ARQULE INC, S-1/A, 1996-10-04

ARQULE INC
S-1/A, 1996-10-04
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996

REGISTRATION NO. 333-11105
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2

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>

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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)

------------------------
COPIES TO:

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

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

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. / /
------------------------

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
[SET VERTICALLY ON LEFT SIDE OF PAGE:
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.]

SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996

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

2,000,000 SHARES

ARQULE, INC.

[ARQULE LOGO]

COMMON STOCK

All of the 2,000,000 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. It is currently anticipated that the initial public
offering price will be between $11.00 and $13.00 per share. 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.............. $ $ $
- ---------------------------------------------------------------------------------
Total(3)............... $ $ $
=================================================================================

<FN>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $775,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 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
$ , $ and $ , 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 , 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 , 1996

<PAGE> 3
[GRAPH]

The above graphical representation displays the integration 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................ 2,000,000 shares
Common Stock to be outstanding after the
offering......................................... 8,976,487 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 ENDED
(MAY 6, 1993) THROUGH YEAR 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
</TABLE>

<TABLE>
<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 $27,912
Working capital.............................................. 1,394 1,394 22,939
Total assets................................................. 11,848 11,848 33,393
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 26,821

<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 2,000,000 shares of Common Stock
offered hereby, after deducting the underwriting discount and offering
expenses, at an assumed 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 to be effected prior to the
effectiveness of the registration statement of which this Prospectus is a part,
(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."

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
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

6
<PAGE> 8

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 71.9% of
the outstanding shares of Common Stock (69.6% 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's success will
depend in large part on 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. 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

7
<PAGE> 9

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."

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

8
<PAGE> 10

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 certain laws and regulations,
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 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

9
<PAGE> 11

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 8,976,487 shares of Common
Stock outstanding, assuming no exercise of currently outstanding options. Of
these shares, the 2,000,000 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 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

10
<PAGE> 12

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 $9.01 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 47.85% 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 $21.5 million ($24.9 million if the Underwriters' over-allotment
option is exercised in full), assuming 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 2,000,000 shares of Common Stock offered hereby,
after deducting the underwriting discount and offering expenses, at an assumed
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, 8,977,987 shares issued and
outstanding as adjusted(1)........................ 5 70 90
Additional paid-in capital........................... 4,435 13,896 35,421
Accumulated deficit.................................. (8,690) (8,690) (8,690)
------- ------- -------
Total stockholders' equity (deficit).............. (1,622) 5,276 26,821
------- ------- -------
Total capitalization......................... $ 6,702 $ 6,702 $28,247
======= ======= =======
<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

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 2,000,000 shares
of Common Stock offered hereby at an assumed 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 $26,821,000, or $2.99 per share. This represents
an immediate increase in the pro forma net tangible book value of $2.23 per
share to existing stockholders of the Company and an immediate dilution of $9.01
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:

<TABLE>
<S> <C> <C>
Assumed 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.................. 2.23
-----
Pro forma net tangible book value per share after the offering...... 2.99
------
Dilution per share to new investors................................. $ 9.01
======
</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 (assuming an 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 77.7% $13,737,000 36.4% $ 1.97
New investors..................... 2,000,000 22.3 24,000,000 63.6 12.00
--------- ----- ----------- -----
Total................... 8,977,987 100.0% $37,737,000 100.0%
========= ===== =========== =====
</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
======= ======
</TABLE>

<TABLE>
<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 $27,912
Working capital........................................................ 275 (2,108) 5,074 1,394 22,939
Total assets........................................................... 1,538 2,321 10,190 11,848 33,393
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) 26,821
<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
2,000,000 shares of Common Stock offered by the Company hereby, after
deducting the underwriting discount and offering expenses, at an assumed
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.

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<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.

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<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>

__________________________________ Average Time to Market: 12 to 15 years__________________________________
Average Cost: $300+ million

</TABLE>

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<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.

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<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.

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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.

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<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.

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<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. The Company intends to increase its marketing efforts
through the creation of a direct sales force.

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 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

28
<PAGE> 30

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.

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, 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

29
<PAGE> 31

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 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.

30
<PAGE> 32

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 interest 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.

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<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. While the Scientific Advisory Board has not
met collectively, its members have 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 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."

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<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% 15.10%
222 Berkeley Street
Boston, MA 02116
Physica B.V.(5)...................................... 907,734 13.01% 10.11%
C.J. van Houtenlaan, 36
1381 CD Weiss
The Netherlands
Sevin Rosen Fund IV L.P.(6).......................... 2,362,833 33.87% 26.32%
13455 Noel Road, Suite 1670
Dallas, TX 75240
Adrian de Jonge, Ph.D.(7)............................ 907,734 13.01% 10.11%
Stephen M. Dow(8).................................... 2,362,833 33.87% 26.32%
Allan R. Ferguson(9)................................. 1,355,738 19.43% 15.10%
Eric B. Gordon(10)................................... 38,743 * *
Seth L. Harrison, M.D.(11)........................... 128,689 1.84% 1.43%
Joseph C. Hogan, Jr., Ph.D.(12)...................... 1,208,194 17.32% 13.46%
All current executive officers and directors as a
group (6 persons)(13).............................. 5,873,242 83.72% 65.15%

<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 2,000,000 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 47.85% 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

Joseph C. Hogan, III 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 assumed 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 assumed 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 assumed 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 assumed 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 Mr. 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 8,976,487 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 8,976,487 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of any other outstanding options. Of these shares, the
2,000,000 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
<TABLE>
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:

<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Hambrecht & Quist LLC..........................................
Oppenheimer & Co., Inc. .......................................
Vector Securities International, Inc. .........................
---------
Total..................................................... 2,000,000
=========
</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 $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ 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 300,000
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.

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

46
<PAGE> 48

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 will be determined
by negotiation among the Company and the Representatives. Among the factors to
be 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. The estimated initial public offering price range
set forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.

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.

The stock split described in Note 11 to the financial statements has not been
consummated at October 2, 1996. When it has been consummated, we will be in a
position to furnish the following report:

"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 2, 1996

F-2
<PAGE> 51

ARQULE, INC.

BALANCE SHEET

<TABLE>
<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, 1995,
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)

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), totaling $2,236,000 and $2,100,000 of cash for the
years ended December 31, 1993 and 1994, respectively, 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.

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 based on the ratio that the effort expended to date bears to the
estimated total effort at completion. 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 assumed 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

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. 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 assumed 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

On August 14, 1996, the Board of Directors approved a 1 for 2 reverse stock
split on the common stock of the Company. The reverse stock split is subject to
stockholder approval and the filing of an amended Certificate of Incorporation
which is expected to occur on or before the effective date of the registration
statement related to the Company's contemplated initial public offering.
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:

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

[This Page Intentionally Left Blank]
<PAGE> 68

[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> 69
================================================================================

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 OF CONTENTS

PAGE
----
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

UNTIL , 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.
================================================================================

================================================================================

2,000,000 SHARES

ARQULE, INC.

[ARQULE LOGO]

COMMON STOCK

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

HAMBRECHT & QUIST

OPPENHEIMER & CO., INC.

VECTOR SECURITIES INTERNATIONAL,
INC.

OCTOBER , 1996

================================================================================

<PAGE> 70

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...................................................... $ 10,311
Nasdaq listing fee........................................................ 39,942
NASD filing fee........................................................... 3,490
Blue Sky fees and expenses................................................ 15,000
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.................................................... 6,257
--------
Total........................................................... $775,000
========
</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> 71

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> 72

ITEM 16.
(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation of ArQule, as amended through
the date hereof.

3.2++ Form of Certificate of Amendment to the Amended and Restated Certificate of
Incorporation as proposed to be filed upon the effectiveness of this Registration
Statement.
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.
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. To be filed by amendment.
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. To be filed by amendment.
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.
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. Filed herewith.
10.18*++ Adoption Agreement for Fidelity Management and Research Company (ArQule's 401(k)
plan).
</TABLE>

II-3
<PAGE> 73

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
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.
<FN>

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

* 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.
</TABLE>

(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> 74

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 4, 1996.

ARQULE, INC.

By: *
-------------------------------------
Eric B. Gordon
President and Chief Executive Officer

POWER OF ATTORNEY
<TABLE>

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 4, 1996
- ------------------------------ and Director (Principal Executive
Eric B. Gordon Officer, Principal Financial Officer
and Principal Accounting Officer)

* Director October 4, 1996
- ------------------------------
Stephen M. Dow

* Director October 4, 1996
- ------------------------------
Joseph C. Hogan, Jr.

* Director October 4, 1996
- ------------------------------
Adrian de Jonge

* Director October 4, 1996
- ------------------------------
Allan R. Ferguson

*By: /s/ MICHAEL LYTTON
-------------------
Michael Lytton
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 75

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> 76

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- -----
<C> <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++ Form of Certificate of Amendment to the Amended and Restated Certificate of
Incorporation as proposed to be filed upon the effectiveness of this Registration
Statement.
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.
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. To be filed by amendment.
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.
To be filed by amendment.
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.
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> 77

<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.
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.
<FN>

- ---------------
* Indicates a management contract or compensatory plan.

++ Previously filed.
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT TO 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 2, 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 3, 1996