

    
 
     The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and its
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
such shares are purchased.
 
   
     The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.48 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to certain other dealers.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm any shares to any accounts over which they
exercise discretionary authority. After the initial public offering of the
shares, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
    
 
   
     The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same proportion thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
    
 
     The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
 
                                       46

<PAGE>   48
 
     The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
 
     Certain existing stockholders of the Company, including the Company's
executive officers and directors, who will own in the aggregate 6,824,515 shares
of Common Stock after the offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the date of this Prospectus.
The Company has agreed that, subject to limited exceptions, it will not, without
the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable for or convertible into shares of Common
Stock during the 180-day period following the date of this Prospectus.
 
   
     Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to those of the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management and
other factors deemed relevant.
    
 

                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts. Michael
Lytton, a partner of Palmer & Dodge LLP, is the Secretary of the Company and
Lynnette C. Fallon, also a partner of Palmer & Dodge LLP, is the Assistant
Secretary of the Company. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.
 

                                    EXPERTS
 
     The financial statements as of December 31, 1994 and 1995 and for each of
the two years in the period ended December 31, 1995 and for the period from
inception (May 6, 1993) through December 31, 1993 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules thereto. All statements made in this Prospectus regarding the contents
of any contract, agreement or other document filed as an exhibit to the
Registration Statement are qualified by reference to the copy of such document
filed as an exhibit to the Registration Statement. A copy of the Registration
Statement may be inspected without charge at the offices of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. Such reports and other information can also be
reviewed through the Commission's Web site (http://www.sec.gov).
 
                                       47

<PAGE>   49
 
                                  ARQULE, INC.


<TABLE>

                           INDEX TO FINANCIAL STATEMENTS
 
<CAPTION>
                                                                                         PAGE
                                                                                         ----
<S>                                                                                      <C>
Report of Independent Accountants....................................................     F-2

Balance Sheet at December 31, 1994 and 1995, and June 30, 1996 (unaudited)...........     F-3

Statement of Operations for the period from inception (May 6, 1993) through December
  31, 1993, for the two years ended December 31, 1995 and for the six months ended
  June 30, 1995 and 1996 (unaudited).................................................     F-4

Statement of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the
  period from inception (May 6, 1993) through December 31, 1995 and for the six
  months ended June 30, 1996 (unaudited).............................................     F-5

Statement of Cash Flows for the period from inception (May 6, 1993) through December
  31, 1993, for the two years ended December 31, 1995 and for the six months ended
  June 30, 1995 and 1996 (unaudited).................................................     F-6

Notes to Financial Statements........................................................     F-7
</TABLE>

 
                                       F-1

<PAGE>   50
 

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Stockholders of ArQule, Inc.
 
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable preferred stock and stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of ArQule, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1995 and for the period from inception (May 6, 1993) through December 31, 1993
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
 
PRICE WATERHOUSE LLP
 
Boston, Massachusetts
October 4, 1996

 
                                       F-2

<PAGE>   51
 
                                 ARQULE, INC.
 

<TABLE>
                                                  BALANCE SHEET
<CAPTION>

                                                                                                 PRO FORMA
                                                           DECEMBER 31,                           JUNE 30,
                                                    --------------------------     JUNE 30,         1996
                                                       1994           1995           1996         (NOTE 10)
                                                    -----------    -----------    -----------    -----------
                                                                                         (UNAUDITED)
<S>                                                 <C>            <C>            <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents......................   $   425,000    $ 2,989,000    $ 2,567,000    $ 2,567,000
  Marketable securities..........................            --      4,802,000      3,800,000      3,800,000
  Restricted cash................................            --         50,000         50,000         50,000
  Prepaid expenses and other current assets......        29,000         73,000         30,000         30,000
  Notes receivable from related party............            --         93,000         93,000         93,000
                                                    -----------    -----------    -----------    -----------
         Total current assets....................       454,000      8,007,000      6,540,000      6,540,000
Restricted cash..................................       288,000         50,000         50,000         50,000
Property and equipment, net......................     1,502,000      1,994,000      5,134,000      5,134,000
Other assets.....................................        14,000         49,000         49,000         49,000
Notes receivable from related party..............        63,000         90,000         75,000         75,000

                                                    -----------    -----------    -----------    -----------
                                                    $ 2,321,000    $10,190,000    $11,848,000    $11,848,000
                                                    ===========    ===========    ===========    ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
    AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Current portion of capital lease obligations...   $   341,000    $   514,000    $   836,000    $   836,000
  Bridge financing -- related party..............     1,594,000             --             --             --
  Accounts payable and accrued expenses..........       627,000        769,000      1,177,000      1,177,000
  Deferred revenue...............................            --      1,650,000      3,133,000      3,133,000
                                                    -----------    -----------    -----------    -----------
         Total current liabilities...............     2,562,000      2,933,000      5,146,000      5,146,000
                                                    -----------    -----------    -----------    -----------
Capital lease obligations........................       962,000        911,000      1,426,000      1,426,000
                                                    -----------    -----------    -----------    -----------
Deferred revenue.................................            --        458,000             --             --
                                                    -----------    -----------    -----------    -----------
Series B mandatorily redeemable convertible
  preferred stock, 1,800,000 and 1,815,468 shares
  issued and outstanding at December 31, 1995 and
  June 30, 1996, respectively, stated at net
  issuance price plus accretion; no shares
  outstanding pro forma..........................            --      6,888,000      6,898,000             --
                                                    -----------    -----------    -----------    -----------
Stockholders' equity (deficit):
  Convertible preferred stock, $0.01 par value;
    15,000,000 shares authorized
       Series A convertible preferred stock,
         8,591,000, 10,511,000 and 10,624,429
         shares issued and outstanding at
         December 31, 1994 and 1995 and June 30,
         1996, respectively, stated at issuance
         price (liquidation preference
         $9,354,790); no shares outstanding pro
         forma...................................        86,000      2,486,000      2,628,000             --
  Common stock, $0.01 par value; 20,000,000
    shares authorized; 554,597, 522,797 and
    523,047 shares issued and outstanding at
    December 31, 1994 and 1995 and June 30, 1996,
    respectively; 6,977,987 shares outstanding
    pro forma....................................         6,000          5,000          5,000         70,000
  Additional paid-in capital.....................     4,376,000      4,435,000      4,435,000     13,896,000
  Accumulated deficit............................    (5,671,000)    (7,926,000)    (8,690,000)    (8,690,000)
                                                    -----------    -----------    -----------    -----------
         Total stockholders' equity (deficit)....    (1,203,000)    (1,000,000)    (1,622,000)     5,276,000
                                                    -----------    -----------    -----------    -----------
Commitments and contingency (Note 13)............            --             --             --             --
                                                    -----------    -----------    -----------    -----------
                                                    $ 2,321,000    $10,190,000    $11,848,000    $11,848,000
                                                    ===========    ===========    ===========    ===========
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-3

<PAGE>   52
 
                                  ARQULE, INC.
 
                            STATEMENT OF OPERATIONS
 

<TABLE>
<CAPTION>
                                   PERIOD FROM
                                    INCEPTION
                                  (MAY 6, 1993)          YEAR ENDED               SIX MONTHS ENDED
                                     THROUGH            DECEMBER 31,                  JUNE 30,
                                  DECEMBER 31,    -------------------------   -------------------------
                                      1993           1994          1995          1995          1996
                                  -------------   -----------   -----------   -----------   -----------
                                                                                     (UNAUDITED)
<S>                               <C>             <C>           <C>           <C>           <C>
Revenue:
  Compound development
     revenue....................   $        --    $    85,000   $ 1,830,000   $   521,000   $ 1,475,000
  Compound development
     revenue--related party.....       --             --            500,000       --          1,500,000
  License option fees...........            --             --     1,000,000     1,000,000            --
                                   -----------    -----------   -----------   -----------    ----------
                                            --         85,000     3,330,000     1,521,000     2,975,000
                                   -----------    -----------   -----------   -----------    ----------
Costs and expenses:
  Cost of revenue...............            --             --     1,367,000       392,000       962,000
  Cost of revenue--related
     party......................       --             --            277,000       --            973,000
  Research and development......       769,000      2,806,000     2,095,000     1,213,000     1,119,000
  General and administrative....       687,000      1,346,000     1,557,000       806,000       828,000
                                   -----------    -----------   -----------   -----------    ----------
                                     1,456,000      4,152,000     5,296,000     2,411,000     3,882,000
                                   -----------    -----------   -----------   -----------    ----------
     Loss from operations.......    (1,456,000)    (4,067,000)   (1,966,000)     (890,000)     (907,000)
Interest income.................            --             --       133,000        11,000       172,000
Interest expense................        (9,000)      (139,000)     (419,000)     (190,000)      (19,000)
                                   -----------    -----------   -----------   -----------    ----------
     Net loss...................   $(1,465,000)   $(4,206,000)  $(2,252,000)  $(1,069,000)  $  (754,000)
                                   ===========    ===========   ===========   ===========    ==========
Unaudited pro forma net loss per
  share assuming conversion of
  convertible preferred stock
  (Note 10):
     Net loss per share.........                                $     (0.33)                $     (0.10)
                                                                ===========                  ==========
     Shares used in computing
       net loss per share.......                                  6,853,000                   7,443,000
                                                                ===========                  ==========
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-4

<PAGE>   53
 
                                  ARQULE, INC.


<TABLE>
                      STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

<CAPTION>
                                                                                       
                                                                                       STOCKHOLDERS' EQUITY (DEFICIT)    
                                                                  SERIES B          ------------------------------------ 
                                                           MANDATORILY REDEEMABLE          SERIES A
                                                           CONVERTIBLE PREFERRED     CONVERTIBLE PREFERRED      COMMON
                                                                   STOCK                     STOCK              STOCK
                                                           ----------------------   -----------------------   ----------
                                                            SHARES       AMOUNT       SHARES       AMOUNT       SHARES
                                                           ---------   ----------   ----------   ----------   ----------
<S>                                                        <C>         <C>          <C>          <C>          <C>
Capital contributions from ArQule Partners, L.P. 
  (Note 1)...............................................
Net loss.................................................
Issuance of common stock on December 30, 1993 in exchange
  for partnership assets and liabilities.................                                                          1,500
                                                                                                              ----------
BALANCE AT DECEMBER 31, 1993.............................                                                          1,500
Capital contribution from ArQule Partners, L.P. 
  (Note 1)...............................................
3,333.33 for 1 stock split effected in the form of a
  stock dividend.........................................                                                      4,998,500
Cancellation of common stock.............................                                                       (140,528)
Issuance of Series A convertible preferred stock in
  exchange for common stock..............................                            8,591,000   $   86,000   (4,295,500)
Cancellation of unvested portion of restricted stock upon
  employee termination...................................                                                         (9,375)
Issuance of common stock purchase warrants under bridge
  financing..............................................
Net loss.................................................
                                                                                    ----------   ----------   ----------
BALANCE AT DECEMBER 31, 1994.............................                            8,591,000       86,000      554,597
Employee restricted stock purchases......................                                                         68,200
Issuance of common stock purchase warrants under bridge
  financing..............................................
Cancellation of unvested portion of restricted stock upon
  employee termination...................................                                                       (100,000)
Conversion of bridge notes into Series A convertible
  preferred stock........................................                            1,920,000    2,400,000
Issuance of Series B mandatorily redeemable convertible
  preferred stock, net of issuance costs of $115,000.....  1,800,000   $6,885,000
Accretion of Series B mandatorily redeemable preferred
  stock to redemption value..............................                   3,000
Net loss.................................................  
                                                           ---------   ----------   ----------   ----------   ----------
BALANCE AT DECEMBER 31, 1995.............................  1,800,000    6,888,000   10,511,000    2,486,000      522,797
Conversion of interest on bridge notes to Series A
  convertible preferred stock (unaudited)................                              113,429      142,000
Issuance of Series B mandatorily redeemable preferred
  stock to maintain ownership percentage (Note 10)
  (unaudited)............................................     15,468
Cancellation of unvested portion of restricted stock upon
  employee termination (unaudited).......................                                                           (375)
Employee option exercise (unaudited).....................                                                            625
Accretion of Series B mandatorily redeemable preferred
  stock to redemption value (unaudited)..................                  10,000
Net loss (unaudited).....................................
                                                           ---------   ----------   ----------   ----------   ----------
BALANCE AT JUNE 30, 1996 (UNAUDITED).....................  1,815,468   $6,898,000   10,624,429   $2,628,000      523,047
                                                           =========   ==========   ==========   ==========   ==========
 
<CAPTION>                                                                  STOCKHOLDERS' EQUITY (DEFICIT)
                                                           --------------------------------------------------------                
                                                            COMMON      
                                                             STOCK      ADDITIONAL                      TOTAL
                                                           ---------     PAID-IN     ACCUMULATED    STOCKHOLDERS'
                                                           PAR VALUE     CAPITAL       DEFICIT     EQUITY (DEFICIT)
                                                           ----------   ----------   -----------   ----------------
<S>                                                          <C>        <C>          <C>              <C>
Capital contributions from ArQule Partners, L.P. 
  (Note 1)...............................................               $2,236,000                    $ 2,236,000
Net loss.................................................                            $(1,465,000)      (1,465,000)
Issuance of common stock on December 30, 1993 in exchange
  for partnership assets and liabilities.................    $     --                                          --
                                                             --------   -----------  -----------      -----------
BALANCE AT DECEMBER 31, 1993.............................          --    2,236,000    (1,465,000)         771,000
Capital contribution from ArQule Partners, L.P. 
  (Note 1)...............................................                2,100,000                      2,100,000
3,333.33 for 1 stock split effected in the form of a
  stock dividend.........................................      50,000      (50,000)                            --
Cancellation of common stock.............................      (1,000)       1,000                             --
Issuance of Series A convertible preferred stock in
  exchange for common stock..............................     (43,000)     (43,000)                            --
Cancellation of unvested portion of restricted stock upon
  employee termination...................................          --                                          --
Issuance of common stock purchase warrants under bridge
  financing..............................................                  132,000                        132,000
Net loss.................................................                             (4,206,000)      (4,206,000)
                                                             --------   -----------  -----------      -----------
BALANCE AT DECEMBER 31, 1994.............................       6,000    4,376,000    (5,671,000)      (1,203,000)
Employee restricted stock purchases......................          --        1,000                          1,000
Issuance of common stock purchase warrants under bridge
  financing..............................................                   57,000                         57,000
Cancellation of unvested portion of restricted stock upon
  employee termination...................................      (1,000)       1,000                             --
Conversion of bridge notes into Series A convertible
  preferred stock........................................                                               2,400,000
Issuance of Series B mandatorily redeemable convertible
  preferred stock, net of issuance costs of $115,000.....
Accretion of Series B mandatorily redeemable preferred
  stock to redemption value..............................                                 (3,000)          (3,000)
Net loss.................................................                             (2,252,000)      (2,252,000)
                                                             --------   -----------  -----------      -----------
BALANCE AT DECEMBER 31, 1995.............................       5,000    4,435,000    (7,926,000)      (1,000,000)
Conversion of interest on bridge notes to Series A
  convertible preferred stock (unaudited)................                                                 142,000
Issuance of Series B mandatorily redeemable preferred
  stock to maintain ownership percentage (Note 10)
  (unaudited)............................................
Cancellation of unvested portion of restricted stock upon
  employee termination (unaudited).......................        --                                            --
Employee option exercise (unaudited).....................        --                                            --
Accretion of Series B mandatorily redeemable preferred
  stock to redemption value (unaudited)..................                                (10,000)         (10,000)
Net loss (unaudited).....................................                               (754,000)        (754,000)
                                                             --------   -----------  -----------      -----------
BALANCE AT JUNE 30, 1996 (UNAUDITED).....................    $  5,000   $4,435,000   $(8,690,000)     $(1,622,000)
                                                             ========   ===========  ===========      ===========
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-5

<PAGE>   54
 
                                  ARQULE, INC.

<TABLE>
 
                                                     STATEMENT OF CASH FLOWS
 
Increase (Decrease) in Cash and Cash Equivalents
 
<CAPTION>
                                                      PERIOD FROM
                                                       INCEPTION
                                                     (MAY 6, 1993)          YEAR ENDED               SIX MONTHS ENDED
                                                        THROUGH            DECEMBER 31,                  JUNE 30,
                                                     DECEMBER 31,    -------------------------   -------------------------
                                                         1993           1994          1995          1995          1996
                                                     -------------   -----------   -----------   -----------   -----------
                                                                                                        (UNAUDITED)
<S>                                                   <C>            <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.........................................   $(1,465,000)   $(4,206,000)  $(2,252,000)  $(1,069,000)  $  (754,000)
  Adjustment to reconcile net loss to net cash
    (used
    in) provided by operating activities:
      Depreciation and amortization................        19,000        189,000       506,000       224,000       434,000
      Amortization of debt discount................            --         25,000       164,000       137,000            --
      (Increase) decrease in prepaid expenses and
         other current assets......................       (70,000)        41,000       (44,000)        6,000        43,000
      Increase in other assets.....................       (14,000)            --       (35,000)           --            --
      Increase in notes receivable from related
         party.....................................       (63,000)            --      (120,000)           --            --
      Increase in accounts payable and accrued
         expenses..................................       287,000        340,000       141,000        49,000       550,000
      Increase in deferred revenue.................            --             --     2,108,000     2,716,000     1,025,000
                                                      -----------    -----------   -----------   -----------   -----------
         Net cash (used in) provided by operating
           activities..............................    (1,306,000)    (3,611,000)      468,000     2,063,000     1,298,000
                                                      -----------    -----------   -----------   -----------   -----------
Cash flows from investing activities:
  Purchases of marketable securities...............            --             --    (9,052,000)           --            --
  Proceeds from sale or maturity of marketable
    securities.....................................            --             --     4,250,000            --     1,002,000
  Decrease (increase) in restricted cash...........      (100,000)      (188,000)      188,000       (14,000)           --
  Additions to property and equipment..............      (201,000)      (168,000)     (495,000)     (228,000)   (2,437,000)
                                                      -----------    -----------   -----------   -----------   -----------
         Net cash used in investing activities.....      (301,000)      (356,000)   (5,109,000)     (242,000)   (1,435,000)
                                                      -----------    -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Proceeds from bridge financing -- related
    party..........................................            --      1,700,000       700,000       700,000            --
  Principal payments of capital lease
    obligations....................................       (34,000)      (110,000)     (381,000)     (161,000)     (285,000)
  Proceeds from issuance of mandatorily redeemable
    convertible preferred stock, net...............            --             --     6,885,000            --            --
  Proceeds from issuance of common stock...........            --             --         1,000            --            --
  Capital contribution from ArQule Partners,
    L.P............................................     2,236,000      2,100,000            --            --            --
  Proceeds from sale-leaseback transactions........            --        107,000            --            --            --
                                                      -----------    -----------   -----------   -----------   -----------
         Net cash provided by (used in) financing
           activities..............................     2,202,000      3,797,000     7,205,000       539,000      (285,000)
                                                      -----------    -----------   -----------   -----------   -----------
  Net increase (decrease) in cash and cash
    equivalents....................................       595,000       (170,000)    2,564,000     2,360,000      (422,000)
  Cash and cash equivalents, beginning of period...            --        595,000       425,000       425,000     2,989,000
                                                      -----------    -----------   -----------   -----------   -----------
  Cash and cash equivalents, end of period.........   $    595,000   $   425,000   $ 2,989,000   $ 2,785,000   $ 2,567,000
                                                      ===========    ===========   ===========   ===========   ===========
</TABLE>

 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
    Capital lease obligations of $1,122,000 and $503,000, $935,000 and $512,000
were incurred in six months ended June 30, 1996 and in the years ended December
31, 1995, 1994 and 1993, respectively, when the Company entered into leases for
various machinery and equipment, furniture and fixtures, and leasehold
improvements.
 
    During 1995, the Company converted $2,400,000 of bridge loans into 1,920,000
shares of Series A convertible preferred stock (Note 8). In addition, during
1996, the Company converted $142,000 of interest relating to the bridge loans
into 113,429 shares of Series A convertible preferred stock.
 
    In addition to cash of $595,000, the Company received certain assets,
liabilities and patented technology upon the issuance of its common stock in
connection with the formation of the Company (Note 1).
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
    During 1995 and 1994, the Company paid approximately $254,000 and $98,000,
respectively, for interest.
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-6

<PAGE>   55
 
                                  ARQULE, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1.  NATURE OF OPERATIONS AND ORGANIZATION
 
     ArQule, Inc. (the "Company") is engaged in the discovery, development and
production of novel chemical compounds for the pharmaceutical and biotechnology
industries. Its operations are focused on the integration of combinatorial
chemistry and structure-guided rational drug design technologies and their
application for producing such compounds.
 
     In May 1993 and in connection with the formation of ArQule Partners, L.P.
(the "Partnership"), Legomer Technologies, Inc. ("LTI"), formerly Molecular
Recognition Technologies, Inc., a company owned by the two founding limited
partners in the Partnership, contributed to the Partnership all rights and
interests in certain LTI patented technology (the "Technology") in exchange for
a 0.5% general partner ownership position. The Company was legally incorporated
on December 30, 1993 to carry on the operations of the Partnership. Immediately
following the incorporation of the Company, the Partnership transferred
substantially all of its assets, liabilities and patented technology (the
"Operating Assets"), having an aggregate net book value of $771,000, to the
Company in exchange for 1,500 shares of the Company's $0.01 par value common
stock, representing all of the Company's then outstanding common stock. Because
of the related party nature of these transactions, the Operating Assets and the
Technology transfers have been accounted for as transfers of assets between
entities under common control. Accordingly, the accompanying financial
statements include the assets, liabilities and results of operations of the
Company at historical amounts as if the transfers occurred at the inception of
the Partnership. The Company is currently a majority-owned subsidiary of the
Partnership.
 
     Amounts which reflect the funding of the Partnership's operations prior to
the conversion of certain shares of the Company's common stock into Series A
preferred stock (Note 10) are reflected as paid-in capital in the accompanying
balance sheet and as capital contributed by ArQule Partners L.P. in the
statements of changes in redeemable preferred stock and stockholders' equity
(deficit) and of cash flows. Such funding totaled $2,236,000 and $2,100,000 of
cash for the years ended December 31, 1993 and 1994, respectively, and was
comprised of aggregate investments in general partnership interests of $43,000
and limited partnership interests of $4,293,000.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Significant accounting policies followed in the preparation of these
financial statements are as follows:
 
  Cash Equivalents, Marketable Securities and Restricted Cash
 
     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its available cash primarily in money market mutual funds and U.S.
government debt securities which have strong credit ratings. These investments
are subject to minimal credit and market risks. The Company specifically
identifies securities for purposes of determining gains and losses on the sale
of cash equivalents and short-term investments. At December 31, 1995 and 1994,
the Company has classified its investments as available-for-sale as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115.
 
     Restricted cash represents cash equivalents and time deposits held at
financial institutions as collateral on certain lease agreements (Note 13).
 
  Fair Value of Financial Instruments
 
     In 1995, the Company adopted SFAS No. 107, "Disclosures about the Fair
Value of Financial Instruments," which requires the disclosure of the fair value
of financial instruments. At December 31, 1995 the Company's financial
instruments consist of cash, cash equivalents, marketable securities,
 
                                       F-7

<PAGE>   56
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
restricted cash, notes receivable from related party, accounts payable and
accrued expenses and mandatorily redeemable convertible preferred stock. The
carrying amount of these instruments approximate their fair values.
 
Property and Equipment
 
     Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases by use of the
straight-line method. Maintenance and repair costs are expensed as incurred.
 
Revenue Recognition
 
     Compound development revenue relates to revenue from significant
collaborative agreements (Note 3) and from licensing of compound arrays. Revenue
from collaborative agreements relates to the delivery of compounds and to
compound development work and is recognized using the percentage of completion
method. The application of this revenue recognition method is dependent on the
contractual arrangement of either compound delivery or development. Accordingly,
revenue is recognized on the proportional achievement of deliveries against a
compound delivery schedule or as development labor is expended against a total
research and development labor plan. Payments received under these arrangements
prior to the completion of the related work are recorded as deferred revenue.
Revenue from licensing of compound arrays with no additional obligations is
recognized upon delivery of the compound array. License option fees represent
payments made to the Company for a right to evaluate and negotiate the terms of
potential licensing arrangement. Payments received for license option fees are
recognized as the options are granted as such fees are nonrefundable and the
Company has no further obligations.
 
Cost of Revenue
 
     Cost of revenue represents the actual costs incurred in connection with
performance pursuant to collaborative agreements and the costs incurred to
produce compound arrays. These costs consist primarily of payroll and
payroll-related costs, supplies and overhead expenses.
 
Unaudited Pro Forma Net Loss Per Share
 
     Pro forma net loss per share is determined by dividing the net loss by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, assuming the conversion of all convertible
preferred stock which will occur upon the closing of a qualified public offering
of the Company's common stock as described in Note 10.
 
   
     Common stock equivalents, although anti-dilutive, issued at prices below
the offering price per share during the twelve month period preceding the
initial filing of the Registration Statement have been included in the
calculation of unaudited pro forma net loss per share using the treasury stock
method and an initial public offering price of $12.00 per share as if
outstanding since the beginning of each period presented.
    
 
     Historical net loss per share has not been presented as the Series A
convertible preferred stock would have been omitted from the weighted average
shares outstanding as it is anti-dilutive and was issued more than twelve months
prior to the anticipated public offering.
 
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
 
                                       F-8

<PAGE>   57
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
 
Interim Financial Data (Unaudited)
 
     The interim financial data as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996, included in the accompanying financial statements are
unaudited; however, in the opinion of the Company, the interim financial data
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. The
interim financial data are not necessarily indicative of the results of
operations for a full year.
 
New Accounting Pronouncements
 
     In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of ". In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation." Both SFAS No. 121 and No. 123
are effective for the Company for the year ending December 31, 1996. The Company
has adopted these standards as required, and has adopted SFAS No. 123 through
disclosure only. The adoption of these statements is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
 
3.  SIGNIFICANT AGREEMENTS
 
     In 1995, the Company entered into a Research, Development and License
Agreement (the "Agreement") and a Stock Purchase Agreement (Note 10) with Solvay
Duphar B.V. ("Solvay"). Under the terms of the Agreement, the Company will
provide a certain number of compounds per year, and Solvay has been granted the
right to screen these compounds to identify compounds which exhibit biological
activity against targets (an "Active Compound"). Solvay has the right to enter
into an exclusive, worldwide license for any Active Compound identified. In
exchange, the Company receives milestone payments during drug development and
royalty payments based on sales of the product. Solvay has a right which expires
on December 31, 1997 to license certain of the Company's technologies on a
nonexclusive basis for internal use only. The initial term of the Agreement is
five years, and Solvay will make payments totaling $3.5 million per contract
year for access to the compounds and for the Company's research work of which
$600,000 was paid by December 31, 1995. At December 31, 1995, deferred revenue
related to this agreement totaled $100,000, and $500,000 was included in
compound development revenue--related party for the year ended December 31,
1995.
 
     In 1995, the Company entered into a Research & Development and License
Agreement with Abbott Laboratories ("Abbott"). Under this agreement, the Company
will conduct research and development activities for Abbott for two years (the
"Research Term") with an option to extend the agreement for up to an additional
three years for additional payments. The Company will also provide a certain
number of compounds per year, and Abbott has been granted the right to screen
these compounds or to use them in research activities pursuant to the agreement.
Abbott has the right to enter into an exclusive, worldwide license for a number
of compounds or derivatives developed under the agreement. In exchange, the
Company receives milestone payments during drug development and royalty payments
based on sales of the product. Pursuant to the agreement, Abbott has made
payments totaling $3.2 million for access to the compounds and for the Company's
research work of which $1,192,000 was included in compound development revenue
in 1995 and $2,008,000 was included in deferred revenue at December 31, 1995.
 
     In 1995, the Company entered into an Option Agreement and a Research and
Development Agreement with Pharmacia Biotech AB ("Pharmacia"), a subsidiary of
Pharmacia & Upjohn, Inc. Under the Option Agreement, a nonrefundable fee of
$1,000,000 was paid by Pharmacia in exchange for a six month option to license
certain technology rights. This amount was included in license option
 
                                       F-9

<PAGE>   58
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
fee revenue. Upon exercise of an option by Pharmacia, the two parties will enter
into a license agreement which would include initial licensing fees based on the
technology licensed and royalty and milestone payments based on Pharmacia's
related net product sales. Under the Research and Development Agreement,
Pharmacia paid $500,000 for certain research and development activities, which
was included in compound development revenue. Subsequent to December 31, 1995
and pursuant to the terms of the Option Agreement, Pharmacia elected to extend
the option for certain technologies by funding an additional research project
under the Research and Development Agreement.
 
     On September 13, 1996, the Company entered into a Research and License
Agreement with Roche Bioscience, a division of Syntex (U.S.A.) Inc. and an
indirect subsidiary of Roche Holding Ltd., pursuant to which the Company will
synthesize a certain number of Directed Array sets from compounds provided to
the Company by Roche Bioscience or developed by the Company. Roche Bioscience
has the right to enter into an exclusive, worldwide license for any Active
Compounds identified. Pursuant to the agreement, the Company will receive
research payments, milestone payments during drug development, and royalty
payments based on sales of the product. The initial term of the agreement is
three years. Roche Bioscience will make payments of approximately $12.1 million
over the initial term for development of and access to Directed Array sets, as
determined jointly by the Company and Roche Bioscience. However, the agreement
is subject to an early termination provision such that it may be terminated at
the end of the second year, in which case the Company will receive payments of
approximately $8.4 million. Roche Bioscience is also obligated to make
additional payments upon the achievement of certain milestones and to pay
royalties on sales of drugs that may result from the relationship.
 
     Under the terms of material transfer agreements with biotechnology
companies (the "collaborators"), the Company has granted the collaborator the
nonexclusive, royalty-free license to test certain compound arrays supplied by
the Company. Upon identification of an active compound, the Company will
negotiate a joint drug development program with the collaborator to develop the
compound, provided the Company has not previously licensed the compound. Under
the collaboration agreements executed in 1996 in connection with these joint
drug development programs, the Company and the collaborator will each bear the
costs and expenses of their respective activities. Proceeds received on sales or
a third party license of the jointly developed compound will first reimburse
development costs incurred by each party on a pro rata basis. After all such
reimbursements have been made, the remaining proceeds will be split evenly
between the parties.
 
4.  CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
     Following is a summary of the fair market value of available-for-sale
securities, by balance sheet classification, as of December 31, 1994 and 1995:
 

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                       -------------------
                                                                        1994       1995
                                                                        ----       ----
    <S>                                                                <C>      <C>
    Cash equivalents
      Money market funds.............................................  $9,000   $2,688,000
    Marketable securities
      U.S. government obligations....................................      --    4,802,000
                                                                       ------   ----------
                                                                       $9,000   $7,490,000
                                                                       ======   ==========
</TABLE>

 
     At December 31, 1994 and 1995, marketable securities are carried at fair
market value, which approximates amortized cost. Available-for-sale securities
classified as marketable securities with fair market values of $1,016,000 and
$3,786,000 have contractual maturities of between one and five years and between
five and ten years, respectively. All of the Company's marketable securities are
classified as current at December 31, 1995 as these funds are highly liquid and
are available to meet working capital needs and to fund current operations.
Gross unrealized gains and losses at December 31, 1994 and 1995 and realized
gains and losses on sales of securities for the year ended December 31, 1994 and
1995 were not significant.
 
                                      F-10

<PAGE>   59
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  PROPERTY AND EQUIPMENT


<TABLE>
 
     Property and equipment consist of the following:
 
<CAPTION>
                                                           ESTIMATED         DECEMBER 31,
                                                          USEFUL LIFE   -----------------------
                                                            (YEARS)        1994         1995
                                                          -----------      ----         ----
    <S>                                                       <C>       <C>          <C>
    Machinery and equipment.............................      3-7       $1,056,000   $1,839,000
    Leasehold improvements..............................        5          585,000      656,000
    Furniture and fixtures..............................        7           52,000       72,000
    Construction-in-progress............................       --               --      124,000
                                                                        ----------   ----------
                                                                         1,693,000    2,691,000
    Less -- Accumulated depreciation and amortization...                   191,000      697,000
                                                                        ----------   ----------
                                                                        $1,502,000   $1,994,000
                                                                        ==========   ==========
</TABLE>

 
     Assets held under capital leases consisted of $935,000 and $1,438,000 of
machinery and equipment at December 31, 1994 and 1995, respectively, and
$485,000 of leasehold improvements at December 31, 1994 and 1995. Accumulated
amortization of these assets totaled $173,000 and $366,000 at December 31, 1994
and 1995, respectively. For the years ended December 31, 1993, 1994 and 1995,
amortization expense related to assets held under capital lease obligations was
$10,000, $163,000 and $193,000, respectively.
 
6.  NOTES RECEIVABLE FROM RELATED PARTY
 
     The Company has a note receivable in the amount of $63,000 from an officer
of the Company at December 31, 1994 and 1995. Under the terms of the note,
interest accrues on the unpaid principal and interest at the lowest applicable
federal rate of interest as published by the Internal Revenue Service (5.9% at
December 31, 1995). Principal and accrued interest are due in full on November
3, 1996. At December 31, 1994 and 1995, interest due on the note was $3,000 and
$5,000, respectively, and is included in prepaid expenses and other current
assets.
 
     The Company also has outstanding at December 31, 1995 a note receivable in
the amount of $120,000 from an officer of the Company which is secured by the
officer's beneficial interest in 96,000 shares of Series A preferred stock of
the Company. Under the terms of the note, interest accrues on the unpaid
principal and interest at the lowest applicable federal rate of interest as
published by the Internal Revenue Service (5.9% at December 31, 1995). Principal
and accrued interest will be paid in four equal installments on November 2 of
each year commencing on November 2, 1996. The amount of the principal due and
payable on any installment date will be forgiven so long as the officer is
employed by the Company on the installment date. At December 31, 1995 interest
receivable relating to this note was $1,000 and is included in prepaid expenses
and other current assets.
 
7.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES


<TABLE>
     Accounts payable and accrued expenses include the following:
 
<CAPTION>
                                                                         DECEMBER 31,
                                                                     ---------------------
                                                                       1994         1995
                                                                       ----         ----
    <S>                                                              <C>          <C>
    Accounts payable...............................................  $420,000     $369,000
    Accrued professional fees......................................   123,000      176,000
    Accrued interest expense.......................................    16,000      142,000
    Other accrued expenses.........................................    68,000       82,000
                                                                     --------     --------
                                                                     $627,000     $769,000
                                                                     ========     ========
</TABLE>

 
                                      F-11

<PAGE>   60
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
8.  BRIDGE FINANCING -- RELATED PARTY
 
     During 1994 and 1995, the Company received $1,700,000 and $700,000,
respectively under bridge financing arrangements with certain stockholders. In
connection with this financing, the Company issued eighteen unsecured promissory
notes at interest rates ranging from 5.86% to 7.43% per annum. On November 2,
1995, the Company and the stockholders agreed to convert the principal of the
notes into 1,920,000 shares of Series A convertible preferred stock. At December
31, 1994 and 1995, interest payable relating to these bridge financings is
$16,000 and $142,000, respectively. In April 1996, the Company and the
stockholders converted the interest payable into an additional 113,429 shares of
Series A convertible preferred stock.
 
     As partial consideration for the promissory notes, the Company issued
warrants to purchase 240,000 shares of the Company's $0.01 par value common
stock. The warrants are exercisable at $0.25 per share (including by means of a
cashless exercise) which was equal to or exceeded the estimated fair value of
the Company's common stock, as determined by the Board of Directors, throughout
the period the warrants were issued. The warrants are currently exercisable and
expire on the earlier of various dates through December 31, 1999 or the
effective date of an initial public offering under the Securities Act of 1933.
 
     The proceeds from the bridge financings were allocated to the notes and to
the warrants based on management's estimate of their relative fair values and of
the then-current market interest rate of 12%. This resulted in $132,000 and
$57,000 being ascribed to the warrants in 1994 and 1995, respectively, which was
recorded as additional paid-in-capital and as a discount to the face value of
the notes. The discount was amortized over the period from issuance to
conversion into Series A convertible preferred stock. The amortization of debt
discount totaled $25,000 and $164,000 for the years ended December 31, 1994 and
1995, respectively, and is included in interest expense.
 
9.  EQUITY INCENTIVE PLAN
 
     During 1994, the Board of Directors approved the 1994 Amended and Restated
Equity Incentive Plan (the "Equity Incentive Plan"). During 1995 and 1996, the
Board of Directors approved amendments to increase the number of shares of
common stock available for awards under the Equity Incentive Plan to 1,104,500
and 2,600,000, respectively. All shares will be awarded at the discretion of a
Committee of the Board of Directors (the "Committee") in a variety of
stock-based forms including stock options and restricted stock. Pursuant to the
Equity Incentive Plan, incentive stock options may not be granted at less than
the fair market value of the Company's common stock at the date of the grant,
and the option term may not exceed ten years. For holders of 10% or more of the
Company's voting stock, options may not be granted at less than 110% of the fair
market value of the common stock at the date of the grant, and the option term
may not exceed five years. Stock appreciation rights granted in tandem with an
option shall have an exercise price not less than the exercise price of the
related option.
 
     Subject to the restrictions above, the Committee is authorized to designate
the options, awards, and purchases under the Equity Incentive Plan, the number
of shares covered by each option, award and purchase, and the related terms,
exercise dates, prices and methods of payment. In addition, for purposes of
determining the recipients' compensation relating to these grants, the fair
value for the awards is determined by the Board of Directors at the date at
which they are granted.
 
                                      F-12

<PAGE>   61
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Activity for the period from inception of the Equity Incentive Plan through
June 30, 1996 was as follows:
 

<TABLE>
<CAPTION>
                                                                   NUMBER OF   OPTION PRICE
    INCENTIVE STOCK OPTIONS                                         SHARES       PER SHARE
    -----------------------                                         ---------  ------------
    <S>                                                            <C>         <C>
    Granted......................................................      2,500           $0.02
                                                                   ---------
    Outstanding at December 31, 1994.............................      2,500           $0.02
    Granted......................................................    298,500   $0.02 - $0.80
                                                                   ---------
    Outstanding at December 31, 1995.............................    301,000   $0.02 - $0.80
    Granted......................................................    837,420   $0.80 - $6.00
    Exercised....................................................       (625)          $0.02
    Cancelled....................................................     (1,875)          $0.02
                                                                   ---------
    Outstanding at June 30, 1996.................................  1,135,920   $0.02 - $6.00
                                                                   =========
    Exercisable at December 31, 1995.............................        625
                                                                   =========
</TABLE>

 
     At December 31, 1995, restricted common stock purchased pursuant to the
Equity Incentive Plan totaled 522,797 shares (Note 11), and there were 280,703
shares available for future grant under the Equity Incentive Plan.
 
     On August 14, 1996, the Board of Directors approved, subject to stockholder
approval, the 1996 Director Stock Option Plan (the "1996 Director Plan") for
non-employee directors. Under this plan, eligible directors are automatically
granted once a year, at the annual meeting of stockholders of the Company,
options to purchase 3,500 shares of common stock which are exercisable on the
date of grant. Upon adoption of the plan and upon election of an eligible
director, options to purchase 7,500 shares of common stock will be granted which
will become exercisable in three equal annual installments commencing on the
date of the Company's next annual stockholders' meeting held after the date of
grant. All options granted pursuant the 1996 Director Plan have terms of ten
years with exercise prices equal to fair market value on the date of grant. A
maximum of 125,000 shares of common stock of the Company is reserved for
issuance in accordance with the terms of this plan.
 
Stock Purchase Plan
 
     On August 14, 1996, the Board of Directors approved, subject to stockholder
approval, the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). This plan
enables eligible employees to exercise rights to purchase the Company's common
stock at 85% of the fair market value of the stock on the date the right was
granted or the date the right is exercised, whichever is lower. Rights to
purchase shares under the Purchase Plan are granted by the Board of Directors.
The rights are exercisable during a period determined by the Board of Directors;
however, in no event will the period be longer than twenty-seven months. The
Purchase Plan is available to substantially all employees, subject to certain
limitations. The Company has reserved 120,000 shares of common stock for
purchases under the Purchase Plan.
 
10.  MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE
     PREFERRED STOCK
 
     On November 18, 1994, the Partnership (the sole stockholder of the Company
as of that date) exchanged 563,972 shares of common stock of the Company for
Partnership interests held by certain employees and consultants. The Partnership
also contributed 140,528 shares of common stock to the Company for future
issuance pursuant to the Equity Incentive Plan (Note 9). The Company
 
                                      F-13

<PAGE>   62
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
immediately retired these contributed shares and reserved 140,528 shares of
common stock for issuance pursuant to the Equity Incentive Plan. The
stockholders of the Company approved the issuance of 8,591,000 shares of Series
A convertible preferred stock to the Partnership in exchange for the remaining
4,295,500 shares of common stock held by the Partnership. Upon the exchange of
preferred stock, the Company retired the related shares of common stock.
 
     On November 1, 1995, the stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of designated
Series A preferred shares from 10,000,000 to 10,511,000 and to approve the
designation of 1,800,000 shares of Series B preferred stock. In February 1996,
the stockholders approved a further increase in the number of designated Series
A and Series B preferred shares to 10,624,429 and 1,815,468, respectively.
 
     On November 5, 1995, as part of a collaborative agreement (Note 3), the
Company sold to Solvay 1,800,000 shares of Series B preferred stock which
resulted in net proceeds to the Company of $6,885,000. In April 1996, the
Company issued to Solvay an additional 15,468 shares of Series B preferred stock
in connection with the conversion of the bridge financing interest into Series A
preferred stock (Note 8) to maintain the original, agreed-upon ownership
percentage.
 
     Convertible preferred stock has the following characteristics:
 
Conversion Rights
 
     The preferred stock is convertible, at the option of the holder, into
common stock of the Company based upon a formula which currently would result in
an exchange of one share of common stock for every two shares of preferred stock
converted. The preferred stock will automatically convert into common stock upon
the closing of an initial public offering, for which net proceeds equal or
exceed $10,000,000 at a price per share equal to or greater than the original
purchase price per share of the related preferred stock.
 
Dividend Rights
 
     When and if declared by the Board of Directors, and prior to any payment of
dividends to common stockholders, the Company shall pay noncumulative, annual
cash dividends of $0.07 and $0.27 per share to the holders of Series A preferred
stock and Series B preferred stock, respectively. In the event of a declaration
and payment of dividends on common stock, dividends on the preferred stock
(determined by the number of common shares into which the preferred shares are
convertible) are payable in an amount equal to or greater than the per share
amount of the dividend to common stockholders.
 
Voting Rights
 
     Holders of the preferred stock are entitled to vote upon any matter
submitted to the stockholders for a vote. Each share of preferred stock shall
have one vote for each full share of common stock into which the respective
share of preferred stock would be convertible on the record date for the vote.
 
Liquidation Rights
 
     In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series A preferred shares are entitled to
receive, prior to and in preference to the holders of Series B preferred stock
and the holders of common stock, an amount equal to $0.89 per share, plus any
declared but unpaid dividends. After all such payments have been made, the
holders of the outstanding Series B preferred shares are entitled to receive,
prior to and in preference to the holders of common stock, an amount equal to
$3.89 per share, plus any declared but unpaid dividend.
 
                                      F-14

<PAGE>   63
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
Redemption Rights
 
     Each holder of shares of Series B preferred stock shall have the right to
cause the Company, at any time on or after November 2, 2001, to redeem the
Series B preferred stock at a price equal to $3.89 per share. The difference
between the net issuance price and the redemption price is being accreted by a
charge to accumulated deficit. The Series A preferred stock is not redeemable.
 
Protection of Series B Preferred Stock
 
     The Company is not allowed to authorize the increase or decrease of the
total number of authorized shares of Series B preferred stock or issue
additional shares of Series B preferred stock without first obtaining the
approval of the majority of the Series B preferred stockholders. In addition,
the Company must first obtain approval of the majority of Series B preferred
stockholders to amend the Articles of Incorporation of the Company if such
amendment would adversely affect any of the rights, preferences or privileges of
shares of Series B preferred stock, or to redeem, purchase or otherwise acquire
shares of Series A preferred stock or common stock, excluding the repurchase of
shares of common stock from employees, officers, directors or consultants.
 
Unaudited Pro Forma Balance Sheet
 
   
     Upon the closing date of the Company's initial public offering, all of the
outstanding shares of Series A and Series B preferred stock will automatically
convert into 5,312,214 and 907,734 shares of common stock, respectively. In
addition, 234,992 shares of common stock will be issued upon the cashless
exercise of the outstanding warrants (Note 8), based on an initial public
offering price of $12.00 per share, which will occur immediately prior to the
effectiveness of the initial public offering. Such conversion and exercise have
been reflected in the unaudited pro forma balance sheet as of June 30, 1996.
    
 
11.  COMMON STOCK
 
     Pursuant to shareholder approval of a 1 for 2 reverse stock split on the
common stock of the Company, an amendment to the Company's Certificate of
Incorporation effecting such split was filed on October 4, 1996. Accordingly,
all share and per share data have been restated to give retroactive effect to
the stock split for all periods presented.
 
     On October 17, 1994 and November 1, 1995, the stockholders approved
amendments to the Company's Certificate of Incorporation to increase the number
of authorized common shares to 15,000,000 and 20,000,000, respectively. On
October 17, 1994, the Board of Directors also approved a 3,333.33 for 1 stock
split of the Company's common stock.
 
     At December 31, 1995, the Company has 6,977,203 shares of its common stock
reserved for issuance upon conversion of the preferred stock and exercise of
warrants and options.
 
Stock Restriction Agreements
 
     At December 31, 1995, the Company had outstanding 522,797 shares of common
stock issued pursuant to the Equity Incentive Plan (Note 9) which are subject to
stock restriction agreements whereby the stockholder automatically forfeits to
the Company the unvested portion of shares of common stock in the event of
termination of their employment with the Company. All such forfeited shares
shall immediately be retired by the Company. Shares subject to this agreement
vest over a four year period, either monthly or annually. At December 31, 1995,
the aggregate number of unvested common shares is 219,356.
 
                                      F-15

<PAGE>   64
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Each stock restriction agreement terminates at the election of the Company
on the earlier of (i) the date upon which an initial public offering of shares
of common stock, with a price of at least $5.00 per share and net proceeds to
the Company of at least $10,000,000, becomes effective or (ii) the closing of an
acquisition, consolidation, or merger of the Company or a sale or transfer of
all or substantially all of the Company's assets.
 
12.  INCOME TAXES


<TABLE>
     The benefit (provision) for income taxes was as follows:
 
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                                ---------------------------
                                                                   1994            1995
                                                                   ----            ----
    <S>                                                         <C>             <C>
    Deferred tax benefit:
      Federal.................................................  $ 1,420,000     $   794,000
      State...................................................      338,000         246,000
                                                                -----------     -----------
                                                                  1,758,000       1,040,000
                                                                -----------     -----------
    Deferred tax asset valuation allowance....................   (1,758,000)     (1,040,000)
                                                                -----------     -----------
                                                                $        --      $       --
                                                                 ==========      ==========
</TABLE>



<TABLE>
     The Company's deferred tax assets consist of the following:
 
<CAPTION>
                                                                       DECEMBER 31,
                                                                ---------------------------
                                                                   1994            1995
                                                                   ----            ----
    <S>                                                         <C>             <C>
    Preoperating costs capitalized for tax purposes...........  $   496,000     $   416,000
    Net operating loss carryforwards..........................    1,667,000       2,590,000
    Tax credit carryforwards..................................      139,000         272,000
    Book depreciation in excess of tax........................       42,000         106,000
                                                                -----------     -----------
    Gross deferred tax assets.................................    2,344,000       3,384,000
    Deferred tax asset valuation allowance....................   (2,344,000)     (3,384,000)
                                                                -----------     -----------
                                                                $        --     $        --
                                                                ===========     ===========
</TABLE>

 
     The Company has provided a full valuation allowance for the deferred tax
assets as the realization of these future benefits is not sufficiently assured
as of the end of each related year. If the Company achieves profitability, the
deferred tax assets will be available to offset future income tax liabilities
and expense.
 

<TABLE>
     At December 31, 1995, the Company has federal net operating loss
carryforwards and tax credit carryforwards available to reduce future taxable
income and tax liabilities, respectively, which expire as follows:
 
<CAPTION>
                                                                                  RESEARCH AND
                                                                      NET          DEVELOPMENT
 YEAR OF                                                         OPERATING LOSS    TAX CREDIT
EXPIRATION                                                       CARRYFORWARDS    CARRYFORWARDS
- ----------                                                       --------------   -------------
  <S>                                                              <C>               <C>
  2009.........................................................    $4,320,000        $ 84,000
  2010.........................................................     2,181,000          52,000
                                                                   ----------        --------
                                                                   $6,501,000        $136,000
                                                                   ==========        ========
</TABLE>

 
     Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of net
operating loss and tax credit carryforwards which can be utilized in future
years.
 
                                      F-16

<PAGE>   65
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
 
     A reconciliation between the amounts of reported income tax benefit and the
amount determined by applying the U.S. federal statutory rate of 35% for 1994
and 1995 to pre-tax loss is as follows:
 
<CAPTION>

                                                                  YEAR ENDED DECEMBER 31,
                                                                ---------------------------
                                                                   1994            1995
                                                                   ----            ----
    <S>                                                         <C>             <C>
    Loss at statutory rate....................................  $ 1,472,000     $   788,000
    State tax benefit, net of federal benefit.................      252,000         135,000
    Research and investment tax credit........................      139,000         133,000
    Other.....................................................     (105,000)        (16,000)
                                                                -----------     -----------
                                                                  1,758,000       1,040,000
    Increase in valuation allowance...........................   (1,758,000)     (1,040,000)
                                                                -----------     -----------
                                                                $        --     $        --
                                                                ===========     ===========
</TABLE>

 
13.  COMMITMENTS AND CONTINGENCY
 
LEASES

<TABLE>
 
     The Company leases office space and equipment under noncancelable operating
and capital leases. The future minimum lease commitments under these leases are
as follows:
 
<CAPTION>
YEAR ENDING                                                      OPERATING       CAPITAL
DECEMBER 31,                                                       LEASES         LEASES
- ------------                                                     ---------       -------
<S>                                                              <C>            <C>
   1996........................................................  $  293,000     $  631,000
   1997........................................................     288,000        620,000
   1998........................................................     289,000        334,000
   1999........................................................     288,000         37,000
   2000........................................................     144,000             --
                                                                 ----------     ----------
   Total minimum lease payments................................  $1,302,000      1,622,000
                                                                 ==========
   Less -- Amount representing interest........................                    197,000
                                                                                ----------
   Present value of minimum lease payments.....................                 $1,425,000
                                                                                ==========
</TABLE>

 
     The Company has a lease line agreement with an unaffiliated third party
(the "Lessor") for $2,000,000 of which approximately $787,000 was available for
future leases at December 31, 1995. Subsequent to December 31, 1995, the Lessor
approved an increase in the lease line limit to $5,000,000. The term for each
lease under the agreement is forty-two months, commencing on the purchase date
of the asset, and the lease bears interest at a rate determined by the Lessor at
each transaction date. The leasing arrangement was collateralized by cash
equivalents totaling $188,000 at December 31, 1994. This collateral was released
in 1995 by the Lessor. During 1994, the Company sold and leased back
approximately $107,000 in machinery and equipment, furniture and fixtures and
office equipment from the Lessor.
 
     Rent expense under noncancelable operating leases was approximately $91,000
and $163,000 for the years ended December 31, 1994 and 1995, respectively.
 
LETTER OF CREDIT
 
     In connection with a capital lease obligation for certain leasehold
improvements, the Company is required to maintain a $100,000 letter of credit
with a bank. Under the terms of the lease obligation, the $100,000 letter of
credit is to be available until September 30, 1996, at which point the required
amount will be reduced to $50,000 through September 30, 1998. The letter of
credit is collateralized by a $100,000 certificate of deposit held by the bank
(Note 2).
 
                                      F-17

<PAGE>   66
 
                                  ARQULE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
EMPLOYMENT AGREEMENTS
 
     The Company entered into an employment agreement with an officer who is
also a member of the board of directors. This agreement provides that if his
employment is terminated without cause, the officer is entitled to receive up to
six months' salary. The Company also entered into an employment agreement with
an officer. This agreement provides that if his employment is terminated without
cause during the first year of the agreement, the officer is entitled to receive
up to six months' salary.
 
CONTINGENCY
 
     In October 1996, the Company received a letter from two individuals who
have asserted that they are entitled to compensation from certain of the
Company's stockholders and/or the Company equal to approximately five percent of
the equity interest in the Company. The Company believes that there are
meritorious defenses against such claims and intends to contest them vigorously;
however, they are currently unable to estimate the outcome of this matter,
including the range of potential loss, if any.
 
                                      F-18

<PAGE>   67

[GRAPH] 

A three-dimensional structure of ArQule's HIV-1 Protease
Inhibitor, bound in the enzyme active site, and developed utilizing 
ArQule's Combinatorial Drug Design and Development Platform.



<PAGE>   68
 
==============================================================================

     NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
 
                            ------------------------

<TABLE>
 
                              TABLE OF CONTENTS
 
   
<CAPTION>
                                             PAGE
                                             ----
<S>                                          <C>
Prospectus Summary.........................    3
Risk Factors...............................    5
The Company................................   12
Use of Proceeds............................   12
Dividend Policy............................   12
Capitalization.............................   13
Dilution...................................   14
Selected Financial Data....................   15

Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...............................   16
Business...................................   20
Management.................................   32
Certain Transactions.......................   38
Principal Stockholders.....................   39
Description of Capital Stock...............   42
Shares Eligible for Future Sale............   44
Underwriting...............................   46
Legal Matters..............................   47
Experts....................................   47
Additional Information.....................   47
Index to Financial Statements..............  F-1
</TABLE>

    
 
   
     UNTIL NOVEMBER 10, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
    
==============================================================================
==============================================================================
 
   
                               2,500,000 SHARES
    
 
                                 ARQULE, INC.

                                [ARQULE LOGO]

                                 COMMON STOCK


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


                               HAMBRECHT & QUIST
 
                            OPPENHEIMER & CO., INC.
 
                        VECTOR SECURITIES INTERNATIONAL,
                                      INC.

   
                                OCTOBER 16, 1996
    
==============================================================================

<PAGE>   69
 

                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION


<TABLE>
     The expenses to be borne by the Company in connection with this offering
are as follows:
 
   
    <S>                                                                         <C>
    SEC registration fee......................................................  $ 12,402
    Nasdaq listing fee........................................................    41,192
    NASD filing fee...........................................................     3,490
    Blue Sky fees and expenses................................................    20,000
    Printing and engraving expenses...........................................   100,000
    Accounting fees and expenses..............................................   150,000
    Legal fees and expenses...................................................   350,000
    Transfer agent and registrar fees.........................................   100,000
    Miscellaneous expenses....................................................    22,916
                                                                                --------
              Total...........................................................  $800,000
                                                                                ========
</TABLE>

    
 
     All of the above figures, except the SEC registration fee and NASD filing
fee, are estimates.
 

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law grants the Company the
power to indemnify each person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the Company, or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgements, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, provided, however, no
indemnification shall be made in connection with any proceeding brought by or in
the right of the Company where the person involved is adjudged to be liable to
the Company except to the extent approved by a court. Article V of the Company's
Amended and Restated By-laws provides that the Company shall, to extent legally
permitted, indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
by reason of the fact that he is or was, or has agreed to become, a director or
officer of the Company, or is or was serving, or has agreed to serve, at the
request of the Company, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise. The indemnification provided for in Article V is expressly not
exclusive of any other rights to which those seeking indemnification may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such persons. Article V also provides that the Company
shall have the power to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Company, or is or
was serving at the request of the Company, as a director, officer or trustee of,
or in a similar capacity with, another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against and incurred
by such person in any such capacity.
 
     Pursuant to Section 102(b)(7) of the Delaware General Corporation Laws,
Section 7 of Article FIFTH of the Company's Restated Certificate eliminates a
director's personal liability for monetary damages to the Company and its
stockholders for breaches of fiduciary duty as a director, except in
circumstances involving a breach of a director's duty of loyalty to the Company
or its stockholders,
 
                                      II-1

<PAGE>   70
 
acts or omissions not in good faith, intentional misconduct, knowing violations
of the law, self-dealing or the unlawful payment of dividends or repurchase of
stock.
 

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     Since June 1, 1993, the Company has issued and sold the following
securities, in each case in reliance on an exemption from required registration
pursuant to Section 4(2) of the Securities Act:
 
     In December 1993, in exchange for the transfer to the Company of
substantially all of the assets and liabilities of the Partnership, the Company
issued 1,500 shares of its Common Stock to the Partnership.
 
     Commencing in March 1995, the Company has granted employees and consultants
options under its Amended and Restated 1994 Equity Incentive Plan, which options
have a ten-year term and are exercisable at a price equal to fair market value
on the date of grant, as determined in good faith by the Board of Directors. As
of June 30, 1996, options for 1,135,920 shares of the Company's Common Stock
were outstanding. As of such date, an option for 625 shares of Common Stock had
been exercised at $0.02 per share.
 
     In addition, from inception through June 1996, the Company made grants of
an aggregate of 523,047 shares of Common Stock to certain employees and
consultants of the Company. Such shares are subject to repurchase rights held by
the Company and were sold at fair market value on the date of grant.
 
     In November 1994, the Company declared and paid a stock dividend of
3,332.33 shares of its Common Stock on each outstanding share of Common Stock
held as of October 17, 1994. Pursuant to a Plan of Recapitalization, the
Partnership surrendered an aggregate of 4,295,500 outstanding shares of Common
Stock (after giving effect to such stock dividend) for shares of Series A
Convertible Preferred Stock of the Company which will convert into an equal
number of shares of Common Stock concurrently with this offering.
 
     During the period from August 1994 through February 1995, certain
stockholders of the Company made a series of Bridge Loans to the Company for an
aggregate of $2,400,000 in exchange for promissory notes and warrants to
purchase an aggregate of 240,000 shares of Common Stock, exercisable at $0.25
per share until the earlier of the effective date of an initial public offering
or various dates through December 31, 1999. In November 1995, the Bridge Loans
were converted to shares of Series A Preferred Stock, which will convert into
960,000 shares of Common Stock concurrently with the closing of this offering.
 
     In November 1995, the Company issued 1,800,000 shares of Series B Preferred
Stock to Physica B.V., which will convert into 900,000 shares of Common Stock
concurrently with the closing of this offering, for cash at the purchase price
of $3.89 per share.
 
     In April 1996, all accrued interest outstanding on the Bridge Loans through
November 1995 was converted into shares of Series A Preferred Stock, which will
convert into 56,714 shares of Common Stock concurrently with the closing of this
offering. In April 1996, the Company also issued shares of Series B Preferred
Stock to Physica B.V., which will convert into 7,734 shares of Common Stock
concurrently with the closing of this offering, in consideration of Physica
B.V.'s waiver of its anti-dilution rights under the Company's Amended and
Restated Certificate of Incorporation and its right of first refusal with
respect to such shares of Series A Preferred Stock.
 
                                      II-2

<PAGE>   71
 

ITEM 16.
(a) EXHIBITS
 
   

<TABLE>
<CAPTION>
EXHIBIT NO.                                      DESCRIPTION
- -----------                                      -----------
   <S>        <C>
    1.1++     Form of Underwriting Agreement.

    3.1++     Amended and Restated Certificate of Incorporation of ArQule, as amended through
              the date hereof.

    3.2       Intentionally omitted.

    3.3++     Form of Amended and Restated Certificate of Incorporation as proposed to be filed
              concurrently with the closing of this offering.

    3.4++     By-laws of ArQule, Inc.

    3.5++     Form of Amended and Restated By-laws as proposed to be adopted concurrently with
              the closing of this offering.

    4.1++     Specimen Common Stock Certificate.

    4.2++     Specimen Common Stock Purchase Warrant.

    5.1       Opinion of Palmer & Dodge LLP as to the legality of the shares being registered.
              Filed herewith.

   10.1*++    Amended and Restated 1994 Equity Incentive Plan, as amended through October 17,
              1994.

   10.2*++    1996 Employee Stock Purchase Plan.

   10.3*++    1996 Director Stock Option Plan.

   10.4++     Form of Indemnification Agreement between ArQule and its directors. Such
              agreements are materially different only as to the signing directors and the
              dates of execution.

   10.5++     Investors' Rights Agreement among ArQule and certain stockholders of the Company
              dated November 2, 1995.

   10.6++     Lease Agreement dated September 29, 1993 between ArQule and Beautyrest Property,
              Inc. and WRB, Inc.

   10.7++     Lease Agreement, dated July 27, 1995, between ArQule and Cummings Properties
              Management, Inc., as amended.

   10.8*++    Employment Agreement effective as of January 2, 1996, between ArQule and Eric B.
              Gordon.

   10.9*++    Employment Agreement effective as of July 9, 1996, between ArQule and James R.
              Fitzgerald, Jr.

   10.10*++   Promissory Note dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and
              ArQule.

   10.11*++   Pledge Agreement dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and
              ArQule.

   10.12*++   Promissory Note and Pledge Agreement dated July 9, 1996 between Eric B. Gordon
              and ArQule.

   10.13*++   Promissory Note dated November 4, 1993 between Dr. Joseph C. Hogan, Jr. and
              ArQule.

   10.14+++   Research, Development and License Agreement between ArQule and Solvay Duphar B.V.
              dated November 2, 1995.

   10.15+     Research & Development and License Agreement between ArQule and Abbott
              Laboratories dated June 15, 1995, as amended. Filed herewith.

   10.16+++   Research & Development Agreement between ArQule and Pharmacia Biotech AB dated
              March 10, 1995, as amended.

   10.17+++   Option Agreement between ArQule and Pharmacia Biotech AB dated March 10, 1995, as
              amended.

   10.18*++   Adoption Agreement for Fidelity Management and Research Company (ArQule's 401(k)
              plan).

   10.19+++   Research and License Agreement between ArQule and Roche Bioscience dated
              September 13, 1996.
</TABLE>

    
 
                                      II-3

<PAGE>   72
 

<TABLE>
<CAPTION>
EXHIBIT NO.                                      DESCRIPTION
- -----------                                      -----------
    <C>       <S>
    11.1++    Statement re computation of unaudited pro forma net loss per share.
    23.1      Consent of Price Waterhouse LLP. Filed herewith.
    23.2++    Consent of Palmer & Dodge LLP. Included in the opinion filed as Exhibit 5.1.
    24.1++    Power of attorney.
    27.1++    Financial Data Schedule.
</TABLE>

 
- ---------------
 
*  Indicates a management contract or compensatory plan.
 
+  Certain confidential material contained in the document has been omitted and
   filed separately, with the Securities and Exchange Commission pursuant to 
   Rule 406 of the Securities Act of 1933, as amended.
 
++ Previously filed.
 
(B) FINANCIAL STATEMENT SCHEDULE
 

<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       ----
<S>                                                                                    <C>
II  Valuation and Qualifying Accounts and Reserves...................................  S-1
</TABLE>

 

ITEM 17.  UNDERTAKINGS
 
     (a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item
14--Indemnification of Directors and Officers" above, or otherwise, the
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 the Registrant of expenses
incurred or paid by a director, officer or controlling person of the 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, the 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.
 
     (b) The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
              Act, 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 the Registrant pursuant
              to Rule 424(b)(1) or (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, 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.
 
     (c) 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.
 
                                      II-4

<PAGE>   73
 

                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Town of Medford, Commonwealth
of Massachusetts, on October 16, 1996.
    
 
                                       ARQULE, INC.
 
                                       By:                  *
                                          -----------------------------------
                                          Eric B. Gordon
                                          President and Chief Executive Officer

<TABLE>
 
                               POWER OF ATTORNEY

     Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacities and on the
dates indicated.
 
   
<CAPTION>
          SIGNATURE                               TITLE                           DATE
          ---------                               -----                           ----
<S>                               <C>                                      <C>
                 *                 President, Chief Executive Officer      October 16, 1996
- ------------------------------      and Director (Principal Executive
Eric B. Gordon                    Officer, Principal Financial Officer
                                    and Principal Accounting Officer)

                 *                              Director                   October 16, 1996
- ------------------------------
Stephen M. Dow

                 *                              Director                   October 16, 1996
- ------------------------------
Joseph C. Hogan, Jr.

                 *                              Director                   October 16, 1996
- ------------------------------
Adrian de Jonge

                 *                              Director                   October 16, 1996
- ------------------------------
Allan R. Ferguson

*By: /s/  LYNNETTE C. FALLON
     -------------------------
     Lynnette C. Fallon
     Attorney-in-Fact
</TABLE>

    
 
                                      II-5

<PAGE>   74
 
                                                                     SCHEDULE II
 
                                  ARQULE, INC.


<TABLE>
                   VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
<CAPTION>
                                                                  CHARGED
                                                 BALANCE AT      TO COSTS      CHARGED TO     DEDUCTIONS     BALANCE AT
                                                BEGINNING OF        AND          OTHER           AND           END OF
                 DESCRIPTION                       PERIOD        EXPENSES       ACCOUNTS      WRITE-OFFS       PERIOD
                 -----------                    -----------      --------       ---------     ----------     ----------
<S>                                              <C>             <C>              <C>            <C>         <C>
Deferred tax asset valuation allowance
    Year ended December 31, 1994..............   $  586,000(1)   1,758,000        --             --          2,344,000
    Year ended December 31, 1995..............    2,344,000      1,040,000        --             --          3,384,000

<FN> 
- ---------------
 
(1) Represents deferred tax asset valuation allowance recorded as of December
     30, 1993 upon incorporation of the Company.

</TABLE>

 
                                       S-1

<PAGE>   75
 

                                 EXHIBIT INDEX
 
   

<TABLE>
<CAPTION>
EXHIBIT NO.                                        DESCRIPTION                                       PAGE
- -----------                                        -----------                                       ----
   <S>        <C>                                                                       
    1.1++     Form of Underwriting Agreement.

    3.1++     Amended and Restated Certificate of Incorporation of ArQule, as amended through the
              date hereof.

    3.2       Intentionally omitted.

    3.3++     Form of Amended and Restated Certificate of Incorporation as proposed to be amended
              concurrently with the closing of this offering.

    3.4++     By-laws of ArQule, Inc.

    3.5++     Form of Amended and Restated By-laws as proposed to be amended concurrently with the
              closing of this offering.

    4.1++     Specimen Common Stock Certificate.

    4.2++     Specimen Common Stock Purchase Warrant.

    5.1       Opinion of Palmer & Dodge LLP as to the legality of the shares being registered.
              Filed herewith.

   10.1*++    Amended and Restated 1994 Equity Incentive Plan, as amended through October 17, 1994.

   10.2*++    1996 Employee Stock Purchase Plan.

   10.3*++    1996 Director Stock Option Plan.

   10.4++     Form of Indemnification Agreement between ArQule and its directors. Such agreements
              are materially different only as to the signing directors and the dates of execution.

   10.5++     Investors' Rights Agreement among ArQule and certain stockholders of the Company
              dated November 2, 1995.

   10.6++     Lease Agreement dated September 29, 1993 between ArQule and Beautyrest Property, Inc.
              and WRB, Inc.

   10.7++     Lease Agreement, dated July 27, 1995, between ArQule and Cummings Properties
              Management, Inc. as amended.

   10.8*++    Employment Agreement effective as of January 2, 1996, between ArQule and Eric B.
              Gordon.

   10.9*++    Employment Agreement effective as of July 9, 1996, between ArQule and James R.
              Fitzgerald, Jr.

   10.10*++   Promissory Note dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and ArQule.

   10.11*++   Pledge Agreement dated November 2, 1995 between Dr. Joseph C. Hogan, Jr. and ArQule.

   10.12*++   Promissory Note and Pledge Agreement dated July 9, 1996 between Eric B. Gordon and
              ArQule.

   10.13*++   Promissory Note dated November 4, 1993 between Dr. Joseph C. Hogan, Jr. and ArQule.

   10.14+++   Research, Development and License Agreement between ArQule and Solvay Duphar B.V.
              dated November 2, 1995.

   10.15+     Research & Development and License Agreement between ArQule and Abbott Laboratories
              dated June 15, 1995, as amended. Filed herewith.

   10.16+++   Research & Development Agreement between ArQule and Pharmacia Biotech AB dated March
              10, 1995, as amended.

   10.17+++   Option Agreement between ArQule and Pharmacia Biotech AB dated March 10, 1995, as
              amended.
</TABLE>

    

<PAGE>   76

<TABLE>
<CAPTION>
EXHIBIT NO.                                        DESCRIPTION                                       PAGE
- -----------                                        -----------                                       ----
   <C>        <S>                                                                                    <C>
   10.18*++   Adoption Agreement for Fidelity Management and Research Company (ArQule's 401(k)
              plan).
   10.19++    Research and License Agreement between ArQule and Roche Bioscience dated September
              13, 1996.
   11.1++     Statement re computation of unaudited pro forma net loss per share.
   23.1       Consent of Price Waterhouse LLP. Filed herewith.
   23.2++     Consent of Palmer & Dodge LLP. Included in the opinion filed as Exhibit 5.1.
   24.1++     Power of attorney. Included on the signature page hereto.
   27.1++     Financial Data Schedule.
</TABLE>

 
- ---------------
*  Indicates a management contract or compensatory plan.
 
+  Certain confidential material contained in the document has been omitted and
   filed separately, with the Securities and Exchange Commission pursuant to 
   Rule 406 of the Securities Act of 1933, as amended.
 
++ Previously filed.





<PAGE>   1
                                                                    Exhibit 5.1

                               PALMER & DODGE LLP
                               One Beacon Street
                                Boston, MA 02108



Telephone: (617) 573-0100                             Facsimile: (617) 227-4420


                                 October 16, 1996


ArQule, Inc.
200 Boston Avenue
Medford, Massachusetts 02155


     We are rendering this opinion in connection with the Registration Statement
on Form S-1 (the "Registration Statement") filed by ArQule, Inc. (the "Company")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, on or about the date hereof. The Registration Statement relates to up
to 2,875,000 shares of the Company's Common Stock, $0.01 par value (the
"Shares"). We understand that the Shares are to be offered and sold in the
manner described in the Registration Statement.

     We have acted as your counsel in connection with the preparation of the
Registration Statement. We are familiar with the proceedings of the Board of
Directors on August 14, 1996 and October 15, 1996 in connection with the 
authorization, issuance and sale of the Shares (the "Resolutions"). We have 
examined such other documents as we consider necessary to render this opinion.

     Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and, when issued and delivered by the Company against payment
therefor at
 the price to be determined pursuant to the Resolutions, will be
validly issued, fully paid and non-assessable.

     We hereby consent to the filing of this opinion as a part of the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus filed as part thereof.

                                   Very truly yours,

                                   /S/ Palmer & Dodge LLP





<PAGE>   1
]                                                                EXHIBIT 10.15


                  RESEARCH & DEVELOPMENT AND LICENSE AGREEMENT


         THIS AGREEMENT ("Agreement") is made and entered into effective as of
the 16th day of June, 1995 ("Effective Date"), by and between ABBOTT
LABORATORIES, an Illinois corporation having a principal place of business at
100 Abbott Park Road, Abbott Park, Illinois 60064 ("Abbott") and ARQULE, INC., a
Delaware corporation having a principal place of business at 200 Boston Avenue,
Suite 3600, Medford, Massachusetts 02155 ("ArQule").

                                    RECITALS


         WHEREAS, ArQule has expertise relating to the modification of
pharmaceutical compounds by use of combinatorial chemistry methods utilizing
rapid parallel synthesis;

         WHEREAS, Abbott has expertise in the discovery, development, marketing
and sale of pharmaceuticals and other health care products;

         WHEREAS, Abbott desires to have ArQule generate large numbers of
ArQule's own compounds as well as compounds derived from specifically targeted
parallel synthesis of Abbott provided compounds;

         WHEREAS, Abbott desires to perform screening of ArQule's compounds and
compounds derived by ArQule from Abbott provided compounds for possible further
research and development by Abbott;

         WHEREAS, as part of such research and
 development effort and contingent
upon ArQule performing research and development activities under a mutually
agreed upon research and development plan, Abbott shall provide certain funding
to ArQule for its research and development activities; and

         WHEREAS, if Abbott commercially develops any such compounds, Abbott
shall pay ArQule milestone payments on such compounds which achieve certain
commercial milestones as well as royalties on commercial sales of pharmaceutical
products containing such compounds, all on the terms and conditions stated
below;

         NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants contained herein, Abbott and ArQule hereby agree as follows:






<PAGE>   2
                                    ARTICLE 1

                                   DEFINITIONS


         For the purposes of this Agreement, the terms defined in this Article 1
shall have the respective meanings set forth below:

         1.1 "Abbott Compound" shall mean an Abbott Core Compound (as defined
below) or an Abbott Derivative Compound (as defined below).

         1.2 "Abbott Core Compound" shall mean a core chemical compound supplied
to ArQule by Abbott pursuant to Section 2.1.

         1.3 "Abbott Derivative Compound" shall mean a chemical compound
generated by ArQule for Abbott by use of chemical modification methods from an
Abbott Core Compound pursuant to Section 2.1.

         1.4 "Abbott Field" shall mean *

         1.5 "Active ArQule Array" shall mean an ArQule Array (as defined below)
that contains at least one (1) Active ArQule Compound (as defined below).

         1.6 "Active ArQule Compound" shall mean *

                   or such higher concentration level demonstrating significant
biological activity as the parties may mutually agree upon.

         1.7 "Affiliate" shall mean, with respect to a party, any other business
entity which directly or indirectly controls, is controlled by, or is under
common control with, such party. A business entity or party shall be regarded as
in control of another business entity if it owns, or directly or indirectly
controls, more than fifty percent (50%) of the voting stock or other ownership
interest of the other business entity. For purposes of this Agreement, Abbott
Affiliates shall also include the following entities: Abbott Laboratories
(India) Ltd. and Abbott Laboratories Nigeria Limited.

         1.8 "ArQule Array" shall mean a set of at least            *
ArQule Core Compounds (as defined below) provided by ArQule to Abbott for
screening pursuant to Section 5.1.

         1.9 "ArQule Compound" shall mean an ArQule Core Compound or an ArQule
Derivative Compound (as defined below).

         1.10 "ArQule Core Compound" shall mean a core chemical compound from an
ArQule Array supplied by ArQule to Abbott pursuant to Section 5.1.


                      * Confidential treatment has been
                        requested for marked portions  


                                      - 2 -


<PAGE>   3
         1.11 "ArQule Derivative Compound" shall mean a chemical compound
generated by ArQule for Abbott or by Abbott, its Affiliates or contractors by
use of chemical modification methods from an ArQule Core Compound.

         1.12 "ArQule Field" shall mean *

         1.13 "Array Screening Period" shall mean a period of three (3) Contract
Years (as defined below) commencing on the Effective Date.

         1.14 "Array Transfer Period" shall mean a period of two (2) Contract
Years commencing on the Effective Date.

         1.15 "Calendar Quarter" shall mean each of the three (3) month periods
beginning on January 1, April 1, July 1 and October 1 of each year.

         1.16 "Combination Product" shall mean a pharmaceutical product
containing a Product (as defined below) and at least one (1) other
therapeutically active ingredient.

         1.17 "Composition of Matter Patent" shall mean any national or European
Union patent(s) of either party or their Affiliates issued anywhere in the
Territory (as defined below) which claims an Abbott Derivative Compound or an
ArQule Compound, including any patent(s) issuing from any divisions,
continuations, continuations-in-part, reexaminations, or reissues thereof, and
any additions, renewals, and extensions of such patent(s).

         1.18 "Contract Quarter" shall mean the three (3) month period beginning
on the Effective Date and each subsequent three (3) month period during the
Research Term.

         1.19 "Contract Year" shall mean the twelve (12) month period beginning
on the Effective Date and each subsequent twelve (12) month period during the
term of this Agreement.

         1.20 "FDA" shall mean the United States Food and Drug Administration or
any successor entity thereto.

         1.21 "FTE" shall mean one (1) or more employees of a party who,
collectively, spend time and effort working on a specified project or task
equivalent to the time and effort of one (1 ) full-time employee of a party
working on such project or task.

         1.23 "Licensed Final Compound" shall mean a specific ArQule Compound
from a Licensed Compound Set that Abbott commercially develops, markets and/or
sells pursuant to Section 5.9.

         1.24 "Licensed Compound Set" shall mean a list of specific ArQule
Compounds licensed to Abbott by ArQule, in accordance with the procedures set
forth in Section 5.6, as well as all prodrugs, esters and salt forms of such
ArQule Compounds.

         1.25 "Licensed Set Core" shall have the meaning set forth in Section
5.6(a).


                      * Confidential treatment has been
                        requested for marked portions  

                                      - 3 -


<PAGE>   4
         1.26 "License Option Period" shall mean a period of ten (10) Contract
Years commencing on the Effective Date.

         1.27 "NDA" shall mean a New Drug Application filed with the FDA with
respect to a Product.

         1.28     "Net Sales" shall mean:

                  (a)      With respect to a Product sold alone, the gross
                           invoiced sales of such Product by Abbott, its
                           Affiliates and/or sublicensees to unrelated third
                           parties, less the following deductions:














                                                *














                           
                  (b)      With respect to a Combination Product, the gross
                           invoiced sales of such Combination Product in a
                           particular country by Abbott, its Affiliates and/or
                           sublicensees to unrelated third parties less the
                           deductions under (i) - (vi) above, multiplied by a
                           fraction (i) the numerator of which shall be the per
                           unit current wholesale selling price of the Product
                           contained in the Combination Product, as sold alone
                           in such country, and (ii) the denominator of which
                           shall be the sum of the per unit current wholesale
                           selling price in such country of each active
                           ingredient in such Combination Product (including the
                           Product) as sold alone as a pharmaceutical product.
                           If there is no established current wholesale selling
                           price of the Product contained in such Combination
                           Product or any other active ingredient of such
                           Combination Product in a particular country, then the
                           standard, fully-burdened manufacturing cost of the
                           Product and other active


                      * Confidential treatment has been
                        requested for marked portions  

                                      - 4 -


<PAGE>   5
                           ingredient(s) shall be used to determine the above
                           fraction, with such costs being determined in
                           accordance with United States generally accepted
                           accounting principles.

                  (c)      With respect to a Product that is sold in a Premium
                           Delivery System (as defined below), an amount
                           calculated by multiplying (i) the total number of
                           milligrams of the ArQule Compound or Abbott
                           Derivative Compound, as applicable, in such Product
                           sold in Premium Delivery Systems in a particular
                           country by Abbott, its Affiliates and/or sublicensees
                           to unrelated third parties, by (ii) the average
                           selling price of one (1 ) milligram of the ArQule
                           Compound or Abbott Derivative Compound, as
                           applicable, in such Product sold in such country by
                           Abbott, its Affiliates and/or sublicensees to
                           unrelated third parties in the same reporting period,
                           which Product is not sold in Premium Delivery
                           Systems. For purposes of the foregoing sentence,
                           "average selling price" is the total Net Sales of
                           such Product not sold in Premium Delivery Systems
                           calculated pursuant to subparagraph (a) above divided
                           by the aggregate number of milligrams of the ArQule
                           Compound or Abbott Derivative Compound, as
                           applicable, contained in all such Products to which
                           such Net Sales apply. If such Product is only sold in
                           Premium Delivery Systems during the applicable
                           reporting period, then the "Net Sales" of the Product
                           sold in Premium Delivery Systems shall be determined
                           by multiplying the "Net Sales" of the Premium
                           Delivery System containing such Product calculated
                           pursuant to subparagraph (a) above by a fraction (A)
                           the numerator of which shall be the standard,
                           fully-burdened manufacturing cost of the Product and
                           (B) the denominator of which shall be the standard,
                           fully-burdened manufacturing cost of all of the
                           ingredients and components of the Premium Delivery
                           System (including such Product). As used herein,
                           "Premium Delivery System" means any drug delivery
                           system product which comprises a drug or drugs along
                           with a device(s), equipment, instrumentation, or
                           other components (but not solely containers or
                           packaging) designed to accomplish or assist in the
                           non-oral administration of such drug(s) and thereby
                           enhance the value of such drug(s), including but not
                           limited to the Abbott ADD-Vantage(R)System.

         1.29 "Patent Rights" shall mean (a) all patent applications filed
anywhere in the Territory by either party or their Affiliates having claims
relating to a Product, Abbott Derivative Compound or ArQule Compound, or the
process of manufacture or use thereof, together with any patents issuing
therefrom (including but not limited to Composition of Matter Patents), and (b)
all divisions, continuations, continuations-in-part, reexaminations, reissues,
additions, renewals and extensions of such patent applications and patents.
Patent Rights owned by Abbott shall be referred to as "Abbott Patent Rights",
Patent Rights owned by ArQule shall be referred to as "ArQule Patent Rights",
and Patent Rights owned by ArQule and Abbott jointly shall be referred to as
"Joint Patent Rights", with ownership of Patent Rights to be determined in
accordance with United States patent laws and practice.



                                      - 5 -


<PAGE>   6
         1.30 "Phase III Studies" shall mean a program of clinical studies
approved by the FDA or other equivalent national or supranational regulatory
agencies outside of the United States which, if successfully completed to the
satisfaction of the FDA or equivalent agencies outside of the United States, is
intended to enable the sponsor of the studies to file an NDA and/or other
equivalent applications for Regulatory Approval (as defined below).

         1.31 "Product" shall mean any product containing an Abbott Derivative
Compound or an ArQule Compound.

         1.32 "R & D Committee" shall mean the Research and Development
Committee established by the parties pursuant to Article 3.

         1.33 "R & D Plan" shall mean the twelve (12) month rolling plan of
ArQule research and development activities to be developed by the R & D
Committee pursuant to Article 3.

         1.34 "R & D Program" shall mean the research and development program
funded by Abbott at ArQule as described in Article 3.

         1.35 "Regulatory Approval" shall mean all governmental approvals
required to market and sell a Product in any given country or multinational
region in the Territory (e.g., the European Union), including but not limited
to, product registrations, medical approvals, and price/marketing approvals.

         1.36 "Research Term" shall mean the two (2) year program of
collaborative research by Abbott and ArQule hereunder, which may be extended by
Abbott pursuant to Section 2.3 for up to three (3) additional successive one (1)
year periods.

         1.37 "Reserved Array(s)" shall mean one (1) or more Active ArQule
Array(s) for which Abbott exercises a Target Reservation (as defined below) in
accordance with the procedures set forth in Section 5.5.

         1.38 "Royalty Term" shall mean, with respect to each Product in each
country of the Territory where Abbott's obligation to pay royalties pursuant to
Section 6.3 is in effect, the period of time commencing with the first
commercial sale of such Product by Abbott, its Affiliates and/or sublicensees to
an unrelated third party in such country and continuing until Abbott's
obligation to pay royalties pursuant to Section 6.3 ceases in such country.

         1.39     "Target" shall have the meaning set forth in Section 5.5.

         1.40 "Target Reservation" shall mean an Abbott's designation of one (1)
or more Active ArQule Arrays as Reserved Arrays for a specified Target pursuant
to Section 5.5.

         1.41     "Territory" shall mean the entire world.

         1.42 "Valid Claim" shall mean a claim of an issued and unexpired
Composition of Matter Patent which neither has been held unenforceable or
invalid by a decision of a court or



                                      - 6 -


<PAGE>   7
governmental agency of competent jurisdiction, unappealable or unappeased within
the time allowed for appeal, nor has been admitted by the holder of the
Composition of Matter Patent to be invalid or unenforceable through reissue,
reexamination, disclaimer, abandonment or otherwise.

         Additional terms used in specific sections of this Agreement shall be
defined in such sections.

                                    ARTICLE 2

                                  R & D PROGRAM


         2.1 ArQule Research and Development Activities. Under the direction of
the R & D Committee, during the Research Term ArQule shall synthesize Abbott
Derivative Compounds from Abbott Core Compounds and/or other Abbott Derivative
Compounds supplied to ArQule by Abbott. ArQule shall deliver such Abbott
Derivative Compounds to Abbott in a format suitable for use by Abbott in
accordance with the R & D Plan, together with structure and purity information
and such other information and documentation as Abbott may reasonably request
concerning the structural changes ArQule has made to (a) Abbott Core Compounds
to synthesize Abbott Derivative Compounds and/or (b) Abbott Derivative Compounds
to synthesize further Abbott Derivative Compounds. Except as otherwise agreed by
the parties or the R & D Committee, ArQule shall supply Abbott with all
quantities of Abbott Derivative Compounds synthesized by ArQule. ArQule shall
supply Abbott with mutually agreed upon quantities of each Abbott Derivative
Compound in accordance with the R & D Plan, as determined by the R & D
Committee, provided that Abbott has supplied ArQule with the necessary
quantities of Abbott Core Compounds in accordance with the R & D Plan. ArQule
shall conduct the research and development activities described in this Section
in a good scientific manner and in compliance with all applicable federal, state
and local laws and regulations.

         2.2 ArQule FTE Requirements. Unless otherwise agreed in writing by the
R & D Committee or the parties, within thirty (30) days after the Effective Date
and thereafter for the remainder of the Research Term, ArQule shall maintain a
minimum of    *    FTE scientists to perform research and development activities
for Abbott Derivative Compounds and such other activities as the R & D Committee
may designate in accordance with the R & D Plan. ArQule employees performing
such activities shall be competent, reasonably qualified and adequately trained
for their respective duties, and ArQule shall provide Abbott with such
information and documentation as Abbott may reasonably request concerning the
qualifications and job performance of such ArQule employees, as well as the time
they spend performing such activities. The number of FTEs may be increased or
decreased by mutual written agreement of the parties upon such terms as may be
mutually agreed upon.

         2.3 Research Term. The Research Term shall commence on the Effective
Date and continue for a period of two (2) Contract Years thereafter. In
accordance with Section 2.4, Abbott may, at its option, extend the Research Term
for up to three (3) additional Contract Years, exercisable one (1) Contract Year
at a time, upon written notice to ArQule at least six (6) months prior to the
then scheduled expiration of the Research Term.


                      * Confidential treatment has been
                        requested for marked portions  

                                      - 7 -


<PAGE>   8
         2.4 Research Term Payments. In consideration of the research and
development activities to be performed by ArQule pursuant to Section 2.1, Abbott
shall make the following payments to ArQule:

                  (a)      A technology access fee of      *      Dollars
                                *       for the first two (2) Contract Years,
                           payable within ten (10) business days of the
                           Effective Date;

                  (b)      Additional technology access fees of      *
                           Dollars     *       per Contract Year for each
                           extension of the Research Term by Abbott pursuant to
                           Section 2.3, payable on the second, third and fourth
                           anniversaries of the Effective Date, as applicable;
                           and

                  (c)      Research and development funding of        
                           *                Dollars      *       per Contract
                           Year, payable in semi-annual installments of 
                                 *          Dollars     *      at the beginning
                           of the first and third Contract Quarters of each
                           Contract Year, which funding is calculated at the
                           rate of          *           Dollars     *      per
                           ArQule FTE per Contract Year. ArQule shall use such
                           funding to support its research and development
                           activities hereunder.


                                    ARTICLE 3

                                 R & D COMMITTEE


         3.1 Establishment. The parties hereby establish an R & D Committee to
monitor the ArQule research and development activities conducted under this
Agreement.

         3.2 R & D Plan. The R & D Committee shall develop an initial R & D Plan
covering the first twelve (12) months of the Research Term within thirty (30)
days of the Effective Date and, thereafter for the remainder of the Research
Term, shall update the R & D Plan to provide for a rolling twelve (12) month R &
D Plan at least once per Contract Quarter. The R & D Plan shall contain
performance goals for ArQule's research and development activities under Section
2.1, including but not limited to minimum numbers of Abbott Derivative Compounds
to be developed from Abbott Core Compounds and supplied to Abbott, a timetable
and budget for key research and development activities, and such other items as
may be agreed upon by the R & D Committee. ArQule shall use commercially
reasonable efforts to achieve the performance goals specified in the R & D Plan
 .

         3.3 Additional Responsibilities. In addition to developing and updating
the R & D Plan pursuant to Section 3.2, the R & D Committee shall also have the
following responsibilities during the Research Term: (a) monitoring ArQule's
research and development activities in accordance with the R & D Plan, (b)
recommending changes in the number of FTEs and Abbott's level of research and
development funding, if necessary or appropriate to accomplish the objectives of
the R & D Plan, provided that any such changes shall require the prior written


                      * Confidential treatment has been
                        requested for marked portions  

                                      - 8 -


<PAGE>   9
approval of both parties, and (c) reporting the status of ArQule's research and
development activities hereunder to both parties at least once per Calendar
Quarter.

         3.4 Membership. The R & D Committee shall consist of six (6) members,
with three (3) members being appointed by each party. The initial R & D
Committee members are:

                  Abbott Members                            ArQule Members
                  -----------------                         --------------------

                  1. Alan Rosenthal                         1. Joseph Hogan, Jr.
                  2. Jake Plattner                          2. David Coffen
                  3. Thomas Sowin                           3. Robert Zambias


Each party may remove and replace its R & D Committee members at any time,
without cause, upon written notice to the other party. An alternate member
designated by a party in writing shall be entitled to vote only in the absence
of a permanent member designated by such party. All references to "members" in
this Agreement refer to the permanent members of the R & D Committee and any
alternate member when acting in the place of a permanent member, unless the
context requires otherwise.

         3.5 Actions. Any action or decision by the R & D Committee must be
approved by a majority of the members present at a duly convened meeting of the
R & D Committee, including at least one (1) member appointed by each party, or,
pursuant to Section 3.8, approved by written consent of a majority of the
members, including at least one (1) member appointed by each party. If the R & D
Committee cannot agree on a particular matter within the scope of its
responsibilities, the matter shall be submitted for dispute resolution in
accordance with Article 12.

         3.6 Meetings. The R & D Committee shall meet within thirty (30) days
after the Effective Date and, thereafter for the remainder of the Research Term,
according to a schedule of regular meetings established by the members of the R
& D Committee. In no event, however, shall the R & D Committee meet less
frequently than once every Contract Quarter during the Research Term. Additional
meetings of the R & D Committee may be called by any two (2) members, one (1) of
which shall have been appointed by each party. Notice of the date, time and
place of each regular or additional meeting and a proposed agenda for the
meeting shall be provided to the members, when practicable, at least fifteen
(15) days prior to the scheduled date of the meeting (unless notice is waived in
writing by a member or party).

         3.7 Locations of Meetings. Except as otherwise provided in Section 3.8
or as otherwise mutually agreed by the parties, the regular and additional
meetings of the R & D Committee shall alternate between the principal business
locations of each party.

         3.8 Conduct of Meetings. Any regular or additional meeting of the R & D
Committee may be conducted in person or by telephone conference. The R & D
Committee may act without a meeting if prior to such action a written consent to
the action is signed by a majority of the members, including at least one (1)
member appointed by each party. Minutes reflecting actions taken at meetings
shall be maintained at a mutually agreed upon location, together with any other



                                      - 9 -


<PAGE>   10
books and records of the R & D Committee, and such minutes shall be distributed
to the parties upon request.

         3.9 Cooperation of Parties. Each party shall furnish to the R & D
Committee all information and documentation that are reasonably required for
purposes of this Agreement, which disclosures shall be subject to the
confidentiality obligations specified in Section 8.1. In addition, it is
anticipated that the parties will engage in frequent informal communications
regarding the research and development activities conducted under this
Agreement.

         3.10 Visits to ArQule Facilities. R & D Committee members shall have
the right to visit the facilities where ArQule's research and development
activities hereunder are being conducted at any time during ArQule regular
business hours upon reasonable prior notice. Other Abbott representatives may
also visit such facilities upon reasonable prior notice with ArQule's prior
written consent, which consent shall not be unreasonably withheld. Abbott shall
bear its own expenses relating to visits to such facilities by its
representatives.

                                    ARTICLE 4

                ABBOTT COMPOUND OWNERSHIP AND FURTHER DEVELOPMENT


         4.1 Ownership of Abbott Core Compounds. All Abbott Core Compounds
supplied to ArQule hereunder shall be the sole and exclusive property of Abbott,
except to the extent of any rights held by third parties who have licensed or
supplied Abbott Core Compounds to Abbott. ArQule shall not acquire any licenses
or intellectual property rights in or relating to Abbott Core Compounds
hereunder, and ArQule, its Affiliates, employees and agents shall execute such
documents and take such other actions as Abbott deems appropriate to establish
or protect Abbott's proprietary rights in Abbott Core Compounds. With respect to
any Abbott Core Compounds that are not proprietary to Abbott, ArQule's
acceptance of such Abbott Core Compounds and synthesis of Abbott Derivative
Compounds from such Abbott Core Compounds shall not preclude ArQule from: (a)
entering into an agreement with a third party with respect to research,
development and commercialization of such Abbott Core Compounds if they are
lawfully in the possession of such third party or (b) having an internal ArQule
program (including programs with academic collaborators) concerning the
research, development and commercialization of such Abbott Core Compounds,
provided that ArQule does not use any Abbott Confidential Information (as
defined in Section 8.1 ) in connection with such research, development and
commercialization pursuant to (a) or (b) above.

         4.2 Ownership of Abbott Derivative Compounds. All Abbott Derivative
Compounds synthesized by ArQule, its Affiliates or contractors hereunder shall
be the sole and exclusive property of Abbott, except to the extent of any rights
held by third parties who have licensed or supplied Abbott Core Compounds to
Abbott. Ownership of intellectual property rights in or relating to Abbott
Derivative Compounds shall be determined in accordance with Article 10. ArQule
hereby grants Abbott a worldwide, royalty-free, irrevocable, exclusive license
(with the right to sublicense) under any ArQule Patent Rights and Joint Patent
Rights in or relating to any Abbott Derivative Compounds to make, have made,
use, import, offer to sell, and sell any product that contains an Abbott
Derivative Compound.



                                     - 10 -


<PAGE>   11
         4.3 Further Research and Development Activities. Abbott may perform
such further research and development activities on Abbott Compounds as Abbott
deems appropriate in its sole discretion. Except for payments of royalties and
milestone payments on Abbott Derivative Compounds pursuant to Article 6, Abbott
shall have no obligations to ArQule with respect to Abbott Compounds hereunder.

                                    ARTICLE 5

                ARQULE COMPOUND RESEARCH AND DEVELOPMENT LICENSES

         5.1 Delivery of ArQule Arrays. During the Array Transfer Period, ArQule
shall deliver to Abbott    *    ArQule Arrays per Contract Year. ArQule may,
at its option, also deliver to Abbott additional ArQule Arrays. ArQule shall
select the ArQule Arrays to be delivered to Abbott hereunder and the ArQule Cole
Compounds within each such ArQule Array, provided that each ArQule Core Compound
shall appear only once in any ArQule Array delivered to Abbott hereunder. Except
as otherwise agreed by Abbott, ArQule shall supply Abbott with a minimum
quantity of      *        of each ArQule Compound in such ArQule Arrays or
*   percent ( * ) of the material synthesized by ArQule of each ArQule Compound
in such ArQule Arrays, whichever is less. ArQule acknowledges that it is its
intention to synthesize approximately           *            of each ArQule Core
Compound, whenever ArQule determines that synthesis of such quantities of ArQule
Core Compounds is chemically feasible and commercially reasonable. ArQule shall
conduct the research and development activities described in this Section in a
good scientific manner and in compliance with all applicable federal, state and
local laws and regulations.

         5.2 Screening of ArQule Compounds. During the Array Screening Period,
Abbott shall have the right, either directly or through Abbott's Affiliates or
third party contractors selected by Abbott, to perform such testing and
analytical work as Abbott deems appropriate on ArQule Core Compounds received
hereunder, provided that Abbott shall have the right to perform composition and
structural analysis only after Abbott's receipt of confirmed chemical
composition and structure and purity information pursuant to Section 5.3, and
further provided that Abbott shall not perform significant derivitization work
on ArQule Core Compounds until Abbott makes a Target Reservation for the ArQule
Array containing such ArQule Core Compounds pursuant to Section 5.5. The parties
agree that "significant derivitization work" shall mean any derivitization work
beyond that which is reasonably necessary to allow Abbott to determine whether
an ArQule Core Compound is sufficiently amenable to chemical modification to
warrant the exercise of a Target Reservation by Abbott.

         5.3 Identification of ArQule Compounds. Upon Abbott's written request
at any time during the Array Screening Period, ArQule shall provide Abbott with
the confirmed chemical composition and structure and purity information for any
Active ArQule Compound in an ArQule Array upon presentation by Abbott of
reasonably sufficient documentation of the biological activity for which Abbott
is testing. Prior to revealing such documentation to ArQule, Abbott shall remove
any reference to the type of biological activity detected and the assay used,
and Abbott shall not identify in any other manner such biological activity or
assay except in accordance with Section 5.4. Upon Abbott's written request,
ArQule shall also provide Abbott with the confirmed chemical composition and
structure and purity information for additional




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<PAGE>   12
ArQule Compounds in the ArQule Array that contains the Active ArQule Compound,
but only if such ArQule Compounds exhibit biological activity less than or equal
to the Active ArQule Compound.

         5.4      Additional Quantities of ArQule Compounds.

         (a)      ArQule Obligations. During the Array Transfer Period, ArQule
                  shall provide Abbott with reasonable additional quantities of
                  Active ArQule Compounds for which Abbott has received
                  confirmed chemical composition and structure and purity
                  information under Section 5.3. Such Active ArQule Compounds
                  shall be synthesized by ArQule in the course of the R & D
                  Program. Abbott may elect to obtain reasonable additional
                  quantities of Active ArQule Compounds from ArQule for up to
                  twelve (12) months after the expiration of the Array Transfer
                  Period upon written notice to ArQule which is received at
                  least ninety (90) days prior to such expiration. In this
                  event, Abbott shall pay ArQule the amount of       *
                          Dollars     *      per ArQule FTE per year, up to a
                  maximum of     *       FTEs in four (4) equal quarterly
                  installments, with the first installment due upon the
                  expiration of the Array Transfer Period and each subsequent
                  installment due every three (3) months thereafter. ArQule
                  shall provide the Abbott-funded FTE scientists to supply
                  Abbott with reasonable quantities of Active ArQule Compounds,
                  as requested by Abbott. Abbott may discontinue this resupply
                  program upon ninety (90) days prior written notice to ArQule;
                  provided, however, that any payments previously received by
                  ArQule under this Section shall be nonrefundable.

         (b)      Suspension of ArQule Obligations. Notwithstanding anything to
                  the contrary set forth herein, if ArQule believes Abbott has
                  failed to pay ArQule all or any portion of research and
                  development funding payments due under Section 2.4 or FTE
                  funding payments due under Section 5.4(a), ArQule may, at its
                  option, provide Abbott with ten (10) business days prior
                  written notice stating the amount ArQule believes Abbott owes,
                  which amount shall be calculated using the amounts and per FTE
                  rates specified in Sections 2.4 or 5.4(a), as applicable
                  ("Disputed Amount"), and (ii) ArQule's intention to suspend
                  performance of its obligations pursuant to Section 5.4(a)
                  pending receipt of the Disputed Amount. If Abbott pays ArQule
                  the Disputed Amount within the ten (10) business day notice
                  period, ArQule shall not suspend such performance, provided
                  that such payment by Abbott shall not preclude Abbott from
                  initiating dispute resolution proceedings pursuant to Article
                  12 to seek a refund of any portion of the Disputed Amount that
                  Abbott believes was not owed to ArQule hereunder. If Abbott
                  does not pay ArQule the Disputed Amount within the ten (10)
                  business day notice period, ArQule may suspend such
                  performance pending receipt of the Disputed Amount.

         5.5      Target Reservations and Reserved Arrays.

         (a)      Determination of a Target. In the event that Abbott desires to
                  make a Target Reservation for one (1) or more Active Arrays,
                  Abbott shall provide written




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<PAGE>   13
                  notice to ArQule of the Active Array(s) of interest, the
                  identity of the Active ArQule Compound(s) therein, the type of
                  biological activity detected, and the assay in which the
                  activity was detected.

                  (i) Specific Target. If the type of activity and the detection
                  assay reveal a probable interaction of the Active ArQule
                  Compound(s) with a specific, identified biomolecule (such as a
                  protein, polynucleotide, carbohydrate, lipid, or any
                  combination thereof), then the term "Target" shall mean that
                  specific biomolecule and any related biomolecules that (A)
                  exhibit substantial structural homology with the identified
                  biomolecule, as measured by the degree of similarity in the
                  primary structure (i.e., amino acid sequence, nucleotide
                  sequence, monosaccharide linkages) and secondary structure
                  (i.e., three-dimensional structure) and (B) perform a
                  substantially similar function as the identified biomolecule.

                  (ii) General Target. In all other cases, the term "Target"
                  shall mean the narrowest definable element of an observed
                  biological activity in a non-specific assay (i.e., an in vitro
                  assay based on use of membranes, whole cells, or specific
                  animal tissues), as customarily used for lead screening
                  purposes by Abbott, subject to further reduction in scope
                  based on the extent to which ArQule would be unreasonably
                  precluded from (A) granting rights to third parties to use the
                  Active Array(s) with specific, identified biomolecules and (B)
                  using the Active Array(s) in an internal ArQule program
                  (including programs with academic collaborators) with
                  specific, identified biomolecules. Based on the criteria set
                  forth in (i) and (ii) above, the parties shall determine in
                  good faith the exact scope of the Target by mutual written
                  agreement, subject to modification from time to time during
                  the License Option Period in the same manner. With respect to
                  Specific Targets, the parties shall make such modifications as
                  may be reasonably necessary to provide Abbott with
                  substantially equivalent biological Target coverage. During
                  the Research Term, the R & D Committee shal; determine the
                  scope of the Target. After the expiration or termination of
                  the Research Term, the parties shall each designate one (1) or
                  more authorized representatives to meet at least once per
                  Contract Quarter to review and update the scope(s) of the
                  Target(s) .

         (b)      Designation of Reserved Arrays. Subject to availability, as
                  described below, Abbott may make Target Reservations by
                  designating any Active Arrays as Reserved Arrays for specified
                  Targets up to a maximum of six (6) Target Reservations at any
                  time during the Array Screening Period. All such Target
                  Reservations shall expire upon expiration of the License
                  Option Period, unless earlier terminated as provided in this
                  Agreement. An Active Array shall be available for designation
                  as a Reserved Array for a Target unless ArQule can reasonably
                  demonstrate to Abbott that ArQule has previously committed the
                  Active Array to (i) a bona fide, documented external program
                  on the same Target or (ii) a bona fide, documented internal
                  ArQule program (including programs with academic
                  collaborators) on the same Target. During the Array Screening
                  Period, Abbott may, upon ten (10) days prior written notice to
                  ArQule, relinquish its rights in Reserved Arrays for up to
                  four (4) Target Reservations, in exchange





                                     - 13 -


<PAGE>   14
                  for the right to designate Reserved Arrays with respect to one
                  (1) substituted Target Reservation for each relinquished
                  Target Reservation. In such event, Abbott shall grant ArQule a
                  royalty-free, world-wide, irrevocable, exclusive license (with
                  the right to sublicense) under all then-existing and
                  subsequently created Abbott Patent Rights claiming ArQule
                  Compounds derived from ArQule Core Compounds in the
                  relinquished Reserved Arrays to make, have made, use, import,
                  sell and offer to sell such ArQule Compounds.

         (c)      Effect of Target Reservation. For as long as each Target
                  Reservation is in effect, Abbott shall have the exclusive
                  right to derivatize ArQule Derivative Compounds from Active
                  ArQule Compounds in Reserved Arrays and to conduct such
                  synthesis, testing and analytical work as Abbott deems
                  appropriate relating to such ArQule Derivative Compounds for
                  use with the Target, including but not limited to composition
                  and structural analysis. Such exclusive right shall be in
                  effect from the date Abbott exercises each Target Reservation
                  until the end of the License Option Period, but only so long
                  as the Target Reservation remains in effect. Abbott may elect
                  to conduct synthesis, testing and analytical work relating to
                  ArQule Derivative Compounds itself or to have such work
                  conducted by Abbott Affiliates or contractors or, during the
                  Array Transfer Period, by ArQule pursuant to the R & D
                  Program.

         (d)      Maintenance of Target Reservations. For each Target
                  Reservation, Abbott shall maintain an active development
                  program for at least one (1) Active ArQule Compound in any
                  Reserved Array for the relevant Target. Abbott shall have
                  maintained such an active program if Abbott commits to the
                  program at least Three Million Dollars ($3,000,000) FTE 
                  synthetic chemists at either Abbott or ArQule.

         (e)      Conflicting Target Reservations. If a third party or ArQule
                  itself, under a bona fide, documented internal ArQule program
                  (which may or may not involve an academic collaborator)
                  originated without use of or reference to Abbott Confidential
                  Information, desires to reserve a Reserved Array subject to an
                  Abbott General Target Reservation for a third party or ArQule
                  Specific Target Reservation or more narrowly defined General
                  Target Reservation and the requested third party or ArQule
                  Target Reservation, in ArQule's determination, actually or
                  potentially conflicts with Abbott's General Target
                  Reservation, then ArQule shall provide Abbott with written
                  notice of such actual or potential conflict within thirty (30)
                  days of ArQule's discovery thereof.

                  (i) ArQule shall include in such notice the proposed Specific
                  Target or narrower General Target definition desired to be
                  reserved by such third party (if ArQule is legally permitted
                  to make such disclosure) or ArQule. Within ten (10) business
                  days of Abbott's receipt of such notice containing the
                  proposed Specific Target or narrower General Target
                  definition, Abbott shall, at its option: (A) accept the
                  proposed third party or ArQule Target Reservation as Abbott's
                  new Target Reservation and release the remainder of Abbott's
                  original General Target Reservation; (B) retain Abbott's
                  original General Target Reservation excluding the proposed
                  third party or ArQule Target Reservation; (C) retain Abbott's





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<PAGE>   15
                  original General Target Reservation on a semi-exclusive basis
                  with the third party or ArQule with respect to the portion of
                  Abbott's original General Target Reservation that conflicts
                  with the proposed third party or ArQule Target Reservation and
                  on an exclusive basis for the remainder of Abbott's original
                  General Target Reservation; or (D) negotiate in good faith to
                  redefine Abbott's General Target Reservation so as to resolve
                  the area of conflict, provided that if the parties are unable
                  to agree on a redefined Abbott General Target Reservation
                  within thirty (30) days, the matter shall be resolved by
                  Scientific Dispute Resolution ("SDR") proceedings as set forth
                  in Exhibit B. In any SDR proceedings pursuant to this Section
                  5.5(e)(i), if the neutrals in such SDR proceedings determine
                  that an actual conflict exists between Abbott's original
                  General Target Reservation and the proposed third party or
                  ArQule Target Reservation, then Abbott shall at a minimum be
                  allowed to retain semi-exclusive rights to the portion of its
                  original General Target Reservation that conflicts with the
                  proposed third party or ArQule Target Reservation .

                  (ii) If ArQule is not legally permitted to disclose the
                  proposed Target Reservation definition desired to be reserved
                  by a third party, ArQule shall arrange for such dispute to be
                  resolved by SDR proceedings as set forth in Exhibit B. In any
                  SDR proceedings pursuant to this Section 5.5(e)(ii), if the
                  neutrals in such SDR proceedings determine that an actual
                  conflict exists between Abbott's original General Target
                  Reservation and the proposed third party Target Reservation,
                  then Abbott shall at a minimum be allowed to retain
                  semi-exclusive rights to the portion of its original General
                  Target Reservation that conflicts with the proposed third
                  party Target Reservation.

         5.6      License Rights.

                  (a)      Exercise of Option. Subject to availability, as
                           described below, Abbott shall have the option to
                           license a total of     *      Licensed Compound Sets
                           under the terms of this Agreement. Abbott may
                           exercise such license options upon written notice to
                           ArQule at any time within the License Option Period,
                           whereupon the parties shall determine the compounds
                           comprising the Licensed Compound Set, in accordance
                           with the following procedures:

                                    (i) Abbott shall identify to ArQule a single
                                    ArQule Compound that Abbott has designated a
                                    "PPCC posttoxicity" compound under Abbott's
                                    then standard internal procedures ("Licensed
                                    Set Core"). The Licensed Set Core shall be
                                    identical to or derived from an Active
                                    ArQule Compound in a Reserved Array. The
                                    Licensed Set Core shall be included in the
                                    Licensed Compound Set.

                                    (ii) The other ArQule Compounds comprising
                                    the Licensed Compound Set shall satisfy both
                                    of the following criteria:





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<PAGE>   16
                  (A)      The ArQule Compound shall exhibit at least    *
                           percent  *   homology with the Licensed Set Core (as
                           measured by a widely accepted and used software
                           program, such as Daylight).

                  (B)      The ArQule Compound shall exhibit biological activity
                           against the Target when the ArQule Compound is
                           present at a concentration of      *      or less in
                           the relevant assay, or such higher concentration
                           level demonstrating significant biological activity
                           against the Target as the parties may mutually agree
                           upon.

                  (iii) The ArQule Compound shall be available for inclusion in
                  the Licensed Compound Set unless ArQule can reasonably
                  demonstrate to Abbott that ArQule has previously committed the
                  ArQule Compound to (A) a bona fide, documented external
                  program involving the same ArQule Compound or (B) a bona fide,
                  documented, internal program (including programs with academic
                  collaborators) involving the same ArQule Compound.

                  (b) License Grant. ArQule hereby grants Abbott a worldwide,
                  royalty-bearing license (with the right to sublicense) under
                  ArQule Patent Rights to make, have made, use, import, offer to
                  sell, and sell in the Abbott Field any Products that
                  incorporate any ArQule Compound in any of the Licensed
                  Compound Sets. Such license grant shall be exclusive to the
                  extent that ArQule may legally grant an exclusive license to
                  Abbott; otherwise, ArQule shall grant Abbott a license with
                  the greatest degree of exclusivity that ArQule may legally
                  grant.

                  (c) Diligence Requirements. Abbott shall maintain an active
                  clinical development program on at least one (1) ArQule
                  Compound in each Licensed Compound Set. Abbott shall have
                  maintained such an active program if Abbott expends at least
                  Three Million Dollars ($3,000,000) per year in direct costs
                  (including, but not limited to, costs attributable to external
                  services or material contracts) relating to clinical
                  development of one (1 ) or more ArQule Compounds within the
                  Licensed Compound Set during the period commencing on the date
                  upon which the Licensed Compound Set is determined and ending
                  on the date upon which Abbott makes a milestone payment to
                  ArQule pursuant to Section 6.1 (a) for the initiation of Phase
                  III Studies for an ArQule Compound within the Licensed
                  Compound Set; provided, however, that this obligation shall be
                  suspended for a period not to exceed twelve (12) months during
                  any period that clinical trials are delayed or suspended
                  because of an unexpected negative result occurring for reasons
                  beyond the control of Abbott. If clinical trials are delayed
                  or suspended because of such unexpected negative result for a
                  period in excess of twelve (12) months, the parties shall in
                  good faith negotiate appropriate modifications to Abbott's due
                  diligence obligations under this Section.




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<PAGE>   17
         5.7      License from Abbott. Abbott hereby grants ArQule:

                  (a) a worldwide, royalty-free, non-exclusive license (with the
                  right to sublicense) under any Composition of Matter Patents
                  relating to ArQule Compounds that are included within the
                  Abbott Patent Rights to make, have made, use, import, offer to
                  sell, and sell any ArQule Compounds in the ArQule Field, and
                  (b) a worldwide, royalty-free, exclusive license (with the of
                  right to sublicense) under any Abbott Patent Rights relating
                  to ArQule Compounds that are not Composition of Matter Patents
                  to make, have made, use, import, offer to sell, and sell any
                  ArQule Compounds in the ArQule Field, excluding in each case
                  Abbott Patent Rights relating to ArQule Compounds in any
                  Licensed Compound Set that are under active clinical
                  development by Abbott.

         5.8 Synthetic Support. During the Array Screening Period, at no cost to
Abbott, ArQule shall provide Abbott with reasonable technical support relating
to the synthesis of ArQule Derivative Compounds. Such technical support shall be
in the form of consultation and advice only, and shall not include any on-site
instruction or the performance of any chemical synthesis.

         5.9 Further Development and Regulatory Approvals. Abbott shall have the
sole discretion to determine which Licensed Final Compounds and Products, if
any, to develop or market, or to continue to develop or market, as well as those
Licensed Final Compounds and Products for which Regulatory Approvals may be
sought, and when, where, how and on what terms and conditions to market such
Licensed Final Compounds and Products in the Territory. All Regulatory Approvals
for Licensed Final Compounds and Products shall be owned solely by Abbott.

         5.10 Agreements With Third Parties. The parties acknowledge and agree
that ArQule may make ArQule Arrays available to third parties in addition to
Abbott for screening and analytical work and possible further research and
development work. If ArQule enters into an agreement with any third party and
the general terms of such agreement relating to ArQule Arrays are substantially
similar to the terms of this Agreement relating to ArQule Arrays, except that
the financial terms of such third party agreement relating to ArQule Arrays,
considered in the aggregate, are more favorable than the financial terms
relating to ArQule Arrays under this Agreement, then Abbott may, at its option,
elect to substitute the financial terms of such third party agreement relating
to ArQule Arrays for the financial terms of this Agreement relating to ArQule
Arrays in their entirety.

         5.11 Other ArQule Compounds. ArQule acknowledges and agrees that Abbott
shall have the right to commercially develop, market and sell ArQule Derivative
Compounds synthesized by Abbott that are (a) not included in any Licensed
Compound Set and (b) not covered by any ArQule Patent Rights, subject to
Abbott's obligation to pay royalties and milestone payments to ArQule pursuant
to Article 6. Abbott acknowledges and agrees that ArQule makes no warranties
with respect to such ArQule Derivative Compounds.




                                     - 17 -


<PAGE>   18
                                    ARTICLE 6

                         MILESTONE AND ROYALTY PAYMENTS


         6.1 Milestone Payments. In consideration of ArQule's entering into this
Agreement and the rights and licenses granted by ArQule to Abbott hereunder,
Abbott shall pay ArQule the following milestone payments with respect to each
Abbott Derivative Compound and ArQule Compound commercially developed by Abbott
hereunder:

(a)           *       Dollars     *      , payable within thirty (30) days after
                                  *                   with respect to each
         Abbott Derivative Compound and ArQule Compound anywhere in the
         Territory;

(b)           *       Dollars     *      , payable within thirty (30) days after
         FDA acceptance of the initial NDA for each Abbott Derivative Compound
         and ArQule Compound filed by Abbott;

(c)           *        Dollars    *        , payable within thirty, (30) days
         after 



                                      *



(d)           *      Dollars     *      , payable within thirty (30) days after
         

                                      *                                  and


(e)           *     Dollars      *     , payable within thirty (30) days after
         

                                      *


         6.2 No Multiple Milestone Payments. If Abbott determines, in its
business judgment, to commercially develop and/or seek Regulatory Approval of a
different Abbott Derivative Compound or a different ArQule Compound in
substitution of an Abbott Derivative Compound or ArQule Compound for which
Abbott has paid one (1) or more milestone payments pursuant to Section 6.1, then
Abbott shall not be required to pay the same milestone payment(s) for the
substituted Abbott Derivative Compound or ArQule Compound, as applicable (e.g.,
if Abbott has paid the     *      milestone payment referenced in Section 6.1
(a) after                *               with respect to Compound A and then
Abbott subsequently substitutes Compound B for Compound A, Abbott shall have no
obligation to pay a second    *     milestone payment for                 * 
        with respect to Compound B. However, Abbott would still be obligated to
make the milestone payments referenced in Section 6.1 (b)-(e) for Compound B, if
applicable).


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         6.3 Royalty Rates and Payments. In further consideration of the rights
and licenses granted to Abbott hereunder, Abbott shall pay ArQule royalties on
Net Sales at the following royalty rates:

         (a) For Products for which a Valid Claim is in effect, for as long as a
Valid Claim is in effect on a country-by-country basis, Abbott shall pay
royalties as follows:

          (i)     For Products containing Abbott Derivative Z Compounds (but not
                  containing ArQule Compounds),        *         percent
                       *     of Net Sales during each calendar year; and


         (ii)     For Products containing ArQule Compounds (or both ArQule
                  Compounds and Abbott Derivative Compounds),  *   percent  *
                  of Net Sales during each calendar year.

         (b) For Products other than Products referenced in Section 6.3(a) which
contain ArQule Compounds as a therapeutically active ingredient and for which no
Valid Claim held by ArQule is in effect, Abbott shall pay ArQule royalties at
the rate of   *     percent  *    of Net Sales during each calendar year for a
period of ten (10) years from the date of the first commercial sale of each such
Product in the United States, or any European Union member country, or Japan;
provided, however, that Abbott shall have no obligation to pay royalties or
milestone payments pursuant to this Article 6 if the ArQule Compound in question
is an ArQule Derivative Compound that was first actually synthesized after the
seventh anniversary of the Effective Date.

         6.4 Lump Sum Royalty Payment. In addition to royalty payments pursuant
to Section 6.3, with respect to any Products containing an ArQule Compound as a
therapeutically active ingredient, Abbott shall pay ArQule a lump sum royalty
payment of        *           Dollars      *        , payable within sixty (60)
days after the end of the first calendar year during the Royalty Term in which
Net Sales of any such Product are greater than      *      Dollars
       *          This lump sum royalty payment shall be payable only once per
Product during the term of this Agreement (i.e., no such payments shall be due
during any subsequent calendar years in which Net Sales of the same Product are
greater than       *         

         6.5 Certain Compounds Previously in Abbott's Possession.
Notwithstanding anything to the contrary set forth herein, Abbott shall have no
obligation to pay ArQule royalties or milestone payments pursuant to this
Article 6 with respect to any ArQule Core Compounds or Abbott Derivative
Compounds that were in Abbott's possession (either by independent development or
acquisition from a third party) prior to receipt thereof from ArQule, as
evidenced by competent written records that Abbott presents to ArQule within
sixty (60) days after Abbott's receipt of the chemical composition and structure
of such ArQule Core Compounds or Abbott Derivative Compounds from ArQule.

         6.6 Royalty Reports and Payments. Commencing with the first Calendar
Quarter in which Abbott, its Affiliates or sublicensees make the first
commercial sale of any Product in the Territory, Abbott shall provide ArQule
with a written report of Net Sales for each Product on a Product-by-Product,
country-by-country basis within forty-five (45) days after the last day of



                      *  confidential treatment has been
                         requested for marked portions

                                     - 19 -


<PAGE>   20
March, June, September and December for royalties accruing on Net Sales in the
United States during the three (3) preceding calendar months and within
seventy-five (75) days after the last day of February, May, August and November
for royalties accruing on Net Sales in the Territory outside of the United
States during the three (3) preceding calendar months. Concurrently with the
submission of each such written report, Abbott shall pay or cause to be paid to
ArQule the total amount of royalties shown to the due thereon.

         6.7 Currency. Abbott shall make all milestone and royalty payments to
ArQule pursuant to this Article 6 in U.S. Dollars. Royalty payments earned shall
be first determined by Abbott in the currency of the country where the Net Sales
were made and then converted by Abbott directly to its equivalent in U.S.
Dollars. The rates of exchange for converting the currencies involved to U.S.
Dollars as quoted by the Statistical Market Letter published by International
Reports, Inc. as Foreign Exchange Rates quoted in New York as market rate (bid)
on the last business day of the quarterly period in which the royalty payments
were earned shall be used by Abbott to determine such conversion rates.

         6.8 No Royalties Payable Between Affiliates. No royalties shall be
payable to ArQule on sales between Abbott, its Affiliates or sublicensees, or
between Abbott Affiliates and sublicensees.

         6.9 No Multiple Royalties. No multiple royalties shall be payable
because any Product, its manufacture, import, use, offer for sale, or sale is or
shall be covered by multiple patents.

         6.10 Sole License Payments; Fully Paid-up License. The parties
acknowledge and agree that the milestone payments under Section 6.1 and the
royalty payments under Sections 6.3 and 6.4 are the sole payments which may
become due and owing by Abbott to ArQule in consideration for the license rights
and other rights granted to Abbott by ArQule under Sections 4.2, 5.5(c), 5.6,
and 5.11. Except as otherwise expressly provided herein, upon expiration of the
Royalty Term for each Product such license rights and other rights shall become
fully paid-up and irrevocable.

                                    ARTICLE 7

                           PAYMENTS, BOOKS AND RECORDS


         7.1 Method of Payment. Payments by Abbott to ArQule under this
Agreement shall be made, at Abbott's option, either by check or by bank wire
transfer to the address or bank account designated by ArQule.

         7.2 Books and Records. Each party shall maintain complete and accurate
financial books and records in accordance with United States generally accepted
accounting principles, consistently applied and in sufficient detail to allow
verification of any amounts subject to payment or reimbursement hereunder,
including without limitation the calculation of Net Sales. Each party shall
retain such records at its principal place of business for three (3) years or
such other period as the parties may agree in writing.



                                     - 20 -


<PAGE>   21
         7.3 Audit Rights. Upon the written request of either party (but not
more frequently than once in any calendar year), the requesting party may retain
an independent certified public accountant, subject to approval by the other
party (which approval shall not be unreasonably withheld), to review such
records of the other party to verify the accuracy of the payments made or
payable hereunder. Such accountant shall be required to execute a
confidentiality agreement in a form reasonably acceptable to the audited party
and shall report to the auditing party (with a copy to the audited party) only
the amount of any underpayment or overcharge. Within ten (10) business days
after completion of such review, the parties shall reconcile any underpayment or
overcharge. The auditing party shall pay the cost of any review of records
conducted at its request under this Section, except that the audited party shall
bear such cost if the audit reveals an underpayment of ten percent (10%) or
greater. Such audit rights may be exercised by the parties only with respect to
records of the other party for the current calendar year and the preceding two
(2) calendar years.

                                    ARTICLE 8

              CONFIDENTIALITY, PUBLICITY AND PROPRIETARY MATERIALS


         8.1 Confidentiality. During the term of this Agreement and for a period
of seven (7) years thereafter, each party (as such, a "Receiving Party") shall
keep in confidence any information and/or documentation received from or on
behalf of the other party (as such, a "Furnishing Party") that is in written or
tangible form and marked or otherwise identified as confidential or proprietary
or, if originally disclosed orally or visually, that is reduced to a written
document marked or otherwise identified as confidential or proprietary within
sixty (60) days of oral or visual disclosure ("Confidential Information"), and
the Receiving Party shall use the Confidential Information only for purposes of
this Agreement. Abbott Confidential Information shall also include, but is not
limited to, any information disclosed to ArQule concerning Abbott Compounds,
Targets and ArQule Arrays that Abbott has reserved or requested to reserve, and
targets for which Abbott is or may be screening Abbott Compounds. ArQule
Confidential Information shall also include, but is not limited to, any
information disclosed to Abbott concerning the identity of ArQule Compounds or
the commitment of any ArQule Compounds or ArQule Arrays to a third party or an
internal ArQule program. Except as expressly provided in this Agreement, the
Receiving Party shall not at any time use or permit others to use any
Confidential Information for any purposes, except as may be necessary for the
Receiving Party to perform its obligations hereunder. The foregoing obligations
shall not apply to, and the definition of "Confidential Information" does not
include:

         (a) information that was already in the public domain or subsequent to
disclosure to the Receiving Party becomes part of the public domain other than
through the fault of the Receiving Party;

         (b) information that was rightfully known by the Receiving Party (as
evidenced by its written records) prior to the date of disclosure by or on
behalf of the Furnishing Party in connection with this Agreement;




                                     - 21 -


<PAGE>   22
         (c) information that was received by the Receiving Party without
restriction of confidentiality from a third party having a lawful right to
disclose the same to the Receiving Party;

         (d) information that the Receiving Party believes in good faith is
required to be disclosed to comply with any applicable law, regulation or order
of a government authority or court of competent jurisdiction (including, but not
limited to, any disclosures required by the FDA or any foreign equivalent
thereof and any securities laws applicable to a Receiving Party), in which event
the Receiving Party shall use commercially reasonable efforts to advise the
Furnishing Party in advance of the need for such disclosure; or

         (e) information that is independently developed by or for the Receiving
Party (as evidenced by its written records) by employees, agents or contractors
of the Receiving Party who have not had access to Confidential Information.

         Notwithstanding the foregoing, the Receiving Party may disclose
Confidential Information to its employees, agents, and contractors to the extent
reasonably necessary for the performance of this Agreement, provided that such
recipients are subject in writing to obligations of confidentiality and non-use
with respect to such information to substantially the same extent as the
Receiving Party is obligated hereunder. Further, Abbott may disclose relevant
ArQule Confidential Information to appropriate government authorities without
the necessity of obtaining ArQule's approval to the extent Abbott deems it
necessary or appropriate in connection with its applications for Regulatory
Approvals anywhere in the Territory, provided that Abbott shall use commercially
reasonable efforts to consult with ArQule at least thirty (30) days prior to
such disclosure in order to provide ArQule with an opportunity to comment on (i)
the content, form and necessity of such disclosures and (ii) any potential
effect of such disclosures on ArQule Patent Rights and Joint Patent Rights, as
well as to provide ArQule with an opportunity to seek confidential treatment, if
available, of the ArQule Confidential Information to be disclosed.

         8.2 Publicity. Neither party shall use the name of the other party or
reveal the terms of this Agreement in any publicity or advertising without the
prior written approval of the other party, except that (a) either party may use
the text of a written statement approved in advance by both parties without
further approval, and (b) either party shall have the right to identify the
other party and to disclose the terms of this Agreement as required by
applicable securities laws or other applicable federal, state or local laws or
regulations, provided that the disclosing party uses commercially reasonable
efforts to notify the other party of such disclosures and to consult with the
other party concerning the form and content of such disclosures prior to such
disclosures.

         8.3      Proprietary Materials.

         (a) Definition of Proprietary Materials. "Proprietary Materials" shall
mean any tangible chemical, biological, or physical research materials that are
furnished by or on behalf of one party (as such, a "Transferor") to the other
party (as such, a "Recipient") in connection with this Agreement regardless of
whether such materials are specifically designated as proprietary to the
Transferor in the case of biological materials, Proprietary Materials shall also
include other



                                     - 22 -


<PAGE>   23
materials ordinarily engendered by the original materials, including, for
example, any progeny derived from a cell line (including naturally occurring
mutants), monoclonal antibodies produced by hybridoma cells, DNA or RNA
replicated from isolated DNA or RNA, recombinant proteins produced by a
recombinant cell line, recombinant proteins produced through use of isolated DNA
or RNA, and substances routinely purified from any source material included in
the original materials. Proprietary Materials shall also include, without
limitation, ArQule Compounds and Abbott Compounds exchanged by the parties under
this Agreement. The Transferor shall furnish such Proprietary Materials, to the
Recipient in a mutually acceptable form, including appropriate labelling and
packaging.

         (b) Limited Use. The Recipient shall use Proprietary Materials solely
for the purposes set forth in this Agreement. The Recipient shall use the
Proprietary Materials only in compliance with all applicable national, federal,
state and local laws and regulations. The Recipient assumes all liability for
damages that may arise from the use, storage, or disposal of any Proprietary
Materials, except for damages resulting from the Transferor's negligence,
willful misconduct or breach of this Agreement.

         (c) Limited Disposition. Except as expressly authorized herein, the
Recipient shall not transfer or distribute any Proprietary Materials to any
third party without the prior written consent of the Transferor.

         (d) Survival. The obligations of this Section shall remain in effect
during the term of this Agreement for a period of seven (7) years thereafter.

         8.4 Return of Confidential information and Proprietary Materials. Upon
the termination of this Agreement, at the request of the Furnishing Party, the
Receiving Party shall return to the Furnishing Party all originals, copies, and
summaries of documents, materials, and other tangible manifestations of the
Furnishing Party's Confidential Information in the possession or control of the
Receiving Party, except that the Receiving Party may retain one (1) copy of the
Furnishing Party's Confidential Information in the possession of its legal
counsel solely for the purpose of monitoring its obligations under this
Agreement. Upon the termination of this Agreement, the Recipient shall at the
instruction of the Transferor either destroy or return any unused Proprietary
Materials of the Transferor.

                                    ARTICLE 9

                         REPRESENTATIONS AND WARRANTIES


Each party hereby represents and warrants to the other party as follows:

         9.1 Corporate Existence and Power. Such party (a) is a corporation duly
organized, validly existing and in good standing under the laws of the state in
which it is incorporated, (b) has the corporate power and authority and the
legal right to own and operate its property and assets, to lease the property
and assets it operates under lease, and to carry on its business as it is now
being conducted, and (c) is in compliance with all requirements of applicable
laws and regulations, except to the extent that any noncompliance would not have
a material adverse effect



                                     - 23 -


<PAGE>   24
on the properties, business, financial or other condition of such party and
would not materially adversely affect such party's ability to perform its
obligations under this Agreement.

         9.2 Authorization and Enforcement of Obligations. Such party (a) has
the corporate power and authority and the legal right to enter into this
Agreement and to perform its obligations hereunder, and (b) has taken all
necessary corporate action on its part to authorize the execution and delivery
of this Agreement and the performance of its obligations hereunder. This
Agreement has been duly executed and delivered on behalf of such party, and
constitutes a legal, valid, binding obligation, enforceable against such party
in accordance with its terms.

         9.3 Consents. All necessary consents, approvals and authorizations of
all governmental authorities and other persons required to be obtained by such
party in connection with the execution, delivery and performance of this
Agreement have been obtained.

         9.4 No Conflict. The execution and delivery of this Agreement and the
performance of such party's obligations hereunder (a) do not conflict with or
violate any requirement of applicable laws or regulations and (b) do not
conflict with, violate or breach or constitute a default or require any consent
under, any contractual obligation of such party.

         9.5 Compliance with Laws. Such party shall perform its activities under
this Agreement in compliance with all applicable national, federal, state and
local laws and regulations.

         9.6 Patent Rights/Intellectual Property Infringement. To the best of
its knowledge based upon reasonably diligent investigation, the issued patents
included within its respective Patent Rights as of the Effective Date are and
shall be valid and enforceable. Neither party represents or warrants to the
other party that the exercise of the rights granted to the other party under
this Agreement shall not infringe any patent rights of any third party
(including, but not limited to, ArQule licensees).

                                   ARTICLE 10

                   OWNERSHIP AND PROSECUTION OF PATENT RIGHTS


         10.1 Abbott Core Compounds. Abbott may, at its own expense, take such
actions as it deems appropriate with respect to the preparation, filing,
prosecution, issuance, maintenance, extension, enforcement and/or defense of all
Patent Rights in or relating to Abbott Core Compounds (including but not limited
to defending infringement suits and pursuing third party infringers). All Patent
Rights in or relating to Abbott Core Compounds shall be in Abbott's name and
shall be owned solely by Abbott.

         10.2 Abbott Derivative Compounds. Abbott shall have sole control, at
its expense, over the preparation, filing, prosecution, issuance, maintenance,
extension, enforcement and/or defense of all Patent Rights in or relating to any
Abbott Derivative Compounds. If any such Patent Rights constitute ArQule Patent
Rights or Joint Patent Rights, Abbott shall use commercially reasonable efforts
to consult with ArQule prior to any deadline or action with the




                                     - 24 -


<PAGE>   25
United States Patent and Trademark Office ("PTO") or any foreign patent office,
and to furnish ArQule with copies of all relevant documents in advance of such
consultation.

         10.3 ArQule Compounds. ArQule shall have sole control, at its expense,
over the preparation, filing, prosecution, issuance, maintenance, extension,
enforcement and/or defense of any ArQule Patent Rights in or relating to ArQule
Compounds; provided that ArQule shall use commercially reasonable efforts to
consult with Abbott prior to any deadline or action with the PTO or any foreign
patent office, and to furnish Abbott with copies of all relevant documents in
advance of such consultation. Abbott shall have sole control, at its expense,
over the preparation, filing, prosecution, issuance, maintenance, extension,
enforcement and/or defense of any Joint Patent Rights in or relating to ArQule
Compounds; provided that Abbott shall use commercially reasonable efforts to
consult with ArQule prior to any deadline or action with the PTO or any foreign
patent office, and to furnish ArQule with copies of all relevant documents in
advance of such consultation. Abbott shall have control, at its expense, over
the preparation, filing, prosecution, issuance, maintenance, extension,
enforcement and/or defense of any Abbott Patent Rights in or relating to ArQule
Compounds.

         10.4 Waiver and Abandonment. If a party decides not to seek or maintain
patent protection in any country for an invention for which such party controls
the preparation and filing of a patent application and/or patent, and if such
patent application and/or patent would constitute an ArQule Patent Right or a
Joint Patent Right, the other party, at its expense, may assume responsibility
for and control over such Patent Right in the relevant country. If a party
decides to terminate or abandon an ArQule Patent Right or a Joint Patent Right
with respect to which such party has control, then such party shall notify the
other party at least sixty (60) days prior to such event to enable the other
party, at its expense, to assume responsibility for and control over such Patent
Right in the relevant country.

         10.5 Full Cooperation. Each party agrees to cooperate fully in the
preparation, filing, prosecution, issuance, maintenance. extension, enforcement
and/or defense of any Patent Rights in or relating to ArQule Compounds and
Abbott Derivative Compounds. Such cooperation includes, but is not limited to:

         (a)      executing all papers and instruments, or requiring its
                  employees or agents, to execute such papers and instruments,
                  so as to enable the other party to apply for, prosecute or
                  defend patent applications or to oppose another party's patent
                  applications or patents in any country;

         (b)      promptly informing the other party of any matters coming to a
                  party's attention that may affect the validity,
                  enforceability, preparation, filing, prosecution, or issuance
                  of any such patent applications or maintenance of issued
                  patents; and

         (c)      undertaking no actions that are potentially deleterious to the
                  validity, enforceability, preparation, filing, prosecution or
                  issuance of such patent applications or patents.

         10.6 Notification of Infringement. The parties shall promptly inform
each other of any information that comes to their attention involving actual or
possible infringement of Patent




                                     - 25 -


<PAGE>   26
Rights by any third party anywhere in the Territory or claims of alleged
infringement made by any third party in the Territory against either party or
its Affiliates resulting from the manufacture, import, offer for sale, sale or
use of any Product.

         10.7 Prosecution of Infringement Actions. Abbott shall have the right,
under its own control and at its own expense, to pursue any third party
infringer of ArQule Patent Rights or Joint Patent Rights in or relating to
Abbott Derivative Compounds or ArQule Compounds that are in any Licensed
Compound Set. Abbott may prosecute any infringement action in the name of
ArQule, if so required by applicable law. If Abbott fails to initiate an
infringement action within six (6) months after notification or knowledge of the
basis for such action relating to a material infringement, ArQule shall have the
right to prosecute such infringement, under its sole control and at its sole
expense. Neither party shall enter into any settlement, consent judgment, or
other voluntary final disposition of any infringement action without the prior
written consent of the other party, which consent shall not be unreasonably
withheld. Any recovery resulting from an infringement action brought under this
Section shall be distributed in the following manner:

         (a)      First, the parties shall be reimbursed for any costs and
                  expenses incurred in prosecuting the action.

         (b)      Second, ArQule shall receive an amount equal to the royalty
                  payments lost due to sales of Products by the infringer.

         (c)      Third, Abbott shall receive an amount equal to the profits
                  lost due to sale of Products by the infringer.

         (d)      Fourth, any remaining recovery will be retained by the party
                  controlling the action at its conclusion.

         10.8 Third Party Claims. In the event that any third party initiates a
declaratory judgment action alleging the invalidity or unenforceability of
ArQule Patent Rights or Joint Patent Rights in or relating to Abbott Derivative
Compounds or ArQule Compounds that are in any Licensed Compound Set, or if any
third party brings an infringement action against Abbott or its Affiliates or
sublicensees because of the exercise of the rights granted Abbott under this
Agreement, then Abbott shall have the right to defend such action under its own
control and at its own expense; provided, however, that in the case of a
declaratory judgment action involving ArQule Patent Rights, ArQule shall have
the right to intervene and assume sole control of such defense, at its own
expense. Neither party shall enter into any settlement, consent judgment, or
other voluntary final disposition of any action under this Section without the
consent of the other party, which consent shall not be unreasonably withheld.
Any recovery shall be retained entirely by the party controlling the action at
its conclusion.

         10.9 Mutual Cooperation. In the event of any patent infringement
litigation in the Territory involving any Patent Rights and/or any Products, the
non-prosecuting or non-defending party, as applicable, shall render such
reasonable assistance as may be requested by the prosecuting or defending party
in connection with such infringement actions.




                                     - 26 -


<PAGE>   27
                                   ARTICLE 11


                          INDEMNIFICATION AND INSURANCE


         11.1 General Indemnification. Each party shall defend, indemnify and
hold the other party, its Affiliates, contractors and sublicensees, and the
officers, directors, employees and agents of each, harmless from and against any
and all liabilities, damages, claims, demands, costs, or expenses (including
reasonable attorneys' fees) claimed by any third party for any harm suffered by
such third party to the extent such harm is determined to have been caused by
the negligence or willful misconduct of the indemnifying party or the
indemnifying party's manufacture or sale of any products, except to the extent
caused by the negligence or willful misconduct of the indemnified party or the
indemnified party's breach of this Agreement, and subject to the conditions of
indemnification set forth in Section 11.2.

         11.2 Conditions of Indemnification. With respect to any indemnification
obligations of either party to the other party under this Agreement, the
following conditions must be met for such indemnification obligations to become
applicable:

         (a)      the indemnified party shall notify the indemnifying party
                  promptly in writing of any claim which may give rise to an
                  obligation on the part of the indemnifying party hereunder;

         (b)      the indemnifying party shall be allowed to undertake the sole
                  control of the defense of any such action and claim, including
                  all negotiations for the settlement, or compromise of such
                  claim or action at its sole expense; and

         (c)      the indemnified party shall render reasonable assistance,
                  information, co-operation and authority to permit the
                  indemnifying party to defend such action, provided that any
                  out-of-pocket expenses or other expenses incurred by the
                  indemnified party in rendering the same shall be borne or
                  reimbursed promptly by the indemnifying party.

         11.3 Insurance. Each party shall maintain reasonably adequate insurance
or self-insurance coverage for its potential liabilities to the other party in
connection with the performance of this Agreement.

                                   ARTICLE 12

                               DISPUTE RESOLUTION


Except for actions commenced by or involving third parties and disputes to be
resolved by Scientific Dispute Resolution pursuant to Exhibit B, all disputes
arising out of or in connection with this Agreement shall be resolved as
follows:





                                     - 27 -


<PAGE>   28
         12.1 Attempted Amicable Resolution. The parties shall promptly give
each other written notice of any disputes requiring resolution hereunder, which
written notice shall specify the Section(s) of this Agreement that the other
party is alleged to have breached or that are in dispute, and shall briefly
state the initiating party's claims. Thereafter, the parties shall use
reasonable efforts to resolve any such disputes in an amicable manner.

         12.2 Reference to Designated Officers. Any disputes arising in
connection with this Agreement which cannot be resolved pursuant to Section 12.1
shall be referred, not later than thirty (30) days after initiation of dispute
resolution proceedings pursuant to Section 12.1, to the following corporate
officers of the parties for resolution:


                           For Abbott:

                           Vice President, Pharmaceutical Products Research and
                           Development (or his or her designee)


                           For ArQule:

                           Chief Executive Officer (or his or her designee)


Such officers (or their designees) shall attempt to resolve the dispute and
shall communicate with each other by facsimile or telephone or in personal
meetings in an effort to resolve the dispute.

         12.3 Alternate Dispute Resolution. Any disputes arising in connection
with this Agreement which cannot be resolved pursuant to Sections 12.1 or 12.2
within sixty (60) days after initiation of dispute resolution proceedings under
Section 12.1 shall be finally settled by binding Alternate Dispute Resolution
("ADR") in accordance with the attached Exhibit A. Judgment upon any award
rendered in such ADR proceedings may be issued and enforced by any court having
competent jurisdiction.

         12.4 ADR Ruling. The neutral in any ADR proceeding under Section 12.3
shall determine and notify the parties in writing:

         (a)      Whether either party has committed a breach of any of its
                  obligations under this Agreement; and

         (b)      if either party has committed a breach, the appropriate remedy
                  for any such breach pursuant to Section 12.5.

         12.5 ADR Remedies. The neutral in any ADR proceeding under Section 12.3
shall have the authority to award the non-breaching party the following relief:

         (a)      For any breach other than those specified in Section 12.5(b)
                  and (c), an award of damages and/or equitable relief;





                                     - 28 -


<PAGE>   29
         (b)      For the second material breach and any subsequent material
                  breach of Abbott's obligations pursuant to Section 5.6(c), an
                  award of damages and/or equitable relief and/or termination of
                  Abbott's license rights related to the specific Licensed
                  Compound Set(s) to which such breach relates (but not any
                  other license rights of Abbott hereunder); and

         (c)      For the second material breach and any subsequent material
                  breach of Abbott's obligations pursuant to Section 5.5(d), an
                  award of damages and/or equitable relief and/or termination of
                  Abbott's Target Reservation(s) to which such breach relates
                  (but not any other Target Reservations by Abbott hereunder).

                                   ARTICLE 13

                              TERM AND TERMINATION


         13.1 Expiration. Unless terminated earlier by mutual written agreement
of the parties or pursuant to Section 13.2, this Agreement shall expire on the
later of: (a) the end of the License Option Period and (b) the date of
expiration of the last Royalty Term for any Product to expire in any country in
the Territory.

         13.2 Early Termination. Either party shall have the right, without
prejudice to any other rights or remedies available to it, to terminate this
Agreement for cause by written notice to the other party in any of the following
events: (a) if the other party is adjudged bankrupt, applies for judicial or
extra-judicial settlement with its creditors, makes an assignment for the
benefit of its creditors, voluntarily files for bankruptcy or has a receiver or
trustee (or the like) in bankruptcy appointed by reason of its insolvency, or in
the event an involuntary bankruptcy action is filed against the other party and
not dismissed within sixty (60) days of filing, or if the other party becomes
the subject of liquidation or dissolution proceedings or otherwise discontinues
business, (b) if the other party commits a material breach of this Agreement and
the party alleged to be in breach fails to (i) cure such breach or (ii) commence
dispute resolution proceedings under Article 12 contesting whether a breach has
occurred and/or whether such breach is a material breach within sixty (60) days
after receipt of written notice from the party asserting the breach.

         13.3 Escrow Payments. In the event that the alleged breaching party
commences dispute resolution proceedings pursuant to Article 12, and if the
dispute involves non-payment of funds under this Agreement, all payments that
would be due and payable under this Agreement in the absence of any dispute
shall be paid into an interest-bearing escrow account until the matter is
resolved and such escrow funds (plus interest) shall be distributed in
accordance with the decision reached in such dispute resolution proceedings.

         13.4 Effect of Termination. Except as otherwise expressly provided
herein, termination or expiration of this Agreement through any means and for
any reason shall not result in the termination of any license rights hereunder,
shall not relieve the parties of any obligations accruing prior thereto, and
shall be without prejudice to the rights and remedies of either party with
respect to any prior breach of any of the provisions of this Agreement. Except
to the extent





                                     - 29 -


<PAGE>   30
otherwise specified therein, the rights and obligations of the parties under the
following provisions shall survive expiration or termination of this Agreement:
Articles 7, 8 and 11.

                                   ARTICLE 14


                                  MISCELLANEOUS


         14.1 Entire Agreement; Amendment. This Agreement contains the entire
understanding of the parties with respect to the subject matter thereof and
supersedes all previous verbal and written agreements, representations and
warranties with respect to such subject matter. This Agreement may be amended
only by a written agreement signed by authorized representatives of both
parties.

         14.2 Force Majeure. Failure of either party to perform its obligations
under this Agreement (except the obligation to make payments) shall not subject
such party to any liability or constitute a breach of this Agreement if such
failure is caused by any event or circumstances beyond the reasonable control of
such nonperforming party, including without limitation acts of God, fire,
explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor
trouble, failure in whole or in part of suppliers to deliver on schedule
materials, equipment or machinery, interruption of or delay in transportation, a
national health emergency or compliance with any order or regulation of any
government entity. A party whose performance is affected by a force majeure
shall take reasonably prompt action to remedy the effects of the force majeure.
If the non-performing party fails to substantially remedy the effects of the
force majeure event within twelve (12) months after the date upon which the
force majeure event first occurred, the parties shall in good faith negotiate
such modifications to this Agreement as the parties deem appropriate to continue
performance of this Agreement notwithstanding such force majeure event. If the
parties are unable to agree upon such modifications within sixty (60) days after
the end of such twelve (12) month period and the non-performing party has still
failed to substantially remedy the effects of the force majeure event, the party
not affected by the force majeure event may terminate this Agreement upon thirty
(30) days prior written notice to the non-performing party, in which case
neither party shall have any liability to the other party with respect to any
failure to perform to the extent caused by the force majeure event.

         14.3 Waiver. A failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of such rights nor shall a waiver
by either party in one or more instances by construed as constituting a
continuing waiver or as a waiver in other instances. Any waiver of breach
executed by either party shall affect only the specific breach and shall not
operate as a waiver of any subsequent or preceding breach.

         14.4 No Assignment. Except as otherwise expressly provided herein,
neither party may sell, assign, pledge, delegate, subcontract or otherwise
dispose of all or any portion of its rights or obligations under this Agreement
except to an Affiliate or to a successor to all or substantially all of the
party's business to which this Agreement relates. Subject to the foregoing, this
Agreement shall inure to the benefit of and be binding upon the parties and
their respective successors and permitted assigns. In the event ownership or
control of ArQule changes after the





                                     - 30 -


<PAGE>   31
Effective Date as a result of a merger, an acquisition or otherwise, this
Agreement (including, but not limited to, Abbott's licenses and other rights
pursuant to Sections 4.2, 5.5(c), 5.6, and 5.11) shall continue in effect
notwithstanding such change of ownership or control.

         14.5 Severability. If any clause or provision of this Agreement is
declared invalid or unenforceable by a court of competent jurisdiction, such
provision shall be severed and the remaining provisions of the Agreement shall
continue in full force and effect. The parties shall use all commercially
reasonable efforts to agree upon a valid and enforceable provision as a
substitute for the severed provision, taking into account the intent of this
Agreement.

         14.6 Relationship of Parties. The parties shall have the status of
independent contractors under this Agreement and nothing in this Agreement shall
be construed as authorization for either of the parties to act as a joint
venturer with, agent for, or partner of, the other party.

         14.7 Notices. Any notice, request or other communication required to be
given pursuant to the provisions of this Agreement shall be in writing and shall
be deemed to be given (a) when delivered in person or by overnight courier, (b)
five (5) days after being deposited in the United States mail, postage prepaid,
certified, return receipt requested, or (c) when received after being sent by
confirmed facsimile transmission to the parties, addressed as follows:


                  If to Abbott to:

                  President
                  Pharmaceutical Products Division

                  Abbott Laboratories
                  200 Abbott Park Road
                  D-309, AP30
                  Abbott Park, Illinois 60064-3500
                  Tel: (708) 937-4367
                  Fax: (708) 938-5383

                  With a copy to:

                  General Counsel
                  Abbott Laboratories
                  100 Abbott Park Road
                  D-364, AP6D
                  Abbott Park, Illinois 60064-3500
                  Tel: (708) 937-8905
                  Fax: (708) 938-5277







                                     - 31 -


<PAGE>   32
                  If to ArQule to:

                  President
                  ArQule, Inc.
                  200 Boston Avenue
                  Suite 3600
                  Medford, Massachusetts 02155
                  Tel: (617) 395-4100
                  Fax: (617) 395-1225

Either party may change its address or its fax number by giving the other party
written notice, delivered in accordance with this Section 14.7.

         14.8 Further Instruments. Each party shall execute and deliver such
further instruments and do such further reasonable acts and things as reasonably
may be required to carry out the intent and purpose of this Agreement.

         14.9 Governing Law. The validity, performance, construction, and effect
of this Agreement shall be governed by the laws of the State of Illinois,
without giving effect to conflict of law rules. The parties expressly disclaim
the applicability of the United Nations Convention on the International Sale of
Goods to this Agreement.

         14.10 Counterparts. This Agreement shall become binding when any, one
or more counterparts hereof, individually or taken together, bears the signature
of each of the parties. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against the party whose
signature appears thereon, but all of which taken together shall constitute one
and the same instrument.

         IN WITNESS WHEREOF, each party has caused this Agreement to be signed
by its duly authorized representative as of the Effective Date.

ABBOTT LABORATORIES                          ARQULE,.INC.


By: /s/ Paul N. Clark
________________________________             By: /s/ Eric Gordon
                                             ____________________________
Name:                                        Name:
Title: Senior Vice President,                Title:
       Pharmaceuticals Operations
       and President Product
       Pharmaceuticals Products
       Division





                                     - 32 -


<PAGE>   33
                                    EXHIBIT A

                         Alternative Dispute Resolution


The parties recognize that a bona fide dispute as to certain matters may arise
from time to time during the term of this Agreement which relates to either
party's rights and/or obligations. To have such a dispute resolved by this
Alternative Dispute Resolution ("ADR") provision, a party first must send
written notice of the dispute to the other party for attempted resolution by
good faith negotiations between the parties pursuant to Sections 12.1 and 12.2.

Any negotiations regarding a dispute shall be treated as settlement negotiations
for purposes of the Federal Rules of Evidence and any similar state rules of
evidence. Such negotiations shall not be admissible in any subsequent ADR
hearing.

If the matter has not been resolved within sixty (60) days after initiation of
dispute resolution proceedings pursuant to Section 12.1, either party may
initiate an ADR proceeding as provided herein (all references to todays" in this
ADR provision are to calendar days). The parties shall have the right to be
represented by counsel in such a proceeding.

1.       To begin an ADR proceeding, a party shall provide written notice to the
         other party of the issues to be resolved by ADR. Within fourteen (14)
         days after its receipt of such notice, the other party may, by written
         notice to the party initiating the ADR, add additional issues to be
         resolved within the same ADR.

2.       Within twenty-one (21) days following receipt of the original ADR
         notice, the parties shall select a mutually acceptable neutral to
         preside in the resolution of any disputes in this ADR proceeding. If
         the parties are unable to agree on a mutually acceptable neutral within
         such period, the parties shall request the President of the Center for
         Public Resources ("CPR"), 366 Madison Avenue, New York, New York 10017
         to select a neutral pursuant to the following procedures:

                  (a) The CPR shall submit to the parties a list of not less
                  than five (5) candidates within fourteen (14) days after
                  receipt of the request from the parties, along with a
                  Curriculum Vitae for each candidate. No candidate shall be an
                  employee, director, or shareholder of either party or any of
                  their subsidiaries or affiliates.

                  (b) Such list shall include a statement of disclosure by each
                  candidate of any circumstances likely to affect his or her
                  impartiality.

                  (c) Each party shall number the Candidates in order of
                  preference (with the number one (1 ) signifying the greatest
                  preference) and shall deliver the list to the CPR within seven
                  (7) days following receipt of the list of candidates. if a
                  party believes a conflict of interest exists regarding any of
                  the candidates, that party shall provide a written explanation
                  of the conflict to the CPR along with its list showing its
                  order of preference for the candidates. Any party failing to
                  return a




                                     - 33 -


<PAGE>   34
                  list of preferences on time shall be deemed to have no order
                  of preference.

                  (d) if the parties collectively have identified fewer than
                  three (3) candidates deemed to have conflicts, the CPR
                  immediately shall designate as the neutral the candidate for
                  whom the parties collectively have indicated the greatest
                  preference. If a tie should result between two candidates, the
                  CPR may designate either candidate. If the parties
                  collectively have identified three (3) or more candidates
                  deemed to have conflicts, the CPR shall review the
                  explanations regarding conflicts and, in its sole discretion,
                  may either (i) immediately designate as the neutral the
                  candidate for whom the parties collectively have indicated the
                  greatest preference, or (ii) issue a new list of not less than
                  five (5) candidates, in which case the procedures set for in
                  subparagraphs 2(a) - 2(d) shall be repeated.

3.       No earlier than twenty-eight (28) days or later than fifty-six (56)
         days after selection, the neutral shall hold a hearing to resolve each
         of the issues identified by the parties. The ADR proceeding shall take
         place at a location agreed upon by the parties. If the parties cannot
         agree, the neutral shall designate a location other than the principal
         place of business of either party or any of their subsidiaries or
         affiliates.

4.       At least seven (7) days prior to the hearing, each party shall submit
         the following to the other party and the neutral:

                  (a) a copy of all exhibits on which such party intends to rely
                  in any oral or written presentation to the neutral;

                  (b) a list of any witnesses such party intends to call at the
                  hearing, and a short summary of the anticipated testimony of
                  each witness;

                  (c) a proposed ruling on each issue to be resolved, together
                  with a request for a specific damage award or other remedy for
                  each issue. The proposed rulings and remedies shall not
                  contain any recitation of the facts or any legal arguments and
                  shall not exceed one (1 ) page per issue.

                  (d) a brief in support of such party's proposed rulings and
                  remedies, provided that the brief shall not exceed twenty (20)
                  pages. This page limitation shall apply regardless of the
                  number of issues raised in the ADR proceeding.

Except as expressly set forth in subparagraphs 4(a) - 4(d), no discovery shall
be required or permitted by any means, including depositions, interrogatories,
requests for admissions, or production of documents.

5.       The hearing shall be conducted on two (2) consecutive days and shall be
         governed by the following rules:


                  (a) Each party shall be entitled to five (5) hours of hearing
                  time to present its case. The neutral shall determine whether
                  each party has had the five (5) hours




                                     - 34 -


<PAGE>   35
                  to which it is entitled.

                  (b) Each party shall be entitled, but not required, to make an
                  opening statement, to present regular and rebuttal testimony,
                  documents or other evidence, to cross-examine witnesses, and
                  to make a closing argument. Cross-examination of witnesses
                  shall occur immediately after their direct testimony, and
                  cross-examination time shall be charged against the party
                  conducting the crossexamination.

                  (c) The party initiating the ADR shall begin the hearing and,
                  if it chooses to make an opening statement, shall address not
                  only issues it raised but also any issues raised by the
                  responding party. The responding party, if it chooses to make
                  an opening statement, also shall address all issues raised in
                  the ADR. Thereafter, the presentation of regular and rebuttal
                  testimony and documents, other evidence, and closing arguments
                  shall proceed in the same sequence.

                  (d) Except when testifying, witnesses shall be excluded from
                  the hearing until closing arguments.

                  (e) Settlement negotiations shall not be admissible under any
                  circumstances. Affidavits prepared for purposes of the ADR,
                  hearing also shall not be admissible. As to all other matters,
                  the neutral shall have sole discretion regarding the
                  admissibility of any evidence.

6. Within seven (7) days following completion of the hearing, each party may
submit to the other party and the neutral a post-hearing brief in support of its
proposed rulings and remedies (subject to the provisions of Sections 12.4 and
12.5 with respect to remedies), provided that such brief shall not contain or
discuss any new evidence and shall not exceed ten (10) pages. This page
limitation shall apply regardless of the number of issues raised in the ADR
proceeding.

7. The neutral shall rule on each disputed issue within fourteen (14) days
following completion of the hearing. Such ruling shall adopt in its entirety the
proposed ruling and remedy (subject to the provisions of Sections 12.4 and 12.5
with respect to remedies) of one of the parties on each disputed issue but may
adopt one party's proposed rulings and remedies on some issues and the other
party's proposed rulings and remedies on other issues. The neutral shall issue a
brief written opinion, not to exceed ten (10) pages, which sets forth the ruling
of the neutrals, the basis of ruling, and the remedy or remedies awarded.
Neither party shall use such written opinion as the basis for any legal action
that attempts to challenge or appeal such ruling or the remedy or remedies
awarded.

8. The neutral shall be paid a reasonable fee plus expenses. These fees and
expenses, along with the reasonable legal fees and expenses of the prevailing
party (including all expert witness fees and expenses), the fees and expenses of
a court reporter, and any expenses for a hearing room, shall be paid as follows:

                  (a) if the neutral rules in favor of one party on all disputed
                  issues in the ADR,



                                     - 35 -


<PAGE>   36
                  the losing party shall pay 100% of such fees and expenses.

                  (b) if the neutral rules in favor of one party on some issues
                  and the other party on other issues, the neutral shall issue
                  with the rulings a written determination as to how such fees
                  and expenses shall be allocated between the parties. The
                  neutral shall allocate fees and expenses in a way that bears a
                  reasonable relationship to the outcome of the ADR, with the
                  party prevailing on more issues, or on issues of greater value
                  or gravity, recovering a relatively larger share of its legal
                  fees and expenses.

9. The rulings of the neutral and the allocation of fees and expenses shall be
binding, non-reviewable, and non-appealable, and may be entered as a final
judgment in any court having jurisdiction.

10. Except as provided in paragraph 9 or as required by law, the existence of
the dispute, any settlement negotiations, the ADR hearing, any submissions
(including exhibits, testimony, proposed rulings, and briefs), and the rulings
shall be deemed Confidential Information. The neutral shall have the authority
to impose sanctions for unauthorized disclosure of Confidential Information.




                                     - 36 -


<PAGE>   37
                                    EXHIBIT B

                          Scientific Dispute Resolution


If the parties are unable to agree on a redefined, non-conflicting Target
pursuant to Section 5.5(e) within thirty (30) days of initiating negotiations,
the parties shall resolve such dispute through a Scientific Dispute Resolution
("SDR") proceeding as provided herein. (all references to "days" in this SDR
proceeding are to calendar days).

1. Within fourteen (14) days after the end of the above-referenced thirty (30)
day negotiation period each party shall designate one (1) neutral having the
following minimum scientific qualifications: a Ph.D. degree in chemistry or life
sciences and/or an M.D. degree plus at least ten (10) years of relevant business
or scientific research experience. These two (2) neutrals shall select a third
neutral having the same minimum scientific qualifications within fourteen (14)
days of the appointment of the first two (2) neutrals. None of the neutrals
shall be an employee, director or shareholder of either party or any of their
subsidiaries or affiliates, or otherwise have a materially conflicting interest
in the outcome of the SDR proceeding.

2. No earlier than fourteen (14) days or later than twenty-eight (28) days after
selection of the third neutral, the neutrals shall hold a hearing to determine a
redefined, non-conflicting Target. The SDR proceeding shall take place at a
location agreed upon by the parties. If the parties cannot agree, the neutrals
shall designate a location other than the principal place of business of either
party or any of their subsidiaries or affiliates.

3. At least seven (7) days prior to the hearing, each party shall submit the
following to the other party and the neutrals:

                  (a) a proposed redefined, non-conflicting Target; and

                  (b) a brief in support of such party's proposed redefined,
                  non-conflicting Target, provided that the brief shall not
                  exceed ten (10) pages (excluding references to published
                  scientific literature, not to exceed two (2) pages). No
                  discovery shall be required or permitted by any means,
                  including depositions, interrogatories, requests for
                  admissions, or production of documents.

4. The hearing shall be conducted on one (1) day and shall be governed by the
following rules:

                  (a) Each party shall be entitled to three (3) hours of hearing
                  time to present its case. The neutrals shall determine whether
                  each party has had the three (3) hours to which it is
                  entitled.

                  (b) ArQule shall make its presentation first, followed by
                   Abbott.




                                     - 37 -


<PAGE>   38
5. The neutrals, by majority vote, shall rule on each disputed issue within
seven (7) days following completion of the hearing. Such ruling shall adopt in
its entirety the redefined, non-conflicting Target proposed by one of the
parties. The neutrals shall issue a brief written opinion, not to exceed ten
(10) pages, which sets forth the ruling of the neutrals, the basis of ruling,
and the remedy or remedies awarded. Neither party shall use such written opinion
as the basis for any legal action that attempts to challenge or appeal such
ruling or the remedy or remedies awarded.

6. The neutrals shall be paid reasonable fees plus expenses. These fees and
expenses, the fees and expenses of a court reporter, and any expenses for a
hearing room, shall be shared equally by the parties.

7. The rulings of the neutrals shall be binding, non-reviewable, and
nonappealable.

8. Except as required by law, the existence of the dispute, any settlement
negotiations, the SDR hearing, any submissions of the parties therein, and the
rulings shall be deemed Confidential Information.

9. The parties may, by mutual written agreement, submit additional issues for
dispute resolution under SDR procedures.





                                     - 38 -


<PAGE>   39
         AMENDMENT NO. 1 TO RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT

     This Amendment No. 1 to Research, Development and License Agreement is
dated as of August 13, 1996 by and between Abbott Laboratories, an Illinois
corporation having a principal place of business at 100 Abbott Park Road, Abbott
Park, Illinois ("Abbott") and ArQule, Inc., a Delaware corporation having a
principal place of business at 200 Boston Avenue, Suite 3600, Medford,
Massachusetts ("ArQule").

                                    RECITALS

     WHEREAS, Abbott and ArQule have entered into that certain Research,
Development and License Agreement, dated as of June 16, 1995 (the "License
Agreement"), pursuant to which ArQule agreed, INTER ALIA, to provide Abbott with
certain ArQule Compounds and Abbott Derivative Compounds (these and other
capitalized terms used herein without definition shall have the respective
meanings provided in the License Agreement) for screening in consideration of
the payment by Abbott to ArQule of certain license fees, milestone payments and
research funding payments on the terms and subject to the conditions set forth
in the License Agreement; and

     WHEREAS, ArQule and Abbott desire to amend the License Agreement to enable
ArQule to supply Abbott with additional ArQule Compounds and to delete certain
aspects of the License Agreement having to do with reservation of Targets and
the Array Screening Period.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions contained herein and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

1.   The License Agreement is hereby amended as follows:

     1.1. Definitions.
          -----------
          (a)  The following definitions are hereby deleted from Article
1 of the License Agreement (and the remaining definitions in Article 1 are
renumbered accordingly):

               (1)  "1.26 License Option Period"
                          ---------------------
               (2)  "1.37 Reserved Arrays"
                          ---------------
               (3)  "1.39 Target"
                          ------
               (4)  "1.40 Target Reservation"
                          ------------------
               (5)  "1.14 Array Screening Period".
                          ----------------------

          (b) The definition of "ArQule Array" originally set forth in
Section 1.8 of the License Agreement (now renumbered as Section 1.10) is hereby
deleted in its entirety and replaced with the following:






<PAGE>   40



               "1.10 `ARQULE ARRAY' shall mean a set of structurally related
               small organic chemical molecules that are synthesized by ArQule
               using its proprietary technology arranged in a format such as a
               microtiter screening plate."

          (c) The definition of "Licensed Final Compound" originally set
forth in Section 1.23 of the License Agreement (now renumbered as Section 1.25)
is hereby deleted in its entirety and replaced with the following:

               "1.25 `LICENSED FINAL COMPOUND' shall mean a specific ArQule
               Compound from a Licensed Compound Set that Abbott commercially
               develops, markets and/or sells pursuant to Section 5.4."

          (d) The definition of "Licensed Compound Set" originally set
forth in Section 1.24 of the License Agreement (now renumbered as Section 1.26)
is hereby deleted in its entirety and replaced with the following:

               "1.26 `LICENSED COMPOUND SET' shall mean, with respect to an
               Active ArQule Compound, such Active ArQule Compound and any
               Active ArQule Homolog thereto which have been licensed to Abbott
               by ArQule pursuant to Section 5.4."

          (e) The following definitions are hereby added to Article 1 of
the License Agreement (and the remaining definitions in Article 1 are renumbered
accordingly):

               "1.7 `ACTIVE ARQULE HOMOLOG' shall mean          


                                      
                                      *




               "1.9 `AMENDMENT DATE' shall mean August 13, 1996."

               "1.17 `CHEMICAL THEME' shall mean the chemical or structural
               characteristics shared by a group of ArQule Compounds in an
               ArQule Array."

               "1.22 `EXCLUSIVE DEVELOPMENT PERIOD' shall have the meaning
               provided in Section 5.5(a)."

               "1.27 `MINIMUM FTE REQUIREMENT' shall have the meaning provided
               in Section 5.5(a)."

               "1.28 `MUTUAL DISCLOSURE DATE' shall mean the date on which the
               information described in Section 5.2 of this Agreement is first
               disclosed by



                      * confidential treatment has been
                        requested for marked portions


                                      - 2 -



<PAGE>   41



               each party to the other with respect to any Active ArQule
               Compound and any Active ArQule Homolog thereto."

               "1.41 `THIRD PARTY MAPPING ARRAY PARTNER' shall mean any third
               party to whom ArQule provides ArQule Arrays."

     1.2. The first two sentences of Section 5.1 are hereby deleted in their
entirety and replaced with the following:

          "During the Array Transfer Period, ArQule shall deliver to Abbott
          ArQule Core Compounds within ArQule Arrays as follows: (i) during the
          initial Contract Year, ArQule shall deliver to Abbott at least   *
          ArQule Core Compounds within ArQule Arrays having not less than   *
              different Chemical Themes and (ii) during the second Contract
          Year, ArQule shall deliver to Abbott at least    *   ArQule Core
          Compounds within ArQule Arrays having not less than    *     different
          Chemical Themes (with a minimum of   *   ArQule Core Compounds and a
          maximum of   *    ArQule Core Compounds for each Chemical Theme).
          Abbott hereby acknowledges that ArQule has delivered to Abbott, as of
          the Amendment Date,   *   ArQule Core Compounds and hereby agrees that
          such ArQule Core Compounds shall be, in all respects, subject to this
          Agreement, as amended from time to time. ArQule may, at its option,
          also deliver to Abbott additional ArQule Arrays. ArQule shall select
          the ArQule Arrays to be delivered to Abbott hereunder and the ArQule
          Core Compounds within each such ArQule Array; PROVIDED, HOWEVER, that
          (i) each ArQule Core Compound shall appear only once in any ArQule
          Array shipped to Abbott hereunder and (ii) no more than   *  percent
            *  of any shipment of ArQule Core Compounds delivered to Abbott
          under this Agreement shall have been previously committed to a Third
          Party Mapping Array Partner or a bona fide, documented internal ArQule
          program as of the date of such shipment."

     1.3. Section 5.2 of the License Agreement is hereby deleted in its entirety
and replaced with the following:

          "5.2 SCREENING OF ARQULE COMPOUNDS. ArQule hereby grants to Abbott and
          its Affiliates a nonexclusive, worldwide, royalty-free license
          (without the right to sublicense or subcontract) during the term of
          this Agreement and thereafter to perform such testing and analytical
          work as Abbott deems appropriate on ArQule Core Compounds delivered by
          ArQule hereunder. Notwithstanding the foregoing, Abbott may, during
          the term of this Agreement and thereafter, deliver ArQule Core
          Compounds to one or more third parties so as to allow such third
          parties to perform testing and analytical work on such ArQule Core
          Compounds provided that, prior to delivering any ArQule Core Compounds
          to any such third party, Abbott, ArQule and each such third party
          enter into a materials transfer agreement substantially in the form of
          the attached EXHIBIT B or such other form as may be acceptable to
          ArQule. At the time of delivery, ArQule will identify the Chemical
          Theme of each ArQule Array delivered to Abbott but not the structures
          of the



                      * confidential treatment has been
                        requested for marked portions


                                      - 3 -



<PAGE>   42

          individual ArQule Core Compounds in such ArQule Arrays. Initially,
          Abbott will not disclose the targets against which such ArQule Arrays
          are screened. If Abbott detects any Active ArQule Compound in an
          ArQule Array, it will promptly notify ArQule. ArQule shall then
          determine if such Active ArQule Compound and any Active ArQule Homolog
          thereto have been previously committed to a Third Party Mapping Array
          Partner or to a bona fide, documented internal ArQule program
          (including programs with academic collaborators). ArQule will disclose
          to Abbott (a) the structure of such Active ArQule Compound if it has
          not been so committed and all Active ArQule Homologs thereto (if any)
          that have not been so committed and (b) the structures, but not the
          locations in the ArQule Array, of all other ArQule Compounds in such
          ArQule Array and Abbott will disclose to ArQule (a) the identity of
          the biological target as to which activity was detected and (b) the
          level of activity exhibited by such Active ArQule Compound and such
          Active ArQule Homolog (the date of such mutual disclosure being
          referred to herein as the "Mutual Disclosure Date"). All such
          disclosed information shall be treated as Confidential Information by
          the receiving party in accordance with Article 8."

     1.4. Sections 5.3 and 5.5 of the License Agreement are hereby deleted in
their entirety (and the remaining sections in Article 5 are renumbered
accordingly).

     1.5. All references in Section 5.3(a) (as renumbered) of the License
Agreement to "Active ArQule Compounds" are hereby changed to "Active ArQule
Compounds and Active ArQule Homologs"; all references in Section 5.3(a) (as
renumbered) of the License Agreement to "Section 5.3" are hereby changed to
"Section 5.2."; and all references in Section 5.3(b) (as renumbered) of the
License Agreement to "Section 5.4(a)" are hereby changed to "Section 5.3(a)".

     1.6. Sections 5.6(a) and (b) (as originally numbered) of the License
Agreement are hereby deleted in their entirety and replaced with the following:

          "5.4 LICENSE RIGHTS. On the Mutual Disclosure Date for any Active
          ArQule Compound and any Active ArQule Homolog thereto comprising the
          Licensed Compound Set, ArQule shall grant to Abbott and its Affiliates
          an exclusive, worldwide, royalty-bearing license (with the right to
          sublicense), in the Abbott Field under ArQule Patent Rights and under
          ArQule's interest in any Joint Patent Rights to develop, have
          developed, make, have made, use, import, offer to sell, sell and have
          sold in the Abbott Field Products incorporating any ArQule Compounds
          within the Licensed Compound Set."



                                      - 4 -



<PAGE>   43




     1.7. Section 5.6(c) (as originally numbered) of the License Agreement is
hereby deleted in its entirety and replaced with the following:

          "5.5 Diligence Requirements.
               ----------------------

               (a) DILIGENCE REQUIREMENTS DURING EXCLUSIVE DEVELOPMENT PERIOD.
               During the one (1) year period commencing on the Mutual
               Disclosure Date for any Licensed Compound Set and continuing
               until the first anniversary thereof (such period being referred
               to herein as the "Exclusive Development Period"), Abbott shall
               maintain a minimum of     *       FTE scientist to perform 
               research and development activities on    *    or more ArQule 
               Compounds within such Licensed Compound Set (the "Minimum FTE
               Requirement"). Abbott shall have the option to extend the
               Exclusive Development Period for such Licensed Compound Set,
               subject to the Minimum FTE Requirement, for up to four (4)
               additional one year periods. The Exclusive Development Period
               shall be deemed to be automatically extended by Abbott each year
               through the end of the fourth additional one year period unless
               Abbott gives ArQule written notice of termination no later than
               thirty (30) days prior to any anniversary of the Mutual
               Disclosure Date for such Licensed Compound Set; PROVIDED, that
               Abbott must have complied with the Minimum FTE Requirement for
               the immediately preceding year for any such extension to be
               effective. Notwithstanding the foregoing, upon Abbott's request
               and with ArQule's consent, which consent shall not be
               unreasonably withheld, an extension to the Exclusive Development
               Period may be made beyond five (5) years if Abbott reasonably
               demonstrates to ArQule that Abbott has devoted appropriate
               resources toward commercialization of at least       *
                        within the Licensed Compound Set and is reasonably
               likely to enter into an active clinical development program with
               respect thereto. Upon expiration of the Exclusive Development
               Period for any Licensed Compound Set, the license granted to
               Abbott under Section 5.4 of this Agreement shall terminate
               unless, within thirty (30) days of such date, Abbott commences
               the clinical development program described in Section 5.5(b) for
                  *    or more ArQule Compounds within such Licensed Compound
               Set.

               (b) DILIGENCE REQUIREMENTS AFTER EXCLUSIVE DEVELOPMENT PERIOD.
               After the Exclusive Development Period, Abbott shall maintain an
               active clinical development program on at least one (1) ArQule
               Compound in each Licensed Compound Set. Abbott shall have
               maintained such an active program if Abbott expends at least
               Three Million Dollars ($3,000,000) per year in direct costs
               (including, but not limited to, costs attributable to external
               services or material contracts) relating to clinical development
               of    *    or more ArQule Compounds within the Licensed Compound
               Set during the period commencing at the end of the Exclusive
               Development Period and ending on the date upon which Abbott makes
               a milestone



                      * confidential treatment has been
                        requested for marked portions

                                      - 5 -



<PAGE>   44



               payment to ArQule pursuant to Section 6.1 (a) for the initiation
               of Phase III Studies for an ArQule Compound within the Licensed
               Compound Set; provided, however, that this obligation shall be
               suspended for a period not to exceed twelve (12) months during
               any period that clinical trials are delayed or suspended because
               of an unexpected negative result occurring for reasons beyond the
               control of Abbott. If clinical trials are delayed or suspended
               because of such unexpected negative result for a period in excess
               of twelve (12) months, the parties shall in good faith negotiate
               appropriate modifications to Abbott's due diligence obligations
               under this Section."

     1.8. All references to "Section 5.5(c)" and "Section 5.6" in Sections 6.10
and 14.4 of the License Agreement are hereby replaced by "Section 5.2" and
"Section 5.4", respectively, and all references to "Section 5.6(c)" in Section
12.5 of the License Agreement are hereby replaced by "Section 5.5".

     1.9. Section 12.5(c) of the License Agreement is hereby deleted in its
entirety and "and (c)" is hereby deleted from Section 12.5(a) of the License
Agreement.

     1.10. Section 13.1 of the License Agreement is hereby deleted in its
entirety and replaced with the following:

          "13.1 EXPIRATION. Unless terminated earlier by mutual written
          agreement of the parties or pursuant to Section 13.2, this Agreement
          shall expire on the date of expiration of the last Royalty Term for
          any Product to expire in any country in the Territory, subject to the
          provisions of Section 5.2."

     1.11. Section 14.7 of the License Agreement is hereby amended by replacing
the telephone and facsimile numbers for Abbott for purposes of notice with the
following:

          Tel: (847) 937-4367
          Fax: (847) 938-5383

     1.12. EXHIBIT B to the License Agreement is hereby deleted in its entirety
and replaced with EXHIBIT B attached hereto.

2. Miscellaneous
   -------------

     2.1 GOVERNING LAW. This Amendment shall be governed in all respects by the
laws of the State of Illinois without giving effect to principles of conflicts
of law thereunder.

     2.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, permitted assigns, heirs, executors and administrators of the
parties hereto.



                                      - 6 -



<PAGE>   45



     2.3 LICENSE AGREEMENT. Except as specifically provided herein, the License
Agreement as previously executed shall remain in full force and effect.

     2.4 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.

     2.5 RESTATED AGREEMENT. Attached hereto as Exhibit C is a copy of the
Agreement, as amended by this Amendment, reflecting the terms of the Agreement,
as amended hereby, in effect as of the Amendment Date.

     IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above written.

                                           ABBOTT LABORATORIES

                                           By: /s/ Paul N. Clark
                                               -----------------------
                                               Name:
                                               Title: Senior Vice President,
                                                      Pharmaceuticals Operations
                                                      and President Product
                                                      Pharmaceuticals Products
                                                      Division

                                            ARQULE, INC.

                                            By: /s/
                                                -----------------------
                                                Eric B. Gordon     
                                                President




                                      - 7 -



<PAGE>   46



                                    EXHIBIT B
                                    ---------


                      FORM OF MATERIALS TRANSFER AGREEMENT
                      ------------------------------------
                                                       







                                       35





<PAGE>   47
                                                                       EXHIBIT B
                                                                       ---------

                      FORM OF MATERIALS TRANSFER AGREEMENT

This Agreement, effective as of the date last written below, is by and among
ArQule, Inc. ("ArQule"), Abbott Laboratories ("Abbott") and
______________________ ("Recipient").

[Set on left column of page]

WHEREAS, Abbott and ArQule have entered into that certain Research, Development
and License Agreement, dated as of June 16, 1995, as amended by Amendment No. 1
to Research, Development and License Agreement, dated as of August __, 1996 (as
so amended, the "License Agreement"), pursuant to which ArQule has agreed, INTER
ALIA, to provide Abbott with certain compounds for screening on the terms and
subject to the conditions set forth in the License Agreement; and

     WHEREAS, pursuant to Section 5.2 of the License Agreement, Abbott is
permitted to deliver such compounds to third parties such as Recipient, provided
such parties execute and deliver this Agreement to ArQule.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions contained herein and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

1.   SUPPLY OF MATERIALS: Within _____ days after receiving an original of this
Agreement executed by all parties, Abbott will supply Recipient with the
compounds set forth on EXHIBIT A (the "Materials"). Upon written request, Abbott
may provide the Recipient with additional quantities of such Materials or with
additional compounds, which compounds shall also be considered Materials for the
purposes of this Agreement.

2.   USE AND TRANSFER RESTRICTIONS: Recipient acknowledges and agrees that the
Materials are proprietary to and owned by ArQule and are or may be covered by
claims of U.S. and international patents or patent applications of ArQule.
Recipient agrees to use the Materials solely to screen them for potential
pharmacological activity for Abbott using the assay procedure [previously
disclosed to Abbott/set forth on EXHIBIT B]. Recipient agrees (i) not to
transfer such Materials to any third party without the prior written consent of
ArQule and Abbott, (ii) to permit access to the Materials only to its employees
and consultants requiring such access, (iii) to inform such employees and
consultants of the proprietary nature of the Materials, (iv) to take reasonable
precautions, at least as stringent as those observed by Recipient to protect its
own proprietary materials, to ensure that such employees and consultants observe
the obligations of Recipient pursuant to this Section and (v) to execute and
deliver any documents of assignment or conveyance that may be necessary to
effectuate the ownership rights of ArQule in the Materials. Upon the expiration
of this Agreement, Recipient shall, at the instruction of ArQule or Abbott,
either destroy or return any unused Materials.

3.   COMPLIANCE WITH LAW: Recipient agrees to comply with all federal, state, 
and local laws and regulations applicable to the use, testing, storage,
disposal, and transfer of the Materials, including without limitation the Toxic
Substances Control Act (15 USC 2601 ET SEQ.) and implementing regulations (in
particular, 40 CFR 720.36 [Research and Development Exemption]), the Food, Drug,
and Cosmetic Act (21 USC 301 ET SEQ.) and implementing regulations, and all
Export Administration Regulations of the Department of Commerce. Recipient
assumes sole responsibility for any violation of such laws or regulations by
Recipient or any of its affiliates or sublicensees.

4.   TERMINATION: This Agreement shall commence on the date last written below 
and continue for a period of ___________ months. Sections 3, 6 and 7 shall
survive termination of this Agreement.

5.   NO WARRANTIES: Any Materials delivered pursuant to this Agreement are
understood to be experimental in nature and may have hazardous properties.
Recipient should assume that the Materials are dangerous and should use
appropriate precautions. NEITHER ABBOTT NOR ARQULE MAKES ANY REPRESENTATIONS, OR
EXTENDS ANY WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO
THE COMPOUNDS. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF THE MATERIALS WILL NOT
INFRINGE ANY PATENT RIGHTS OF OTHERS.


[Set on right column of page]

6.   ASSIGNMENT OF INVENTIONS: Recipient agrees promptly to disclose to Abbott 
any and all ideas, concepts, discoveries, inventions, developments,
improvements, trade secrets, technical data, know-how or biological materials
that are conceived, devised, invented, developed or reduced to practice or
tangible medium by Recipient, or any of its agents or employees, or under its
direction, during the term of this Agreement and which arise out of its
screening or evaluation of the Materials (hereinafter "Inventions"). Recipient
hereby assigns to Abbott all of its right, title and interest in and to the
Inventions and any and all related patent rights, copyrights and applications
and registrations therefor. During and after the expiration of this Agreement,
Recipient shall cooperate with Abbott, at Abbott's expense, in obtaining
proprietary protection for the Inventions and shall execute all documents which
Abbott shall reasonably request in order to perfect Abbott's rights in the
Inventions.

7.   INDEMNIFICATION: Recipient assumes all liability for, and agrees to
indemnify, defend, and hold harmless ArQule and Abbott and their respective
directors, officers, representatives, employees, and agents against, all losses,
expenses (including without limitation any legal expenses), claims, demands,
damages, judgments, suits, or other actions arising from the use, testing,
storage, or disposal of the Materials by Recipient and its agents or employees,
or from any breach of its obligations under Section 2 of this Agreement.

8.   MISCELLANEOUS: This Agreement shall not be assigned or otherwise 
transferred by Recipient without the prior written consent of ArQule and Abbott.
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts. This Agreement constitutes the entire understanding of the
parties and supersedes all prior agreements, written or oral, with respect to
the subject matter hereof.

Recipient
          ---------------------------------------
Signature:
          ---------------------------------------
Name:
          ---------------------------------------
Title:
          ---------------------------------------
Date:
          ---------------------------------------

Shipping Address:

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

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

- -------------------------------------------------
Tel:
          ---------------------------------------
Fax:
          ---------------------------------------

ACCEPTED AND AGREED:
ArQule, Inc.
Signature:
          ---------------------------------------
Name:
          ---------------------------------------
Title:
          ---------------------------------------
Date:
          ---------------------------------------

Address:
ArQule, Inc.
200 Boston Avenue, Suite 3600
Medford, MA  02155
Tel:  (800) 644-5000
Fax:  (617) 395-1225

ACCEPTED AND AGREED:
Abbott Laboratories
Signature:
          ---------------------------------------
Name:
          ---------------------------------------
Title:
          ---------------------------------------
Date:
          ---------------------------------------

Address:
Abbott Laboratories
100 Abbott Park Road
Abbott Park, IL  60064
Tel:  (847) 937-4367
Fax:  (847) 938-5383








<PAGE>   48
                                                                       EXHIBIT C
                                                                       ---------



         See Exhibit 10.15 of the Registrant's Registration Statement.






<PAGE>   1
 
                                                                    EXHIBIT 23.1
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 4, 1996 relating
to the financial statements of ArQule, Inc., which appears in such Prospectus.
We also consent to the application of such report to the Financial Statement
Schedule for the two years ended December 31, 1995 listed under item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
 
PRICE WATERHOUSE LLP
 
Boston, Massachusetts
   
October 15, 1996