ARQULE INC, S-3, 2000-10-20

ARQULE INC
S-3, 2000-10-20
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 2000.

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

19 PRESIDENTIAL WAY
WOBURN, MASSACHUSETTS 01801
(781) 994-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DR. STEPHEN A. HILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ARQULE, INC.
19 PRESIDENTIAL WAY
WOBURN, MASSACHUSETTS 01801
(781) 994-0300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

WITH COPIES TO:

<TABLE>
<S> <C>
MICHAEL E. LYTTON, ESQ. JONATHAN L. KRAVETZ, ESQ.
PALMER & DODGE LLP MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
ONE BEACON STREET ONE FINANCIAL CENTER
BOSTON, MASSACHUSETTS 02108-3190 BOSTON, MASSACHUSETTS 02111
(617) 573-0100 (617) 542-6000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value..... 2,875,000 shares(2) $18.91 $54,366,250 $14,353
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</TABLE>

(1) Estimated solely for the purpose of determining the registration fee and
computed pursuant to Rule 457(c), based upon the average of the high and low
prices on October 13, 2000 as reported by the Nasdaq National Market.
(2) Includes a total of 375,000 shares that are subject to an over-allotment
option granted to the Underwriters.

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 SAID SECTION 8(a),
MAY DETERMINE.

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<PAGE> 2

WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED OR LEGAL.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED , 2000
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2,500,000 SHARES

[ARQULE LOGO]
COMMON STOCK
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We are offering 2,500,000 shares of our common stock to be sold in this
offering.

Our common stock is listed for trading on the Nasdaq National Market under the
symbol "ARQL". On October 18, 2000, the last reported sale price of the common
stock on the Nasdaq National Market was $22.50 per share.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE BUYING ANY
SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF INVESTING IN OUR
COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price $ $
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Underwriting discounts and commission $ $
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Proceeds, before expenses, to us $ $
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</TABLE>

We have granted the underwriters a 30-day option to purchase up to an additional
375,000 shares of common stock to cover over-allotments at the public offering
price per share less the underwriting discounts and commissions. If the option
is exercised in full, the total underwriting discounts and commissions will be
$ and the total proceeds, before expenses, to us will be
$ . The underwriters expect to deliver the shares of common stock
in New York, New York on , 2000.

UBS WARBURG LLC
CIBC WORLD MARKETS
GERARD KLAUER MATTISON
LEGG MASON WOOD WALKER
INCORPORATED

The date of this prospectus is , 2000
<PAGE> 3

TABLE OF CONTENTS
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Prospectus summary...................... 1

Risk factors............................ 5

Use of proceeds......................... 10

Forward-looking statements.............. 10

Market price of common stock and
dividend policy....................... 11

Capitalization.......................... 12

Selected consolidated financial data.... 13

Management's discussion and analysis of
financial condition and results of
operations............................ 14

Business................................ 19

Management.............................. 36

Underwriting............................ 40

Legal matters........................... 42

Experts................................. 42

Where you can find more information..... 42

Incorporation of certain documents by
reference............................. 43
</TABLE>

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Prospectus summary

The following is only a summary. You should carefully read the more detailed
information contained elsewhere in this prospectus and the financial statements
and the notes to the financial statements incorporated by reference in this
prospectus. Investing in our common stock involves risk. Therefore, carefully
consider the information provided on pages 5-9 under the heading "Risk factors."
Unless we indicate otherwise, all information in this prospectus assumes that
the underwriters' overallotment option will not be exercised. We urge you to
read the entire prospectus, including information incorporated by reference in
this prospectus from our other filings with the SEC.

ArQule seeks to bridge the gap between genomics and clinical development by
applying its proprietary technology platform and world class chemistry
capabilities to drug discovery. Recent advances in genomics and the completion
of the mapping of the human genome are bringing about a revolution in
scientists' understanding of the molecular mechanisms of disease. Genomics has
created explosive growth in the number of new biological targets for the
development of drugs. Fulfilling the promise of genomics, however, will require
similar advances in the technology and systems used to design and test new
chemical compounds which interact with these targets. Since these chemical
compounds will become the medicines of the future, advances in chemistry
technologies hold the key to unlocking the value of genomics.

The continued success of the pharmaceutical industry will depend on its ability
to significantly reduce the time and cost required to bring a drug to market, to
increase the number of candidates entering clinical development, and to improve
the success rate of clinical testing. ArQule has built an integrated technology
platform incorporating our proprietary automated AMAP Chemistry Operating
System, patented processes and world class chemistry capabilities to address
these critical needs of drug discovery.

ArQule offers a range of products and services tailored to our customers' needs
for drug discovery assistance. Our products and services provide solutions for
the lead generation, lead qualification and lead optimization components of the
drug discovery process. We focus on making the drug discovery process more
efficient, less expensive and more likely to result in better clinical
candidates. We believe that, while no single technology platform will bridge the
gap in the drug discovery process between genomics and the clinic, the
integration of multiple emerging technologies will result in major efficiency
gains. Our integrated technologies provide the following benefits:

- high-throughput, automated production of new chemical compounds using our AMAP
Chemistry Operating System;

- discrete compounds of known structure, high purity and sufficient quantity for
lead optimization;

- early availability of information on the relationship between the chemical
structure of compounds and their suitability as potential drugs;

- compound libraries designed to increase the likelihood of generating
marketable drugs;

- reduced screening costs by utilizing smaller, more focused libraries of
compounds;

- cost-efficient profiling of compounds for desirable drug characteristics; and

- target validation through proprietary compound libraries which interact with
targets.

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<PAGE> 5

We provide our products and services under collaboration agreements with a
number of pharmaceutical companies, including Pfizer, Inc, Bayer AG, American
Home Products Corporation, Solvay Duphar B.V., Pharmacia Corp., Sankyo Company,
Ltd. and Johnson & Johnson, Inc.

We plan to continue to build our drug discovery capabilities by developing our
own technologies and by in-licensing or acquiring new complementary
technologies. We seek to balance risk and reward over time through a combination
of pharmaceutical collaborations, partnerships with biotechnology companies and
internal discovery programs.

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THE OFFERING

<TABLE>
<S> <C>
Common stock offered by us........................... 2,500,000 shares

Common stock to be outstanding after the offering.... 16,119,152 shares(1)

Use of proceeds...................................... We intend to use the estimated net proceeds of
$52.72 million that we will receive from the
offering for general corporate purposes,
including: working capital, the acquisition of
complementary technologies, expansion of existing
operations, and investment in systems
infrastructure and new technologies.

Nasdaq National Market Symbol........................ ARQL
</TABLE>

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(1) Based on 13,619,152 shares outstanding as of October 18, 2000. Excludes
2,352,254 shares issuable upon exercise of options outstanding as of October
18, 2000

HOW TO CONTACT US

Our executive offices are located at 19 Presidential Way, Woburn, Massachusetts,
01801, and our telephone number is (781) 994-0300. Our World Wide Web site is
located at http://www.arqule.com. We do not intend for the information in our
Web site to be incorporated into any part of this Prospectus.

The terms "ArQule", "Mapping Array", and "Directed Array" are trademarks of
ArQule that are registered in the U.S. Patent and Trademark Office. The terms
"Compass Array", "AMAP", "Custom Array", "ArQule Reactor", "MapMaker", "Parallel
Track", and "PrepQule" are trademarks of ArQule.

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1999 1999 2000
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<S> <C> <C> <C> <C> <C> <C> <C>

Revenues............................................ $ 3,330 $ 7,255 $17,420 $22,193 $ 18,582 $ 13,463 $ 36,257

Cost and expenses:

Cost of revenue................................... 1,644 4,739 10,218 14,036 17,457 11,685 15,764

Research and development.......................... 2,095 3,076 4,704 10,427 14,260 9,751 12,772

Marketing, general and administrative............. 1,557 2,850 4,670 6,387 6,022 4,380 6,395
------- ------- ------- ------- -------- -------- --------

Total costs and expenses........................ 5,296 10,665 19,592 30,850 37,739 25,816 34,931
------- ------- ------- ------- -------- -------- --------

Income (loss) from operations....................... (1,966) (3,410) (2,172) (8,657) (19,157) (12,353) 1,326

Interest income (expense), net...................... (286) 417 2,463 2,195 1,724 1,136 919
------- ------- ------- ------- -------- -------- --------

Net income (loss)................................... $(2,252) $(2,993) $ 291 $(6,462) $(17,433) $(11,217) $ 2,245
======= ======= ======= ======= ======== ======== ========

Basic net income (loss) per share................... $ (7.93) $ (1.32) $ 0.03 $ (0.54) $ (1.38) $ (0.90) $ 0.17
======= ======= ======= ======= ======== ======== ========

Weighted average common shares
outstanding -- basic.............................. 284 2,272 11,282 12,031 12,606 12,522 13,437
======= ======= ======= ======= ======== ======== ========

Diluted net income (loss) per share................. $ (7.93) $ (1.32) $ 0.02 $ (0.54) $ (1.38) $ (0.90) $ 0.15
======= ======= ======= ======= ======== ======== ========

Weighted average common shares
outstanding -- diluted............................ 284 2,272 12,394 12,031 12,606 12,522 14,710
======= ======= ======= ======= ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
BALANCE SHEET DATA: ACTUAL ADJUSTED(1)
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<S> <C> <C>

Cash, cash equivalents and marketable securities.......... $ 46,696 $ 99,416

Working capital........................................... 21,463 74,183

Total assets.............................................. 82,702 135,422

Long-term debt............................................ 8,075 8,075

Total stockholders' equity................................ $ 46,873 $ 99,593
</TABLE>

(1) Reflects the sale of the 2,500,000 shares of common stock offered by us
hereby at an assumed public offering price of $22.50 per share (the closing
price on October 18, 2000), and the application of the net proceeds, after
deducting the estimated offering expenses and underwriting discounts and
commissions payable by us. See "Use of Proceeds."

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Risk factors

You should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business, results
of operations and financial condition could suffer. In that case, the trading
price of our common stock could decline, and you could lose all or part of your
investment. The risks described below may not be exhaustive.

RISKS RELATING TO OUR BUSINESS

WE ARE AT AN EARLY STAGE OF DEVELOPMENT.

From our inception in 1993 to September 30, 2000, we have incurred cumulative
losses of approximately $32.3 million. These losses have resulted principally
from the costs of our research activities and enhancements to our technology. We
have derived our revenue primarily from:

- license fees;

- payments for product deliveries;

- milestone payments; and

- research and development funding paid under our agreements with our
collaboration partners.

To date, except for during 1997 and during the second and third quarters of
2000, these revenues have not generated profits, nor have we realized any
revenue from royalties from the sale by any of our collaboration partners of a
commercial product developed using our technology. We cannot be certain that we
will ever become profitable on a sustainable basis.

WE CANNOT GUARANTEE THAT OUR STRATEGY OF USING OUR INTEGRATED COMPOUND DISCOVERY
TECHNOLOGIES TO ASSIST IN THE DEVELOPMENT OF NEW DRUGS AND OTHER PRODUCTS WILL
EVER BE COMMERCIALLY SUCCESSFUL.

OUR APPROACH TO COMPOUND DISCOVERY HAS NOT YET YIELDED A COMMERCIALLY SUCCESSFUL
DRUG.

Our strategy is to use our technology platform to rapidly identify, optimize and
obtain financial interest in as many compounds with commercial potential as
possible. This approach has not yet yielded any commercially successful drug. In
addition, we have recently reoriented our business and technology strategies to
offer an integrated compound discovery solution, in addition to combinatorial
chemistry products and services. Our new strategy may not be accepted by our
potential customers. In particular, we have not proven that we can use our
products successfully to assist our customers to conduct lead optimization. Our
ability to succeed depends on our potential customers accepting our approach to
combinatorial chemistry and integrated compound discovery as an effective tool
in the discovery and development of compounds with commercial potential. If we
cannot demonstrate that our approach can result in successful products, we may
not be able to attract additional customers or to retain our existing customers.

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RISK FACTORS
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BECAUSE OF THE SPECIALIZED NATURE AND HIGH PRICE OF OUR SERVICES, OUR POTENTIAL
CUSTOMER BASE IS LIMITED, AND THESE POTENTIAL CUSTOMERS MAY DECIDE TO TRY TO USE
OUR APPROACH THEMSELVES WITHOUT OUR ASSISTANCE OR TRY OTHER METHODS.

Because we offer specialized assistance in the development of drugs, our
potential customer base consists of a limited number of pharmaceutical and
biotechnology companies and research institutions. These companies have
historically conducted lead compound identification and optimization within
their own research departments. Because of the high cost of our products and
programs, they may decide to conduct these activities without our assistance.

WE DEPEND ON COLLABORATION ARRANGEMENTS WITH THIRD PARTIES FOR OUR REVENUE AND
CANNOT BE SURE WHETHER OUR COLLABORATIONS WILL SUCCEED OR WHETHER WE WILL
REALIZE MUCH OF THE POTENTIAL REVENUE FROM OUR COLLABORATIONS.

WE DEPEND ON OUR COLLABORATIONS FOR ALL OF OUR REVENUES, AND WE WILL ONLY
REALIZE MUCH OF THE POTENTIAL REVENUE UNDER THESE COLLABORATIONS IF WE MEET
COMPOUND DELIVERY TARGETS, SATISFY MILESTONES AND EARN ROYALTIES.

Our revenue stream and our business strategy depend largely on the formation of
collaborative arrangements with third parties, initially pharmaceutical and
biotechnology companies and research institutions. To date, we have entered into
many of these arrangements. Much of the potential revenue from our
collaborations consists of contingent payments, such as payments for achieving
development milestones and royalties payable on sales of drugs developed using
our products. We cannot guarantee that these milestones will be achieved or that
commercial drugs or other products will be developed on which royalties will be
payable.

OUR ABILITY TO REALIZE POTENTIAL REVENUE FROM MILESTONES AND ROYALTIES FROM OUR
COLLABORATIONS DEPENDS, IN LARGE PART, ON THE EFFORTS OF OUR PARTNERS, OVER
WHICH WE HAVE LITTLE CONTROL.

Much of the revenue from milestones and royalties that we may receive under
these collaborations will depend upon our partners' ability to successfully
develop, introduce, market and sell new drugs developed using our products. Our
products will result in commercialized drugs generating milestone payments and
royalties only after, among other things:

- significant preclinical and clinical development efforts or the completion of
preliminary field trials;

- the receipt of the required regulatory approvals;

- developing manufacturing capabilities; and

- successful marketing efforts.

With the exception of certain aspects of preclinical drug development, we do not
currently intend to perform any of these activities. Accordingly, we will depend
on our partners having the necessary expertise and dedicating sufficient
resources to develop and commercialize products. Our collaboration partners may
fail to develop or commercialize a compound or product to which they have
obtained rights from us, because, among other reasons:

- they decide not to devote the necessary resources because of internal
constraints or other development priorities;

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RISK FACTORS
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- they decide to pursue a competitive potential drug or compound developed
outside of the collaboration; or

- they cannot obtain the necessary regulatory approvals.

FOR OUR STRATEGY TO BE SUCCESSFUL, WE MUST EXPAND THE NUMBER OF OUR
COLLABORATIONS BOTH BY MAINTAINING EXISTING COLLABORATIONS AS WELL AS CONTINUING
TO ENTER INTO NEW ONES.

To be successful, we must expand the number of our collaborations both by
maintaining existing collaborations, as well as continuing to enter into
agreements with new partners to use our technology to develop potential drugs.
We may not be able to maintain our existing collaborations or establish new
collaborations, and we cannot guarantee that any collaboration will be on
commercially acceptable terms.

OUR COMPETITORS MAY HAVE GREATER RESOURCES OR RESEARCH AND DEVELOPMENT
CAPABILITIES THAN WE HAVE AND WE MAY NOT HAVE THE RESOURCES REQUIRED TO
SUCCESSFULLY COMPETE WITH THEM.

The drug development business is highly competitive. We compete with many
organizations that are engaged in attempting to identify and optimize compounds
as potential drugs. Many of these competitors have greater financial and human
resources and more experience in research and development than we have. They
include:

- biotechnology, pharmaceutical, combinatorial chemistry and other companies;

- academic and scientific institutions;

- governmental agencies; and

- public and private research organizations.

Historically, pharmaceutical companies have maintained close control over their
research activities, including the synthesis, screening and optimization of
potential drugs. Many of these companies, which represent a significant
potential market for our products and services, have developed or are developing
internal combinatorial chemistry and other capabilities to improve productivity.
We anticipate that we will face increased competition in the future as new
companies enter the market and alternative technologies become available.

WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD HURT OUR ABILITY TO
COMPETE.

We are highly dependent on the principal members of our scientific and
management staff. The loss of one or more members of our staff could have a
material adverse effect on our business. We do not maintain key person life
insurance coverage on the life of any employee. Our success will depend in part
on our ability to identify, attract and retain qualified managerial and
scientific personnel. We face intense competition for qualified personnel in our
industry. We may not be able to continue to attract and retain personnel with
the advanced technical qualifications or managerial expertise necessary for the
development of our business.

WE FACE UNCERTAINTY IN RAISING ADDITIONAL FUNDS THAT MAY BE NECESSARY TO FUND
OUR OPERATIONS.

Our capital requirements depend on many factors. If our operations do not become
profitable on a sustainable basis before we exhaust existing resources, we will
need to obtain additional financing, either

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RISK FACTORS
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through public or private financings, including debt or equity financings, or
through collaboration or other arrangements with corporate partners. We may not
be able to obtain adequate funds for our operations from these sources when
needed or on acceptable terms. If we raise additional capital through the sale
of equity, or securities convertible into equity, your proportionate ownership
in ArQule may be diluted. If we cannot obtain additional financing, we could be
forced to delay or scale back our research and development programs. If adequate
funds are not available, we may be required to curtail operations significantly
or to obtain funds by entering into arrangements with collaboration partners or
others that may require that we relinquish rights to certain technologies,
product candidates, products or potential markets.

OUR SUCCESS DEPENDS ON OUR ABILITY TO SCALE UP AND MANAGE OUR GROWTH.

Our success depends on the expansion and proper management of our operations. To
be cost-effective in our delivery of services and products, we must enhance
productivity by further automating our processes and technology. We may not
succeed in our engineering efforts to further automate these processes. We also
must successfully structure and manage multiple collaborative relationships.
Further, we may not succeed in managing and meeting the staffing requirements of
additional collaborative relationships.

WE DEPEND ON PATENTS AND OTHER PROPRIETARY RIGHTS THAT MAY FAIL TO PROTECT OUR
BUSINESS.

Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. We cannot be certain that we will
receive any additional patents, that the claims of our patents will offer
significant protection of our technology, or that our patents will not be
challenged, narrowed, invalidated or circumvented. In order to protect or
enforce our patent rights, we may initiate patent litigation against third
parties, such as infringement suits or interference proceedings. These lawsuits
could be expensive, take significant time and divert management's attention from
other business concerns. We may also provoke these third parties to assert
claims against us. The patent position of biotechnology firms is generally
highly uncertain, involves complex legal and factual questions, and has recently
been the subject of much litigation. No consistent policy has emerged from the
U.S. Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under many biotechnology patents.
In addition, there is a substantial backlog of biotechnology patent applications
at the U.S. Patent and Trademark Office, and the approval or rejection of patent
applications may take several years.

In an effort to protect our trade secrets, we require our employees, consultants
and advisors to execute confidentiality agreements. We cannot guarantee,
however, that these agreements will provide us with adequate protection against
improper use or disclosure of confidential information. In addition, in some
situations, these agreements may conflict with, or be subject to, the rights of
third parties with whom our employees, consultants or advisors have previous
employment or consulting relationships. Also, others may independently develop
substantially equivalent proprietary information and techniques, or otherwise
gain access to our trade secrets.

OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.

Others may sue us for infringing on their patent rights. Intellectual property
litigation is costly, and, even if we prevail, the cost of such litigation could
adversely affect our business, financial condition and results of operations. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. If we do not prevail in litigation, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. Any required license may not

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RISK FACTORS
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be available to us on acceptable terms, or at all. In addition, some licenses
may be non-exclusive and, accordingly, our competitors may have access to the
same technology licensed to us. If we fail to obtain a required license or are
unable to design around a patent, we may be unable to sell some of our products.

RISKS RELATING TO THIS OFFERING

OUR COMMON STOCK MAY HAVE A VOLATILE PUBLIC TRADING PRICE AND LOW TRADING
VOLUME.

The market price of our common stock has been highly volatile and the market for
our common stock has experienced significant price and volume fluctuations, some
of which are unrelated to our operating performance. Many factors can have a
significant adverse effect on our common stock's market price, including:

- announcements by us or our competitors of technological innovations or new
commercial products;

- developments concerning our proprietary rights, including patent and
litigation matters;

- publicity regarding actual or potential results relating to our or our
collaborators' products or compounds under development;

- an unexpected termination of one of our collaborations;

- regulatory developments in the United States and other countries;

- general market conditions; and

- quarterly fluctuations in our revenues and other financial results.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS AND DELAWARE LAW MAY
ADVERSELY AFFECT OUR STOCK PRICE.

Our certificate of incorporation, certain provisions of our by-laws and certain
provisions of Delaware law could delay or make more difficult a merger, tender
offer or proxy contest involving us. These provisions may have the effect of
delaying or preventing a change of control without action by the stockholders
and, therefore, could adversely affect the price of our common stock.

OUR MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS
OFFERING.

Our management will have broad discretion regarding how we use the net proceeds
of the offering. Investors will be relying on the judgment of management
regarding the application of the proceeds of the offering. The result and
effectiveness of our use of the proceeds are uncertain.

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Use of proceeds

We estimate the net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed public offering price of $22.50 per share (the
closing price on October 18, 2000) will be approximately $52.72 million after
deducting the underwriting discount and estimated offering expenses payable by
us. Our net proceeds are estimated to be approximately $60.65 million if the
underwriters exercise their over-allotment option in full. We anticipate that
these funds will be used for general corporate purposes, including working
capital, the acquisition of complementary businesses or technologies, the
expansion of existing operations and investment in systems infrastructure and
new technologies. Our management will have broad discretion to allocate proceeds
from this offering to uses that it believes are appropriate. Pending such uses,
the net proceeds of this offering will be invested in short-term, investment
grade, interest-bearing securities.

Forward-looking statements

This prospectus contains forward-looking statements, principally in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Generally, these statements can be
identified by the use of phrases like "believe," "expect," "anticipate," "plan,"
"may," "will," "could," "estimate," "potential," "opportunity," "future,"
"project," and similar terms and include statements about our:

- implementation of our corporate strategy;

- financial performance;

- ability to deliver our products to our corporate collaborators and to satisfy
milestones so that we can earn future payments under our collaboration
agreements;

- collaborators' ability to develop and commercialize products using our
technology and pay us royalties on the sales of those products;

- ability to enter into future collaborations with pharmaceutical and
biotechnology companies and academic institutions;

- product research and development activities and projected expenditures;

- spending the proceeds from this offering;

- cash needs;

- plans for sales and marketing; and

- results of scientific research.

These forward-looking statements involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed in "Risk factors." You should carefully
consider that information before you make an investment decision. You should not
place undue reliance on our forward-looking statements.

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<PAGE> 14
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MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock commenced trading on October 16, 1996 on the Nasdaq National
Market under the symbol ARQL. Quarterly high and low sale prices for the common
stock as reported by the Nasdaq National Market are shown below.

<TABLE>
<CAPTION>
HIGH LOW
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
First Quarter............................................... $24.75 $16.38
Second Quarter.............................................. 20.63 10.81
Third Quarter............................................... 13.25 4.22
Fourth Quarter.............................................. 7.38 4.50

1999
First Quarter............................................... $ 7.50 $ 4.38
Second Quarter.............................................. 5.25 3.66
Third Quarter............................................... 7.06 4.25
Fourth Quarter.............................................. 11.13 5.13

2000
First Quarter............................................... $40.38 $ 7.63
Second Quarter.............................................. 20.50 5.75
Third Quarter............................................... 25.75 15.63
Fourth Quarter (through October 18, 2000)................... 23.09 11.88
</TABLE>

The closing price of the common stock on October 18, 2000, as reported on the
Nasdaq National Market was $22.50 per share. As of October 18, 2000, there were
68 holders of record of our common stock. We have never paid a cash dividend on
our common stock and currently expect that future earnings, if any, will be
retained for use in our business.

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11
<PAGE> 15

--------------------------------------------------------------------------------
Capitalization

The following table sets forth, as of September 30, 2000, our actual
capitalization and our capitalization as adjusted for this offering of 2,500,000
shares of common stock at an assumed public offering price of $22.50 per share
(the closing price on October 18, 2000) after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. This table should
be read in conjunction with the consolidated financial statements and related
notes thereto incorporated by reference into this prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
HISTORICAL AS ADJUSTED
(UNAUDITED)
-----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>

Long-term debt, including current portion of long-term
debt...................................................... $12,450 $12,450

Stockholders' equity:

Preferred stock, par value $0.01 per share; 1,000,000
authorized, no shares issued and outstanding, or as
adjusted................................................ -- --

Common stock, par value $0.01 per share; 30,000,000 shares
authorized, 13,614,277 shares issued and outstanding,
16,114,277 shares issued and outstanding, as adjusted... 136 161

Additional paid-in capital................................ 79,329 132,024

Deferred compensation..................................... (262) (262)

Unrealized loss on marketable securities.................. (37) (37)

Accumulated deficit....................................... (32,293) (32,293)
------- -------

Total stockholders' equity.................................. 46,873 99,593
------- -------

Total capitalization........................................ $59,323 $112,043
======= =======
</TABLE>

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<PAGE> 16

--------------------------------------------------------------------------------
Selected consolidated financial data

The selected financial data set forth below as of December 31, 1999 and 1998 and
for each of the three fiscal years in the period ended December 31, 1999, are
derived from our consolidated financial statements incorporated by reference in
this prospectus, which have been audited. The selected financial data set forth
below as of December 31, 1997, 1996, and 1995 and for the two fiscal years in
the period ended December 31, 1996 are derived from audited consolidated
financial statements not incorporated by reference in this prospectus. The
selected consolidated financial data as of September 30, 2000 and for the nine
months ended September 30, 2000 and 1999 are derived from our unaudited
financial statements incorporated by reference in this prospectus. The unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and include adjustments consisting of normal,
recurring adjustments that we consider necessary for a fair presentation of the
financial position and results of operations for the periods presented.
Historical results are not necessarily indicative of the results that may be
expected in the future, and the results of interim periods are not necessarily
indicative of the results that may be expected for the entire fiscal year.

This data should be read in conjunction with our consolidated financial
statements and related notes thereto incorporated by reference in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 1995 1996 1997 1998 1999 1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 3,330 $ 7,255 $17,420 $22,193 $ 18,582 $ 13,463 $36,257
Cost and expenses:
Cost of revenue...................... 1,644 4,739 10,218 14,036 17,457 11,685 15,764
Research and development............. 2,095 3,076 4,704 10,427 14,260 9,751 12,772
Marketing, general and
administrative..................... 1,557 2,850 4,670 6,387 6,022 4,380 6,395
------- ------- ------- ------- -------- -------- -------
Total costs and expenses........ 5,296 10,665 19,592 30,850 37,739 25,816 34,931
------- ------- ------- ------- -------- -------- -------
Income (loss) from operations.......... (1,966) (3,410) (2,172) (8,657) (19,157) (12,353) 1,326
Interest income (expense), net......... (286) 417 2,463 2,195 1,724 1,136 919
------- ------- ------- ------- -------- -------- -------
Net income (loss)...................... $(2,252) $(2,993) $ 291 $(6,462) $(17,433) $(11,217) $ 2,245
======= ======= ======= ======= ======== ======== =======
Basic net income (loss) per share...... $ (7.93) $ (1.32) $ 0.03 $ (0.54) $ (1.38) $ (0.90) $ 0.17
======= ======= ======= ======= ======== ======== =======
Weighted average common shares
outstanding -- basic................. 284 2,272 11,282 12,031 12,606 12,522 13,437
======= ======= ======= ======= ======== ======== =======
Diluted net income (loss) per share.... $ (7.93) $ (1.32) $ 0.02 $ (0.54) $ (1.38) $ (0.90) $ 0.15
======= ======= ======= ======= ======== ======== =======
Weighted average common shares
outstanding -- diluted............... 284 2,272 12,394 12,031 12,606 12,522 14,710
======= ======= ======= ======= ======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31, SEPTEMBER 30,
(IN THOUSANDS) 1995 1996 1997 1998 1999 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable
securities................................ $ 7,791 $37,086 $49,282 $33,870 $36,421 $46,696
Working capital............................. 5,074 31,440 46,023 35,546 17,371 21,463
Total assets................................ 10,190 43,509 66,925 60,480 77,346 82,702
Long-term debt.............................. 911 1,728 1,213 306 10,700 8,075
Total stockholders' equity (deficit)........ (1,000) 34,621 57,340 54,267 38,753 46,873
</TABLE>

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<PAGE> 17

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Management's discussion and analysis of financial condition and results of
operations

OVERVIEW

We are engaged in the production and development of novel chemical compounds
with commercial potential in the pharmaceutical and biotechnology industries. We
primarily manufacture arrays of synthesized compounds for delivery to our
customers for use in lead compound generation and lead compound optimization
activities. We also offer other research and development services to meet the
needs of our customers. In addition, we have established a number of joint drug
discovery programs with biotechnology companies and academic institutions, and
are pursuing a limited number of our own internal drug discovery programs.

We primarily generate revenue through our collaborative agreements for
production and delivery of compound arrays and other research and development
services. Under most of these collaborative agreements, we are also entitled to
receive milestone and royalty payments if the customer develops products
resulting from the collaboration. To date, we have received two milestone
payments and no royalty payments. In addition, we have not yet realized any
significant revenue from our joint discovery programs with biotechnology
companies and academic institutions, or from our internal drug discovery
programs. Quarterly variations in financial performance may be expected because
levels of revenue are dependent on expanding or continuing existing
collaborations, entering into additional corporate collaborations, receiving
future milestones and royalty payments, and realizing value from ongoing drug
discovery programs, all of which are difficult to anticipate.

We will continue to invest in technologies that enhance and expand our
capabilities in drug discovery. These continued investments in technology are
intended to enhance the novelty, diversity, and medical relevance of our
compound arrays and to augment the power and scope of our chemistry
capabilities. In addition to investments in technology, we may invest in
internal lead optimization programs with the goal of delivering clinical
candidates. In November 1999, we moved our main operations to a new facility in
Woburn, Massachusetts, which includes 128,000 square feet of laboratory and
office space. Investments of this nature may result in near term earnings
fluctuations or impact the magnitude of profitability or loss.

We have incurred a cumulative net loss of $32.3 million through September 30,
2000. Losses have resulted principally from costs incurred in research and
development activities related to our efforts to develop our technologies and
from the associated administrative costs required to support those efforts.
While we were profitable in the second and third quarters of fiscal year 2000,
our ability to achieve sustained profitability is dependent on a number of
factors, including our ability to perform under our collaborations at the
expected cost, expand or continue existing collaborations, time additional
investments in technology and realize value from the development and
commercialization of products in which we have an economic interest, all of
which are difficult to anticipate.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

REVENUE

Our revenue for the three months ended September 30, 2000 increased $8.9 million
to $13.8 million from $4.9 million for the same period in 1999. Revenue was
$36.3 million and $13.5 million for the nine months ended September 30, 2000 and
1999, respectively. These increases are primarily due to the

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

amortization of upfront fees and fees for delivery of Custom Array sets to
Pfizer and Bayer and from other delivery fees earned from our collaborations.

COST OF REVENUE

Our cost of revenue for the three months ended September 30, 2000 increased $0.9
million to $5.0 million from $4.1 million for the same period in 1999. Cost of
revenue was $15.8 million and $11.7 million for the nine months ended September
30, 2000 and 1999, respectively. Our gross margin as a percentage of sales was
63.4% and 56.5% for the three and nine months ended September 30, 2000 as
compared to 15.8% and 13.2% for the comparable periods in the prior year. Our
gross margin as a percentage of sales was higher in 2000 due to the higher gross
margin on the Pfizer collaboration and other economies of scale.

RESEARCH AND DEVELOPMENT EXPENSES

Our research and development expenses for the three months ended September 30,
2000 increased $1.0 million to $4.2 million from $3.2 million for the same
period in 1999. Research and development expenses were $12.8 million and $9.8
million for the nine months ended September 30, 2000 and 1999, respectively.
This increase is the result of our ongoing efforts to augment and enhance our
chemistry capabilities and related proprietary technologies as we expand our
lead optimization programs.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Our marketing, general and administrative expenses for the three months ended
September 30, 2000 increased $0.3 million to $1.9 million from $1.6 million for
the same period in 1999. Marketing, general and administrative expenses were
$6.4 million and $4.4 million for the nine months ended September 30, 2000 and
1999, respectively. These increases have been primarily associated with
increased administrative costs to support our growth during 2000.

NET INTEREST INCOME

Our net interest income for the three months ended September 30, 2000 decreased
$0.1 million to $0.4 million from $0.5 million for the same period in 1999. Net
interest income was $0.9 million and $1.1 million for the nine months ended
September 30, 2000 and 1999, respectively. Net interest income decreased due to
higher interest expense in 2000 resulting primarily from our higher average debt
balance on our term loan with Fleet National Bank.

NET INCOME (LOSS)

Our net income for the three months ended September 30, 2000 was $3.0 million,
compared to a net loss of $(3.7) million for the same period in 1999. Our net
income (loss) was $2.2 million and $(11.2) million for the nine months ended
September 30, 2000 and 1999, respectively. Our net income in 2000 has been
primarily attributable to increased revenue from our collaborator base.

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

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUE

Revenue for 1999 decreased $3.6 million to $18.6 million from $22.2 million for
the same period in 1998. This decrease reflected the completion of our
collaborative agreements with Roche and Abbott, while not yet recognizing
significant revenues from the collaborative agreements entered into with Pfizer
and Bayer in 1999.

COST OF REVENUE

Cost of revenue for 1999 increased $3.5 million to $17.5 million from $14.0
million for the same period in 1998. This increase is primarily attributable to
the overhead and depreciation related to additional facilities and scientific
personnel and the necessary supplies and overhead expenses related to the
delivery of the Mapping Array and Directed Array sets pursuant to our
collaborative agreements, as well as charges related to the relocation of our
corporate headquarters in November 1999.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for 1999 increased $3.9 million to $14.3
million from $10.4 million for the same period in 1998. This increase is the
result of our ongoing efforts to augment and enhance our chemistry capabilities
and related proprietary technologies.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Marketing, general and administrative expenses for 1999 decreased $0.4 million
to $6.0 million from $6.4 million for the same period in 1998. This decrease is
the result of a reduction in the use of outside marketing and consulting
services.

NET INTEREST INCOME

Net interest income for 1999 decreased $0.5 million to $1.7 million from $2.2
million for the same period in 1998. Lower interest income in 1999 resulted
primarily from lower amounts available for investment in 1999.

NET LOSS

The net loss for 1999 was $17.4 million as compared to a net loss of $6.5
million for the same period in 1998. The net loss for 1999 is primarily
attributable to decreased revenue, increased expenditures as we invested in new
technologies to expand our drug discovery capabilities, and charges related to
the relocation of our headquarters.

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

YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUE

Revenue for 1998 increased $4.8 million to $22.2 million from $17.4 million for
the same period in 1997. This increase was primarily due to increased compound
development revenue from work performed on and the delivery of Mapping Array and
Directed Array sets under our collaborative agreements.

COST OF REVENUE

Cost of revenue for 1998 increased $3.8 million to $14.0 million from $10.2
million for the same period in 1997. The increase is primarily attributable to
the costs of additional facilities and scientific personnel and the necessary
supplies and overhead expenses related to the performance of work and the
delivery of the Mapping Array and Directed Array sets pursuant to our
collaborative agreements.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for 1998 increased $5.7 million to $10.4
million from $4.7 million for the same period in 1997. These increases are the
result of our expansion of our chemistry capabilities and related proprietary
technologies.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Marketing, general and administrative expenses for 1998 increased $1.7 million
to $6.4 million from $4.7 million for the same period in 1997. These increases
are primarily associated with increased marketing and business development
activities, and higher levels of administrative support in concert with our
growth during 1998.

NET INTEREST INCOME

Net interest income for 1998 decreased $0.3 million to $2.2 million from $2.5
million for the same period in 1997. Lower interest income in 1998 resulted
primarily from our need to utilize cash and marketable securities balances to
finance operations and capital additions.

NET INCOME (LOSS)

The net loss for 1998 was $6.5 million as compared to net income of $0.3 million
for the same period in 1997. The net loss for 1998 is primarily attributable to
increased expenditures as we invested in new technologies to expand our drug
discovery capabilities.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2000, we held cash, cash equivalents and marketable securities
with a value of $46.7 million, compared to $36.4 million at December 31, 1999.
Our working capital at September 30, 2000 was $21.5 million. We have funded
operations through September 30, 2000 with sales of common stock, revenues from
corporate collaborators, and the utilization of capital equipment lease
financing. On March 18, 1999, we consummated a term loan agreement with Fleet
National Bank to support our

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

facilities expansion. Under this agreement, we borrowed $14.0 million of the
potential $15.0 million available. As of September 30, 2000, we have made four
principal payments of $0.4 million each.

Cash flows from operating activities for the nine months ended September 30,
2000 decreased $3.5 million to $8.9 million from $12.4 million for the same
period in 1999. This decrease reflects primarily the timing of payments from our
corporate collaborations. Cash flows used in investing activities for the nine
months ended September 30, 2000 decreased $17.4 million to $5.3 million from
$22.7 million for the same period in 1999. During 1999 we completed our facility
expansion in Woburn. Cash flows from financing activities for the nine months
ended September 30, 2000 decreased $7.2 million to $4.4 million from $11.6
million for the same period in 1999. In 1999 we borrowed $11.4 million under our
Fleet Term Loan agreement to finance our facilities expansion.

We expect that our available cash and marketable securities, together with
operating revenues and investment income will be sufficient to finance our
working capital and capital requirements for the foreseeable future. Our cash
requirements may vary materially from those now planned depending upon the
results of our drug discovery and development strategies, our ability to enter
into any additional 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,
acquisitions and other factors. We cannot guarantee that we will be able to
obtain additional customers for our products and services, or that such products
and services will produce revenues adequate to fund our operating expenses. If
we experience increased losses, we may have to seek additional financing from
public or private sales of our securities, including equity securities. There
can be no assurance that additional funding will be available when needed or on
acceptable terms.

RECENT ACCOUNTING PRONOUNCEMENTS

During April 2000, the Financial Accounting Standards Board issued
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of Accounting Principles Board Opinion
No. 25". Among other issues, FIN 44 clarifies the definition of an employee, the
criteria for determining whether a stock award plan qualifies as
non-compensatory, and the accounting consequence of various award modifications.
This interpretation became effective July 1, 2000. We evaluated the effects of
FIN 44 on our financial position and results of operations and have determined
any such effects to be immaterial.

During June 2000, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101B, an amendment to SAB 101, "Revenue Recognition in
Financial Statements." SAB 101B defers the required implementation of SAB 101
until the fiscal quarter ended December 31, 2000. We have evaluated SAB 101 and
have determined that the effects on our financial position and results of
operations are not material.

During June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 138, "Accounting for Certain Derivative
Instruments -- An amendment of FAS 133 "Accounting for Derivative Instruments
and Hedging Activities". FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. We do not expect FAS 138 to have
a material impact on our financial position and results of operations.

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Business

OVERVIEW

Major pharmaceutical companies need to bring three to five new drugs to market
each year to sustain expected growth and profitability. Historically,
researchers have needed to evaluate at least 10,000 compounds for each drug that
ultimately reaches the market. Even if drug candidates make it through discovery
research into the first phase of human trials, up to ninety percent of these
candidates fail to gain final approval. At this level of attrition, large
pharmaceutical companies will need to add 30 to 50 drug candidates per company
per year to their clinical development portfolios. Currently, the discovery
research required to identify a drug candidate takes an average of six years to
complete. It then takes an average of eight more years for the drug candidate to
move through clinical development to the marketplace. The average investment
required to bring a drug to the market, including the cost of failed candidates,
is estimated to be in the range of $350 to $500 million. Consequently, the cost
of failure is high.

The continued success of the pharmaceutical industry will depend on its ability
to significantly reduce the time and cost required to bring a drug to market, to
increase the number of candidates entering clinical development, and to improve
the success rate of clinical testing. ArQule has built an integrated technology
platform incorporating our proprietary AMAP Chemistry Operating System, patented
processes and world class chemistry capabilities to address these critical needs
of drug discovery.

THE DRUG DISCOVERY AND DEVELOPMENT PROCESS

[Graphic depicting the drug discovery and development process from target
identification to compound discovery to drug development]

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The drug discovery and development process depicted above includes three major
components:

TARGET IDENTIFICATION: THE ROLE OF GENOMICS

Until recently, pharmaceutical researchers were limited to studying how
approximately 400 biological targets interact with chemical compounds. Targets
are proteins or other large molecules that play a fundamental role in the onset
or progression of a particular disease. The number of available biological
targets is being vastly expanded through genomics. Genomics is the science of
identifying genes and their role in biological processes, including disease and
other medical conditions. Scientists now use genomics to identify genes and the
proteins they encode, including proteins that may become drug discovery targets.
Advances in genomics are accelerating the process of target identification,
thereby creating the potential for a wealth of new targets for drug discovery.

COMPOUND DISCOVERY: FROM TARGET TO DRUG CANDIDATE

The many potential targets identified through genomics are only the beginning of
the process of discovering a potential drug. Through a process called target
selection, scientists seek to confirm that a given target plays an important
role in a disease process. Having identified an appropriate target, researchers
identify chemical compounds that interact with the target in a process known as
lead generation. Lead qualification is the process of selecting from a group of
lead compounds those which have sufficient drug-like characteristics to justify
further evaluation. In a process known as lead optimization, researchers seek to
maximize the likelihood of a given lead compound becoming a drug by minimizing
or eliminating those characteristics that might interfere with the desired
effect. Researchers must consider a number of factors in optimizing a lead
compound to become a clinical candidate, including effectiveness against the
target and specificity for that target, as well as the following factors which
are referred to by the acronym "ADMET":

- Absorption: whether the compound will be absorbed properly in the body

- Distribution: once absorbed, how the compound will be distributed throughout
the body

- Metabolism: how the compound will change within the body

- Elimination: whether the compound will be removed from the body in a harmless
way

- Toxicity: whether the compound might be toxic to the body and cause harmful
side effects

Traditionally, researchers have optimized compounds for these various factors in
a largely serial process. For example, researchers have optimized first for
potency, followed by selectivity, and then for various ADMET properties.

DRUG DEVELOPMENT: FROM DRUG CANDIDATE TO MEDICINE

Following the discovery process, optimized lead compounds must undergo
pre-clinical and clinical development and regulatory approval. This lengthy and
expensive process can take ten years, with up to a 90% failure rate.
Unfortunately, a high proportion of the failures occur in the latter, most
expensive phases of the drug development process. For each approved drug, the
total cost of discovery and development, including the cost of failed clinical
candidates, is estimated to be between $350 and $500 million. These high risks
are justified by the ultimate potential reward -- a share of the worldwide
market for approved drugs, which in 1998 was approximately $300 billion.

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THE COMPOUND DISCOVERY CHALLENGE

We believe that significant advances are being made in the productivity of the
genomics and clinical development phases of drug discovery and development.
However, for these advances to fulfill their potential to improve the efficiency
of the overall drug discovery and development process, similar advances are
required in the compound discovery phase. ArQule believes that the traditional
compound discovery process is extremely inefficient and therefore represents a
significant opportunity for value creation. ArQule seeks to use its integrated
technology platform to overcome the following problems:

- DIFFICULTIES IN SELECTING TARGETS. The proliferation of targets will trigger a
need to select those targets that a researcher should pursue further. The
traditional approach to target selection encompasses a variety of molecular
biology techniques which can be time consuming and labor intensive.

- POOR QUALITY OF INITIAL LEAD COMPOUNDS. Early in the discovery process,
researchers typically lack information about the potential for a lead compound
to become a drug candidate. Consequently, they cannot efficiently determine or
predict which compounds have a greater chance of success or what changes can
be made in the structure of a particular compound to improve its chances for
success. The problems caused by this lack of information are intensified by
the lack of diversity of the compounds screened. As a result, researchers
typically select a single chemotype for further evaluation and optimization. A
chemotype is a core chemical structure around which families of chemical
compounds with similar structures can be created. If a particular chemotype
proves difficult to optimize and no other chemotype is available, researchers
may waste time and money pursuing related compounds with the same chemotype,
which will share the same problems. Early availability of alternative
chemotypes could increase the likelihood of success against a particular
target.

- INEFFICIENT LEAD OPTIMIZATION PROCESS. Because researchers conduct lead
optimization in sequential steps, rather than in parallel, the traditional
compound discovery process is long and expensive. In the conventional lead
optimization process, medicinal chemists analyze a lead compound's structure
and use their experience to suggest changes that might produce the desired
result for potency or an ADMET characteristic. Because changes to a compound's
structure that enhance one desired feature of a compound may impair other
desired features, the traditional, sequential lead optimization process is
very inefficient, time-consuming and unpredictable.

The shortcomings in the current compound discovery process create two major
problems for pharmaceutical researchers. First, due in part to the lack of early
information about lead compounds and the lack of alternative chemotypes, very
few lead compounds meet the minimum criteria to become clinical candidates.
Second, of the lead compounds that meet the minimum criteria, too many are only
marginally acceptable clinical candidates and are therefore more likely to fail
during clinical development. Without improvements in this process, the current
failure rate of drug candidates will continue and there will not be enough new
drugs to fuel continued revenue and profit growth of the major pharmaceutical
companies.

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THE ARQULE INTEGRATED SOLUTION

ArQule has built an integrated technology platform incorporating our proprietary
AMAP Chemistry Operating System, patented processes and world class chemistry
capabilities to bridge the gap between targets and clinical candidates. Our
technology provides the following benefits:

OUR AMAP CHEMISTRY OPERATING SYSTEM ALLOWS US TO PERFORM HIGH-THROUGHPUT,
AUTOMATED PRODUCTION OF NEW CHEMICAL COMPOUNDS.

The compound discovery process requires efficient production of a wide range of
chemical compounds. Lead generation requires a large number of screening
compounds; lead optimization requires the rapid creation of structurally similar
compounds, or analogs. The growth in available targets emerging from genomics
will only increase these needs. Our AMAP Chemistry Operating System allows us to
address these issues. The AMAP system forms the foundation of our parallel
synthesis approach to combinatorial chemistry and consists of an integrated
series of automated workstations that perform tasks such as weighing and
dissolution, chemical synthesis, thermally-controlled agitation and reaction
process development. The AMAP system also incorporates purification, quality
control, the ability to re-format libraries and the ability to replicate
libraries for multiple customers. Our proprietary Array Information Management
and Process Control Management System (AIMS/PCMS) software controls and monitors
the overall production process within the system. The AIMS/PCMS software allows
us to capture information about every compound in the library, as well as to
process this information and to audit test data.

Our AMAP Chemistry Operating System is highly modular, which makes it easy to
expand production capacity and to add new capabilities. In addition, because the
AMAP Chemistry Operating System incorporates proprietary processes, software,
and equipment, and relies on highly trained operators, we believe that
duplication of the system by others would be difficult or impossible. We hold
U.S. and foreign patents, and have several pending patent applications, covering
various aspects of the AMAP Chemistry Operating System.

WE DELIVER DISCRETE COMPOUNDS OF KNOWN STRUCTURE, HIGH PURITY AND IN SUFFICIENT
QUANTITY FOR LEAD OPTIMIZATION.

Our proprietary AMAP Chemistry Operating System and parallel synthesis
capabilities enable us to produce:

- DISCRETE COMPOUNDS WITH KNOWN STRUCTURES. Parallel synthesis allows us to
produce hundreds of thousands of individual compounds of known structure every
year. Consequently, we can immediately link target screening data to specific
chemical structures, accelerating subsequent steps in the discovery process.

- COMPOUNDS WITH HIGH LEVELS OF PURITY. In 1999, the compounds in each of our
screening libraries were at least 85% pure, on average, with many libraries
exceeding 90% purity. The compounds in our lead optimization libraries
routinely exceed 90% purity, and in many cases exceed 95% purity. This high
level of purity minimizes the incidence of inaccurate test results in the
screening and optimization processes.

- SUFFICIENT QUANTITIES OF EACH COMPOUND USING REPRODUCIBLE METHODS. We produce
milligram quantities of each compound, which are large quantities in
comparison to the output of other combinatorial compound production methods.
This amount allows researchers to conduct extensive screening and follow-up
work without synthesizing additional quantities. Moreover, in the event that
additional amounts of a compound are required, we can easily reproduce our
compounds in relatively large, highly pure amounts needed for the later stages
of drug discovery.

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WE CAN QUICKLY UNDERSTAND HOW LARGE AND SMALL VARIATIONS IN THE CHEMICAL
STRUCTURE OF A COMPOUND WILL ALTER ITS PROFILE AS A LEAD COMPOUND.

Our AMAP Chemistry Operating System has allowed us to create compound libraries
based on more than one hundred distinct chemotypes. We continue to add more than
60 chemotypes to our compound libraries each year. The AMAP system also allows
us to produce thousands of analogs for each chemotype. Screening these logically
designed libraries results in data showing the relationship of large and small
changes in compound structure to activity. With this structure-activity
relationship data, we can rapidly design successive generations of compounds to
accelerate the identification of a lead compound with improved performance.

WE DESIGN AND PRODUCE COMPOUND LIBRARIES WITH PRE-SELECTED CHARACTERISTICS FOR
INCREASED LIKELIHOOD OF GENERATING MARKETABLE DRUGS.

Our scientists select chemotypes based on our understanding of drug-like
characteristics and, in some cases, our knowledge of the targets. We then use
proprietary software to evaluate and select building blocks to add to the core
structures with the goal of creating compounds with the desired properties and
diversity.

Currently, certain chemical structures with drug-like characteristics cannot be
produced in high-throughput processes. Over the past several years, we have
enhanced our AMAP system to enable us to expand the range of chemical structures
with drug-like characteristics that we can produce in high-throughput processes.

WE REDUCE SCREENING COSTS BY UTILIZING SMALLER, MORE FOCUSED LIBRARIES OF
COMPOUNDS.

To streamline the screening process, we have developed a method of accessing the
complete chemical diversity of our compound collection using a proportionally
representative subset called a Compass Array library. The Compass Array library
contains a subset of representative compounds from our full Mapping Array
libraries in the same proportions as they exist in the full libraries. The
results of screening the Compass Array library will direct subsequent screening
to those portions of the full library that are more likely to contain active
compounds for that target. This enables our customers, by screening the
approximately 50,000 compounds in our Compass Array library, to rapidly identify
the most promising chemotypes for further evaluation without screening our full
repository of over half a million compounds.

In addition, to the extent that structural information about a target is known,
our AMAP system permits the creation of specialized, focused arrays of compounds
biased toward that target. These libraries have the capability to streamline the
lead generation and qualification process by allowing collaborators to focus on
compounds most likely to be effective against the target.

WE CAN PERFORM COST-EFFICIENT PROFILING OF COMPOUNDS FOR DESIRABLE DRUG
CHARACTERISTICS.

We are supplementing our AMAP system with profiling screens to assess ADMET
characteristics in parallel with compound creation during the lead optimization
process. By enhancing the throughput and automation of these screens, we will
improve the cost-efficiency of generating ADMET data. This will allow us to have
early access to ADMET characteristics of compounds. Early access to this data
will allow us to optimize compounds for multiple ADMET properties in parallel,
which will expedite the optimization process and help reduce late stage
failures. Moreover, the relatively small size of our Compass Array library makes
it feasible for us to obtain and store ADMET profiling data on all of the
compounds in the library. This ADMET profiling data will lead to informed
decisions as to which initial screening hits should be pursued for further
optimization.

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WE CAN USE OUR DIVERSE CHEMISTRIES TO ASSIST IN TARGET SELECTION.

We have created compound libraries consisting of small molecules which interact
with a significant number of disease targets. In circumstances where researchers
have identified interesting targets of unknown function, we can provide
libraries which will allow researchers to clarify the role of these targets in
disease. Using chemistry in this way also allows rapid initiation of the lead
optimization process based on the compounds which have been identified.

ARQULE'S STRATEGY

Using our proven technology platform and drug design expertise, we seek to
become the premier independent partner for lead generation, qualification and
optimization programs. We believe we can reduce the time and cost of the
compound discovery process and improve the quality of the compounds that advance
to the clinic. Our strategy includes the following:

- CONTINUE TO INVEST IN CORE TECHNOLOGIES. We will continue to design improved
compounds and to create libraries that streamline the process of generating,
qualifying and optimizing lead compounds. We believe we can streamline these
processes by (a) reducing the number of compounds that need to be screened
without sacrificing diversity, (b) providing early structure-activity and
ADMET data, and (c) performing optimization in parallel rather than in the
traditional serial process. We plan to continue to build our drug discovery
capabilities by developing our own technologies and by in-licensing or
acquiring complimentary technologies.

- BALANCE THE RISKS AND REWARDS OF DRUG DISCOVERY. We seek to balance risk and
reward over time by pursuing three types of collaborations with different
risk/reward profiles.

- Pharmaceutical Collaborations. We will continue to pursue
collaborations with pharmaceutical companies to provide near-term
revenues in the form of up-front payments and annual license fees. In
comparison to typical biotechnology collaborations, these
collaborations offer lower long term royalties and milestones but
higher current cash flow.

- Biotechnology Collaborations. Our biotechnology collaborations offer
longer-term revenue potential, with a higher risk/reward profile. We
will seek to establish dedicated and focused partnerships with
companies that have a relatively large number of validated targets or
a strong proprietary position in a specific therapeutic area. In these
collaborations, we will seek to advance a compound through the
discovery process in conjunction with our partner on an equal
cost-sharing basis. We will then enter into commercialization
agreements with pharmaceutical company partners at an appropriate
point in the development process, sharing equally in future milestone
and royalty revenues with our biotechnology partner.

- Pursue In-House Drug Discovery. As the final part of our balanced
strategy, we plan to identify and in-license targets and to take these
compounds through the optimization process at our own risk and
expense. We would then out-license these optimized compounds as
clinical candidates to other companies in exchange for cash payments
plus potential milestone and royalty payments. We believe that
licensing drug candidates to outside companies at later stages of the
discovery process would make it possible to capture higher downstream
royalty rates for good clinical candidates.

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ARQULE'S TECHNOLOGY

We offer solutions to the shortcomings of the compound discovery process through
our world class chemistry capabilities which integrate our scientific personnel,
proprietary computer informatics software, and customized robotic workstations.
Our AMAP Chemistry Operating System, which forms the foundation of our
technology, is a highly automated and integrated series of chemistry
workstations and processes designed to enable rapid, parallel generation of
thousands of novel, pure, diverse and spatially-addressed arrays of compounds.
The AMAP system represents the integration of proprietary and patented
technologies in seven areas that results in a consistent, well-defined,
well-monitored, reproducible and flexible process consisting of the following
steps:

- library design

- process chemistry

- production

- purification

- quality control

- culling and reformatting

- replication

LIBRARY DESIGN

To design a library, we first select a chemotype that will be represented within
the library; the chemotype may be target-based or selected to increase the
diversity of the library. We select chemotypes based on input from our
scientists and scientific advisory board as well as information from our
collaborators, literature searches, and biological data. At this stage in
library design, we also identify the potential chemical components or building
blocks needed to create compounds in the library.

Our Library Design department uses our proprietary ArQule Reactor and MapMaker
software to evaluate and then select those building blocks which will create
compounds with the desired properties and diversity. The software then creates a
virtual library of compounds resulting from the reaction of the chosen building
blocks. Our designers calculate the properties of these compounds and assess
their diversity. A resulting list of recommended building blocks serves as the
starting point for the Process Chemistry department.

PROCESS CHEMISTRY

Before synthesizing an array of actual compounds, the recommended building
blocks must be qualified, and reaction conditions developed by our Process
Chemistry department. Using the list of recommended building blocks from Library
Design, our Process Chemistry department:

- assesses the solubility and reactivity of all building blocks;

- obtains full characterization of the resulting compounds;

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- identifies optimal reaction conditions; and

- transitions the production process from bench-scale to an automated process.

Our Process Chemistry department uses a series of automated workstations to
evaluate the solubility and reactivity of the building blocks. The automation
capabilities of our Process Chemistry department include the following
components:

- Small-Scale Weighing and Dissolution. Weighs and dissolves building blocks and
prepares racks of building block solutions for use in chemical synthesis.

- Small-Scale Chemical Synthesis. Enables distribution of building blocks to
pre-defined reactors for multi-step chemical reactions.

- Reaction Workup. Removes catalysts, salts, bases, or other extraneous elements
of building blocks. Includes liquid-liquid extraction and separation methods.

- Quality Control. Analyzes reaction products to confirm chemical structure,
yield and purity.

Once the building blocks and reaction conditions are optimized, the resulting
list of building blocks and synthetic protocols serves as the basis for
synthesis of the full library by the Production department.

PRODUCTION

Our Production department synthesizes libraries of compounds using a series of
automated workstations similar to those used in process chemistry. Each
workstation in the production process, however, has a higher throughput capacity
to support synthesis of a greater number of compounds.

The overall production process is controlled and monitored by our proprietary
Array Information Management and Process Control Management System (AIMS/PCMS)
software. With this software, we can track the production process throughout
synthesis, characterization, analysis, and final registration into our library
collection. In addition to controlling various aspects of the AMAP system, the
AIMS/PCMS software also collects and stores data in two databases, one for
storing information about compounds and a second for storing process information
and workstation audit data.

Following production, arrays are transferred to either our Quality Control or
Purification department. Some libraries need to be purified before Quality
Control, while other arrays move directly to Quality Control.

PURIFICATION

Our Purification department uses two separation methods to purify compounds and
confirm their structure. Using our proprietary PrepQule method, all fractions
from a high performance liquid chromotography, or HPLC, run are collected and
subjected to flow-injection mass spectrometry analysis for identification of the
fraction(s) containing the desired compound. Using the commercially available
FractionLynx(TM) method, only those HPLC fractions containing the expected
molecular weight are collected and analyzed by mass spectrometry.

Following identification of fractions containing desired product from either
method, samples are concentrated, quantified, reconstituted, and sent to the
Quality Control department for final analysis.

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QUALITY CONTROL

Our Quality Control department develops the analytical methods used to evaluate
compound arrays and evaluates libraries as they arrive from our Production and
Purification departments. Once a library has arrived in Quality Control, a
sequence list is generated using the AIMS/PCMS software. This list indicates
which analytical method will be used to analyze the library and interfaces with
customized software that controls the liquid handling systems enabling automated
analyses. AIMS/PCMS software enables us to view quality control data for
individual compounds, plates, or entire libraries. The AIMS/PCMS software also
produces a customized report based on quality control data. Data can be
automatically compiled for all the plates in an array, a specific production
run, a specific plate, or for the original plates of building blocks.

CULLING AND REFORMATTING

Based on analytical results and purity selection criteria, we may remove some
compounds from an array. The AIMS/PCMS software displays the analytical results
for each compound in an array using color-coding based on user defined
thresholds to rapidly and efficiently select individual compounds that should
not be included in the array. Once we select individual compounds to be culled,
the plates are automatically reformatted. This eliminates the spaces in the
array formerly containing the undesired compounds.

REPLICATION

Following final quality control assessment, arrays that will become part of our
Mapping Array repository are sent to our Replication department. Portions of
each compound are removed from the master plates and used to create sets of
plates that are shipped to our collaborators. We then replicate and store
additional sets of plates in our cold room storage facility.

ARQULE'S COMPOUND DISCOVERY PRODUCTS

ArQule offers a range of products and services tailored to our customers' needs
for drug discovery assistance. Our products and programs provide solutions for
the lead generation, lead qualification and lead optimization components of the
compound discovery process. We focus on making the compound discovery process
more efficient, less expensive and more likely to result in better clinical
candidates. We believe that, while no single technology platform will bridge the
gap in the drug discovery process between genomics and the clinic, the
integration of multiple emerging technologies will result in major efficiency
gains. In the past, we focused primarily on production and licensing of compound
libraries. We intend to offer our range of products and services both to
customers who need assistance with a specific aspect of the discovery process
and to customers desiring a complete compound discovery solution. We believe
that our integrated technologies will enable our collaborators to identify and
optimize drug candidates in a faster, less-expensive and more reliable way. The
following diagram depicts the integration of our compound discovery products.

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Our Compound Discovery Products

[Graphic depicting how ArQule's products can be
used in the compound discovery process]

MAPPING ARRAY PROGRAM

We offer our Mapping Array libraries to our collaborators to screen against
their biological targets in order to identify lead compounds. Collaboration
partners can also use our Mapping Array libraries in conjunction with our
Compass Array library or our Target Biased Array libraries to screen compounds
in a more efficient and cost-effective way. We grant subscribers a non-exclusive
license for screening. We grant subscribers an exclusive license on active
compounds identified. We also use our Mapping Array libraries for our own
discovery programs.

Our Mapping Array program provides:

- LARGE NUMBERS OF HIGHLY PURE COMPOUNDS IN SPATIALLY ADDRESSABLE ARRAYS. Using
a combination of technologies including the AMAP Chemistry Operating System,
we produce significant numbers of highly pure, small, drug-like compounds in
spatially addressable arrays of 96-well plates with a single compound in each
well.

- HIGHLY ORGANIZED ARRAYS ALLOW RAPID SCREENING AND OPTIMIZATION. We design
Mapping Array compounds with systematic variation of diverse building blocks
on multiple scaffolds. As a result, each compound in the array differs from
adjacent compounds by a single structural modification.

This allows structure-activity relationship data to be generated from primary
screening data. This patented, proprietary process allows researchers to
rapidly navigate through a logically organized series of modifications to the
core chemical structure of the compound and to rapidly optimize active
molecules.

- INCREASED CHEMICAL DIVERSITY EACH YEAR. Each year, we add approximately
200,000 new compounds to our Mapping Array repository, including 60 or more
new chemotypes.

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COMPASS ARRAY PROGRAM

We offer our Compass Array program to our collaborators as a focused and
streamlined approach to lead generation and qualification. We designed the
Compass Array library to identify rapidly those arrays contained within our
Mapping Array repository that warrant further evaluation without the need to
screen the entire compound library. Our Compass Array library contains
approximately 50,000 compounds representing a 12.5% subset of the entire
chemical diversity contained in our Mapping Array repository.

Compass Array Screening Advantage

[Graphic depicting the relationship between ArQule's Mapping Array(TM) and
Compass Array(TM) Libraries]

Researchers can use screening results from the Compass Array library to identify
arrays from the Mapping Array repository that are of interest. We then supply
our collaborator with the arrays that they identify, which average 3,000
compounds per array. Further screening of these full arrays identifies
additional potent, selective compounds of interest. This process ensures that
the related compounds within any active chemotype have been tested and that the
structure-activity relationship patterns within the corresponding Mapping Array
libraries have been thoroughly explored.

DIRECTED ARRAY PROGRAM FOR LEAD OPTIMIZATION

We offer Directed Array libraries for use in lead optimization. We create
Directed Array libraries as focused collections containing between 1,000 and
2,500 analogs of the lead compound. The collaborator receives each compound in a
single well format, and we arrange the library in accordance with our patented,
spatially-addressable array format to facilitate collection and analysis of
structure-activity relationship data. We also send information files with each
library that define the structures and molecular weights for all of the
compounds along with their exact location (plate, column, row) within the array.

In the past, we have used the Directed Array program to take a lead compound
provided by our collaborator through a parallel process of systematic structural
modifications to enhance and maximize the potency of the compound. In the
future, we intend to offer a Directed Array program as part of an integrated
process for general lead optimization, which would seek to optimize a lead
compound for selectivity and ADMET criteria in addition to potency. Under this
proposed program, we envision taking a collaborator's lead compound through a
parallel process of systematic structural modifications and testing to select
and optimize many of the desired compound features, including potency,
selectivity and ADMET

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criteria. By using lead compounds derived from our libraries, we anticipate that
we will have greater flexibility in pursuing lead optimization because:

- we will have more usable information about the structure of the compound;

- we will have easier access to analogs from our own libraries; and

- we will have greater knowledge of possible back-up compounds and alternative
structures generated from "hits" detected in our libraries during the
screening and lead generation and qualification process.

TARGET-BIASED ARRAY

We also intend to develop and offer specialized, focused arrays of compounds
biased toward particular targets. Under this program, we envision collaborators
providing us with information about their own proprietary targets so that we can
then use our expertise in combinatorial chemistry and library building to
assemble focused libraries of compounds most likely to have an affinity for that
target. These libraries would streamline the lead generation and qualification
process by allowing collaborators to focus on compounds most likely to be
effective against that target.

CUSTOM ARRAY PROGRAM

Our Custom Array program generates custom compound libraries based on
specifications provided by a collaborator. This results in compounds which are
exclusively available to an individual collaborator.

AMAP TECHNOLOGY TRANSFER

We offer our customers an option of licensing our AMAP Chemistry Operating
System on a non-exclusive basis, allowing them to produce their own
combinatorial libraries.

Two sizes of the AMAP Chemistry Operating System are available: a large-scale
AMAP Chemistry Operating System capable of producing more than 200,000 compounds
per year; and a small-scale AMAP Chemistry Operating System capable of producing
between 50,000 and 100,000 compounds per year. Transfers of both the large-scale
and small-scale systems include equipment, training and installation.

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OUR COLLABORATIONS

PHARMACEUTICAL COLLABORATIONS

The following table summarizes our collaborations with pharmaceutical companies:

<TABLE>
<CAPTION>
COMPANY PRODUCTS/SERVICES PROVIDED
------------------------------------------------------------------------------------------
<S> <C>
Pfizer, Inc Technology transfer of AMAP Chemistry Operating System and
Custom Array libraries
Bayer AG Custom Array libraries

American Home Products, Mapping Array and Directed Array libraries
Wyeth-Ayerst Division
Solvay Duphar B.V. Mapping Array and Directed Array libraries and a
non-exclusive license to our AMAP Chemistry Operating
System
G.D. Searle, a division Mapping Array, Directed Array and Compass Array libraries
of Pharmacia Corp. and lead optimization services
Sankyo Company, Ltd. Mapping Array and Directed Array libraries
Johnson & Johnson, Inc. Mapping Array libraries and Compass Array libraries
Abbott Laboratories(1) Mapping Array and Directed Array libraries
Roche Bioscience(1) Directed Array libraries
</TABLE>

(1) The collaboration portion of these agreements ended in March 1999, but the
collaboration partner is still obligated to make payments upon the
achievement of specified milestones and to pay royalties on sales of drugs
that may result from the collaboration.

PFIZER

In July 1999, we entered into a four and one half year technology acquisition
agreement with Pfizer, Inc. We will manage and staff a dedicated facility
containing an AMAP Chemistry Operating System for Pfizer in Medford,
Massachusetts. The facility will produce Custom Array libraries exclusively for
Pfizer. In addition, we will train Pfizer staff to use our AMAP Chemistry
Operating System. At the end of the collaboration, Pfizer will receive a
non-exclusive license to the AMAP Chemistry Operating System. We expect to
receive up to $117 million dollars over the term of the agreement. We have
received a $15.8 million upfront payment and will potentially receive up to $27
million per calendar year for compound production, technology access, and
operating costs. Pfizer will pay no milestones or royalties to us on compounds
which they develop and market.

BAYER

In October 1999, we entered into a three-year collaboration with Bayer AG to
produce Custom Array libraries. We received a $3 million upfront payment and
will receive up to an additional $27 million during the term of the agreement in
delivery and success fees. Bayer will pay no milestones or royalties to us on
compounds which they develop and market.

AMERICAN HOME PRODUCTS, WYETH-AYERST DIVISION

In July 1997, we entered into an agreement with Wyeth-Ayerst Pharmaceuticals, a
division of American Home Products Corporation. Under this agreement,
Wyeth-Ayerst subscribed to our Mapping Array program and has committed to a
minimum number of Directed Array Programs. Wyeth-Ayerst made a $2 million equity
investment in ArQule in June 1998, and is committed to make payments totaling

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$26.2 million during the course of the agreement. In addition, Wyeth-Ayerst has
agreed to pay us development milestones and royalties from the sales of products
resulting from the collaboration.

SOLVAY DUPHAR

In November 1995, we entered into an agreement with Solvay Duphar B.V. Under
this agreement, Solvay subscribed to our Mapping Array and Directed Array
programs. Solvay has a non-exclusive license to our AMAP Chemistry Operating
System. Solvay is committed to make payments totaling $17.5 million under this
agreement. Solvay has also agreed to make additional payments if we achieve
certain development milestones and to pay royalties on sales of any drugs that
result from the relationship. In connection with this collaboration, an
affiliate of Solvay, Physica B.V., made a $7 million equity investment in
ArQule.

PHARMACIA

We entered into a five-year collaboration with Monsanto Company (now Pharmacia
Corporation) in December 1996. Under this agreement, we provided Monsanto with
access to our Mapping and Directed Array programs for use in the development of
agrochemicals. In January 2000, we expanded this collaboration to cover life
science applications, including pharmaceutical use by G.D. Searle, and extended
the term until 2002. We also agreed to provide Monsanto with Compass Array and
Mapping Array libraries through 2001 and Compass Array libraries only through
2002. We also converted the Monsanto agrochemical Directed Array Program into a
credit for pharmaceutical lead optimization services. Pharmacia is committed to
make payments totaling $12.7 million under this agreement. In addition, Monsanto
has agreed to pay us development milestones and royalties from the sales of
products resulting from the collaboration. In July 1998, we received a milestone
payment for a Mapping Array compound selected by Monsanto for entry into field
trials. On June 30, 2000, in connection with the merger between Monsanto and
Pharmacia, we replaced our existing collaboration agreement with a new
collaboration agreement with G.D. Searle & Co., a division of Pharmacia. The
financial terms of the new agreement are substantially the same as the prior
agreement. However, we expanded the scope of the agreement to enable Pharmacia
and its affiliates to screen our compounds, which may result in milestone and
royalty payments in the future.

SANKYO

In November 1997, we entered into an agreement with Sankyo Company, Ltd. to
discover and optimize drug candidates. Under the terms of the agreement, Sankyo
received a three-year subscription to our Mapping Array program to discover new
lead compounds. Sankyo has also committed to a minimum number of Directed Array
Programs during the term of the agreement. The total value of the agreement is
up to $9 million in committed payments. Sankyo has also agreed to pay us
developmental milestones and royalties resulting from sales of any products
resulting from this collaboration.

JOHNSON & JOHNSON

In December 1998, we entered into a four-year collaboration with R.W. Johnson
Pharmaceutical Research Institute, a division of Johnson & Johnson, Inc., in
which R.W. Johnson subscribed to our Mapping Array program. During the term of
the agreement, R.W. Johnson has committed to pay us an aggregate of $8.1 million
to deliver Mapping Array libraries. In addition, R.W. Johnson has agreed to pay
us developmental milestones and royalties from sales of any products resulting
from this collaboration. On August 14, 2000, we amended our collaboration
agreement with R.W. Johnson to discover new lead compounds for a variety of
therapeutic areas. The amended agreement includes a subscription to our Compass
Array libraries in lieu of other deliverables. The amendment did not alter the
financial terms of the agreement.

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ABBOTT LABORATORIES

In June 1995, we entered into an agreement with Abbott Laboratories. Under this
agreement Abbott subscribed to our Mapping Array and Directed Array programs.
This collaboration was extended on two occasions and ended successfully in March
1999. Abbott has agreed to pay us developmental milestones and royalties from
sales of any products resulting from this collaboration.

ROCHE BIOSCIENCE

In September 1996, we entered into an agreement with Roche Bioscience. Under
this agreement, we synthesized Directed Array compounds. Our obligations under
this agreement ended in March 1999. Roche Bioscience has agreed to pay us
developmental milestones and royalties from sales of any products resulting from
this collaboration. In May 1999, we received a milestone payment from Roche
Bioscience for a Directed Array compound that was chosen for Investigational New
Drug application, or IND, enabling toxicology studies.

BIOTECHNOLOGY COLLABORATIONS

In the past, we have entered into a number of collaborations with biotechnology
companies, primarily providing them with access to our Mapping Array libraries.
Going forward, we intend to enter into a select number of focused biotechnology
collaborations with companies who can contribute significant numbers of
important targets, generally around a specific target class or therapeutic area.
These collaborations will pool the necessary resources from each company to
conduct a drug discovery program aimed at delivering at least one IND candidate
per collaboration. We intend to share equally in the costs and downstream
benefits derived from these collaborations.

GENOME THERAPEUTICS CORPORATION

On October 17, 2000, we entered into a collaborative drug discovery agreement
with Genome Therapeutics Corporation to discover and develop anti-infective drug
candidates. Under the agreement, we will use our Parallel Track Drug Discovery
program to screen and optimize compounds against a significant number of
proprietary validated anti-infective targets which Genome Therapeutics has
derived from its PathoGenome(TM) Database. We will share equally in all
downstream value created by the collaboration, including future milestone,
royalty and upfront payments resulting from the outlicensing of clinical
candidates or later stage compounds derived from the collaboration.

ACADIA PHARMACEUTICALS

On April 7, 1998, we entered into a material transfer and screening agreement
with Acadia Pharmaceuticals Inc. Under this agreement, we provided to Acadia
access to certain ArQule compound arrays for screening against their target
collection. On May 10, 2000, we entered into a compound license agreement with
Acadia. Under this agreement, we granted to Acadia a license to certain of our
compounds having activity against certain of their targets, in return for
payments and royalties.

PATENTS AND PROPRIETARY RIGHTS

We have a number of issued U.S. and foreign patents, and numerous patent
applications in the U.S. and other countries. We depend, in part, on these
patents to protect our technology and products. We also rely upon our trade
secrets, know-how and continuing technological advances to develop and maintain
our competitive position. In an effort to maintain the confidentiality and
ownership of our trade secrets and proprietary information, we require our
employees and consultants to sign confidentiality and invention assignment
agreements. We intend these agreements to protect our proprietary information by
controlling the disclosure and use of technology to which we have rights. These
agreements also provide that we will own all the proprietary technology
developed at ArQule or developed using our resources.

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COMPETITION

The biotechnology industry is highly competitive. Our services and products face
competition based on several factors, including size, diversity and ease of use
of compound libraries; speed and costs of identifying and optimizing potential
lead compounds; and patent position. We compete with many organizations that are
engaged in attempting to identify and optimize compounds. They include
biotechnology, pharmaceutical, combinatorial chemistry and other companies;
academic and scientific institutions; governmental agencies; and public and
private research organizations.

Smaller companies may also prove to be significant competitors, particularly
through arrangements with large corporate collaborators. In addition to
competition for our customers, these organizations also compete with us 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 our 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 design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which we are working either on their own or
through collaborative efforts.

GOVERNMENT REGULATION

Our research and development processes involve the controlled use of hazardous
materials. Although we are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
these materials and waste products, the license or sale of our products is not
subject to significant government regulations. Our future profitability,
however, depends on our collaborators selling pharmaceuticals and other products
developed from our compounds that may be subject to government regulation.

Virtually all pharmaceutical and biotechnology products developed by our
collaborative partners will require regulatory approval by governmental agencies
prior to commercialization. The nature and the extent to which these regulations
apply to our collaborative partners varies depending on the nature of their
products. In particular, human pharmaceutical products and biologics 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 these
products. The process of obtaining these approvals and the subsequent compliance
with appropriate federal and foreign statutes and regulations are time consuming
and require 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, we or our collaborator 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. Clinical trials are normally done in three phases and
generally take several years, but may take longer to complete. After completion
of clinical trials of a new product, FDA and foreign

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BUSINESS
--------------------------------------------------------------------------------

regulatory authority marketing approval must be obtained. If the product is
classified as a new pharmaceutical, we or our collaborator will be required to
file a New Drug Application, or NDA, and receive approval before commercial
marketing of the drug. Similarly, if the product is a new biologic, a biological
license application, BLA, must be filed and must receive approval prior to
commercial marketing of the product. The testing and approval processes require
substantial time and effort. NDAs and BLAs 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. If and when the FDA approves any of our collaborators'
products under development, the manufacture and marketing of these products will
be subject to continuing regulation, including compliance with current Good
Manufacturing Practices, known as GMPs, adverse event reporting requirements and
prohibitions on promoting a product for unapproved uses. 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, we will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products and biologics. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country.

PROPERTIES

In November 1999, we moved our main operations to a new facility in Woburn,
Massachusetts, which includes approximately 128,000 square feet of laboratory
and office space. This facility was designed to our specific requirements and we
believe represents a state-of-the-art chemistry-based drug discovery facility.
We have a 15 year lease on these facilities, with options to extend the original
lease term by two additional five-year periods. Further, we have options to
expand our operations into approximately 130,000 square feet of additional space
to be constructed on an adjacent lot. We also have options to purchase the
entire building and the adjacent lot.

Our research facilities include approximately 56,000 square feet of laboratory
and office space in Medford, Massachusetts, the majority of which is dedicated
to the Pfizer collaboration. We lease these facilities under three lease
agreements, one of which expired on July 30, 2000, one of which expires on July
30, 2005 and one of which expires on July 30, 2006. We believe our facilities
are adequate for our current operations.

EMPLOYEES

As of October 20, 2000, we employed 247 people, of whom 79 have Ph.D. degrees.
One hundred and four of our employees were engaged in operations, 117 were
engaged in research and development, and 26 were engaged in marketing and
general administration. None of our employees are covered by collective
bargaining agreements. We believe that we have good relations with our
employees.

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MANAGEMENT

Set forth below is certain information regarding our executive officers and
directors, including their respective ages, as of October 20, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>

Dr. Stephen A. Hill............................. 42 President, Chief Executive Officer and a Director

Philippe Bey, Ph.D.............................. 58 Senior Vice President of Research and Development
and Chief Scientific Officer

David C. Hastings............................... 39 Vice President, Chief Financial Officer and
Treasurer

Michael D. Rivard............................... 35 Vice President, Legal, General Counsel and Assistant
Secretary

John M. Sorvillo, Ph.D. ........................ 46 Vice President of Business Development

Robert F. Tilton, Ph.D. ........................ 43 Vice President of Information Management

Anthony Messina................................. 54 Vice President of Human Development

James Kyranos, Ph.D. ........................... 38 Vice President of Systems Technologies

Norton P. Peet, Ph.D............................ 56 Vice President of Discovery Alliances

L. Patrick Gage................................. 58 Director

Michael Rosenblatt, M.D. ....................... 52 Director

Werner Cautreels, Ph.D. ........................ 47 Director

Laura Avakian................................... 55 Director

Tuan Ha-Ngoc.................................... 48 Director

Ariel Elia...................................... 65 Director
</TABLE>

STEPHEN A. HILL Stephen A. Hill, B.M., B.Ch., M.A., F.R.C.S. has served as our
President and CEO since April 1999. Prior to his employment with us, Dr. Hill
was the Head of Global Drug Development at F. Hoffmann-La Roche Ltd. He joined
Roche in 1989 as Medical Adviser to Roche Products in the United Kingdom. He
held several senior positions there, including that of Medical Director, with
responsibility for clinical trials of compounds across a broad range of
therapeutic areas, including those of CNS, HIV, cardiovascular, metabolic, and
oncology products. Dr. Hill also served as Head of International Drug Regulatory
Affairs at Roche headquarters in Basel, Switzerland, where he led the regulatory
submissions for seven major new chemical entities globally. He also was a member
of Roche's Portfolio Management, Research, Development and Pharmaceutical
Division Executive Boards. Prior to Roche, Dr. Hill served for seven years with
the National Health Service in the United Kingdom, in General and Orthopedic
Surgery. Dr. Hill is a Fellow of the Royal College of Surgeons of England, and
holds his scientific and medical degrees from St. Catherine's College at Oxford
University.

PHILIPPE BEY, PH.D. Philippe Bey, Ph.D. has served as our Chief Scientific
Officer and Senior Vice President of Research and Development since August 1999.
Dr. Bey has previously held various senior management positions at Hoechst
Marion Roussel (HMR), Marion Merrell Dow, Inc. and Selectide, a combinatorial
chemistry company fully owned by HMR. While at HMR, he coordinated U.S. Research
& Development programs and participated in a task force that defined HMR's
strategic plans. At Marion Merrell Dow, where he served as Vice President of
Global Research, he designed research strategies to incorporate new technologies
and internal organizational competencies while improving productivity. Dr. Bey
also served as President of Selectide. Dr. Bey earned his BS and Ph.D. Chemistry
qualifications at the Louis Pasteur University in Strasbourg, France, and
conducted post-doctoral training at the California Institute of Technology in
Pasadena.

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MANAGEMENT
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DAVID C. HASTINGS David C. Hastings has served as our Vice President and Chief
Financial Officer since February 2000. Prior to his employment with us, Mr.
Hastings was Vice President and Corporate Controller at Genzyme, Inc. where he
was responsible for the management of the finance department. Prior to his
employment with Genzyme, Mr. Hastings was the Director of Finance at Sepracor,
Inc. where he was primarily responsible for Sepracor's internal and external
reporting. Mr. Hastings is a Certified Public Accountant and received his BA in
Economics at the University of Vermont.

MICHAEL D. RIVARD Michael D. Rivard has served as our Vice President, Legal,
General Counsel and Assistant Secretary since 1997. Prior to his employment with
us, he served as Associate Counsel at the University of Massachusetts, where he
was responsible for legal matters relating to intellectual property, technology
transfer, and sponsored research for the five-campus University System. Prior to
his position at the University of Massachusetts, Mr. Rivard was employed as a
corporate attorney at the law firm of Palmer & Dodge LLP, practicing mainly in
the area of intellectual property law and corporate law for biotechnology
companies. He received his JD from the UCLA School of Law and his BA in
Biochemistry from Bowdoin College.

JOHN M. SORVILLO, PH.D. John M. Sorvillo, Ph.D. joined us as our as Vice
President of Business Development in 1995 after performing consulting services
for us for several months. Prior to his employment with us, 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 Program for Senior
Executives. He received his Ph.D. in Immunology from the New York University
Medical Center and his BA in Biology from the City University of New York,
Hunter College.

ROBERT F. TILTON, PH.D. Robert F. Tilton, Ph.D. joined us in 1997 and is our
Vice President of Information Management. Prior to his employment with us, Dr.
Tilton was employed at Bayer Inc. for nine years, where he was responsible for
initiating and developing a comprehensive and integrated group consisting of
Structural Biology, Protein Biochemistry, Computational Chemistry and Analytical
Chemistry. Prior to joining Bayer, Dr. Tilton was Assistant Professor in the
Department of Molecular Biology at Scripps Research Institute. Dr. Tilton
received his doctorate degree in pharmaceutical chemistry from the University of
California at San Francisco under the direction of Professor I.D. Kuntz and did
his post-doctoral work in the laboratory of Professor G.A. Petsko in the
Department of Chemistry at the Massachusetts Institute of Technology.

ANTHONY S. MESSINA Anthony S. Messina joined us in 1997 and has served as our
Vice President of Human Development since June 1999 when he was promoted from
Senior Director of Human Development. His responsibilities include working with
the senior leadership team to ensure our culture is one in which each employee
can develop their skills and talents, contribute to the business in meaningful
ways and be recognized and rewarded appropriately for their contributions. Prior
to joining us, he was Vice President for Camden Consulting where he specialized
in executive coaching. Prior to that, he was Human Resources Manager for Varian
Associates. Mr. Messina received his BBA in management from the University of
Massachusetts.

JAMES N. KYRANOS, PH.D. James N. Kyranos, Ph.D. has served as our Vice
President of Systems Technologies since September 1998 and prior to that was our
Senior Director of Analytical Chemistry. His responsibilities include the
development of automated workstations for high-throughput parallel synthesis of
combinatorial libraries, as well as high-throughput techniques for compound
characterization and purification. Prior to his employment with us, Dr. Kyranos
was Director of Analytical Chemistry at Biodevelopment Laboratories, Inc. and
worked at Arthur D. Little, Inc., where he was involved in conducting contract
research in support of pharmaceutical and agrochemical registration. Dr. Kyranos
received his Ph.D. in Mass Spectrometry with Professor Paul Vouros at
Northeastern University and has a BA in Chemistry and Biology from Boston
University.

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MANAGEMENT
--------------------------------------------------------------------------------

NORTON P. PEET, PH.D. Norton P. Peet, Ph.D. joined ArQule in August 2000 as
Vice President of Discovery Alliances. Prior to joining the company, Dr. Peet
was Head of Medicinal Chemistry and Distinguished Scientist at Aventis. Dr. Peet
received his BA degree from the University of Minnesota and his Ph.D. degree
from the University of Nebraska. After his postdoctoral assignments at the
Massachusetts Institute of Technology and the University of South Carolina, he
joined the former Dow Pharmaceuticals, now known as Aventis. He was responsible
for initiating parallel synthesis as a medicinal chemistry tool at Hoechst
Marion Roussel, a predecessor company of Aventis. Dr. Peet has been a scientific
advisor for Drug Discovery Technology since 1997 and serves on the editorial
boards for Current Medicinal Chemistry -- Anti-inflammatory and Anti-Allergy
Agents and Investigational Drugs.

L. PATRICK GAGE, PH.D. L. Patrick Gage, Ph.D. has been a director since January
1998. Since March 1998, Dr. Gage has been the President of Wyeth-Ayerst
Research, a division of American Home Products Corporation, a pharmaceutical
company. Prior to that, Dr. Gage was employed by Genetics Institute, Inc., a
biopharmaceutical company, in a variety of positions including President.

MICHAEL ROSENBLATT, M.D. Michael Rosenblatt, M.D. has been a director since
April 1998. From 1992-1998, Dr. Rosenblatt served as the Robert H. Ebert
Professor of Molecular Medicine at the Harvard Medical School, Chief of the
Division of Bone and Mineral Metabolism at Beth Israel Hospital, and the
director of the Harvard MIT Division of Health Sciences and Technology. Since
1993, he has also been a faculty member in the department of Biological
Chemistry and Molecular Pharmacological, Biological and Biomedical Sciences
Program of the Division of Medical Sciences at Harvard University. From
1996-1999, he has been the executive director of the Carl J. Shapiro Institute
for Education and Research at Harvard Medical School and Beth Israel Deaconess
Medical Center. Since 1996, he has been Harvard faculty dean for academic
programs at the Beth Israel Deaconess Medical Center. He is now the President
(interim) of Beth Israel Deaconess Medical Center and the George R. Minot
Professor of Medicine at Harvard Medical School. Prior to 1992, Dr. Rosenblatt
was the Senior Vice President for Research at Merck Research Laboratories, a
pharmaceutical company. Dr. Rosenblatt serves as a director of Creative
Biomolecules, Inc. and certain privately held companies.

WERNER CAUTREELS, PH.D. Werner Cautreels, Ph.D. has been a director since
September 1999. Since May 1998, Dr. Cautreels has been the Global Head of
Research and Development of Solvay Pharmaceuticals. Prior to that, Dr. Cautreels
had been employed by Nycomed Amersham Ltd., Sterling Winthrop, and Sanofi in a
variety of positions in Research and Development.

LAURA AVAKIAN Laura Avakian has been a director since March 2000. Ms. Avakian
is currently Vice President for Human Resources for the Massachusetts Institute
of Technology where she directs all human resource programs and oversees the
institution's Medical Department. Prior to joining MIT, she was Senior Vice
President, Human Resources, for Beth Israel Deaconess Medical Center and for its
parent corporation CareGroup. She has previously served as President of the
American Society for Healthcare Human Resources Administration, and has received
the distinguished service award, literature award and chapter leadership award
from that society. She received the 1996 Award for Professional Excellence in
Human Resources Management from the Society for Human Resource Management. She
has also served as editor of the Yearbook of Healthcare Management and authored
numerous chapters and articles on human resources management. Ms. Avakian
received her BA degree from the University of Missouri at Columbia and her MA
degree from Northwestern University.

TUAN HA-NGOC Tuan Ha-Ngoc has been a director since March 2000. Mr. Ha-Ngoc is
the founder, Chief Executive Officer and a director of eHealthDirect, Inc.,
which provides an advanced business to business financial transactions platform
for health care benefits administration. Mr. Ha-Ngoc was previously the Vice
President of Strategic Development at American Home Products Corporation where
he directed its corporate strategy in the pharmaceuticals industry. Prior to
joining AHP, he was an Executive Vice President for Genetics Institute, Inc. Mr.
Ha-Ngoc is a member of the Board of Fellows and Chairman of

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MANAGEMENT
--------------------------------------------------------------------------------

the Research Committee at the Harvard School of Dental Medicine. He is also a
member of the Board of Trustees of the Lupus Foundation. Mr. Ha-Ngoc received an
MBA from INSEAD and received a Master's Degree in Pharmacy from the University
of Paris, France.

ARIEL ELIA Ariel Elia has been a director since September 2000. Currently, Mr.
Elia serves as Chairman of the European Advisory Board of E.Med Securities, a
private, U.S.-based company providing investment banking services to emerging
growth companies in the life science industry. Mr. Elia is a director of Altamir
S.A., a French venture capital company, and of Yssum, the research and
development company of the Hebrew University of Jerusalem in Israel. Mr. Elia
also serves as a Governor of both the Ben Gurion University and the Hebrew
University of Jerusalem, in Israel. Prior to his current positions, Mr. Elia was
the Chief Executive Officer of Jouveinal Laboratories, a privately held, French
pharmaceutical company. Mr. Elia also spent 17 years with Merck & Co., serving
both in Europe and in the U.S., most recently as Senior Vice President,
International Division. Before joining Merck & Co., Mr. Elia spent 12 years with
American Home Products Corp., serving as President of the International
Household Products Division prior to his departure. Mr. Elia is a U.S. citizen
born in Alexandria, Egypt. He graduated from Victoria College in Alexandria,
Egypt with an Oxford and Cambridge degree as a bachelor of arts. His honors
include Knight of the Order of the Crown in Belgium, and Doctor of Philosophy
Honoris Causa of Ben Gurion University, Israel.

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39
<PAGE> 43

--------------------------------------------------------------------------------
UNDERWRITING

We have entered into an underwriting agreement with the underwriters named
below. UBS Warburg LLC, CIBC World Markets Corp., Gerard Klauer Mattison & Co.,
LLC and Legg Mason Wood Walker, Incorporated are acting as representatives of
the underwriters.

The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below.

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC.............................................
CIBC World Markets Corp. ...................................
Gerard Klauer Mattison & Co., LLC...........................
Legg Mason Wood Walker, Incorporated........................
Total................................................ 2,500,000
</TABLE>

This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.

The representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$ per share to certain other dealers. The underwriters may also allow to
dealers, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.

In addition, in connection with this offering, certain of the underwriters (and
selling group members) may engage in passive market making transactions in the
common stock on the Nasdaq National Market, prior to the pricing and completion
of the offering. Passive market making consists of displaying bids on the Nasdaq
National Market no higher than the bid prices of independent market makers and
making purchases at prices no higher than these independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
discontinued when such limit is reached. Passive market making may cause the
price of the common stock to be higher than the price that otherwise would exist
in the open market in the absence of such transactions. If passive market making
is commenced, it may be discontinued at any time.

We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 375,000 additional shares of our common
stock to cover over-allotments. If the underwriters exercise all or part of this
option, they will purchase shares covered by the option at the public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. To the extent that the underwriters exercise the over-allotment option
in part and not in full, the underwriters will purchase shares from us on a pro

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40
<PAGE> 44
UNDERWRITING
--------------------------------------------------------------------------------

rata basis. The underwriters have severally agreed that, to the extent the
over-allotment option is exercised, each of the underwriters will purchase a
number of additional shares proportionate to its initial amount reflected in the
above table.

The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:

<TABLE>
<CAPTION>
PAID BY US
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION OPTION
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................................... $ $
Total ........................................................ $ $
</TABLE>

We estimate that the total expenses of this offering, excluding the underwriting
discount, will be approximately $155,000.

We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.

We and our directors and executive officers have agreed pursuant to certain
"lock-up" agreements with the underwriters that, subject to certain exceptions,
they will not offer, sell, contract to sell, pledge, grant any option to sell,
or otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible into or exercisable or exchangeable for common stock for
a period of 90 days after the date of this prospectus without the prior written
consent of UBS Warburg LLC. UBS Warburg LLC, in its sole discretion, may release
the shares subject to the lock-up agreements in whole or in part at any time
with or without notice. However, UBS Warburg LLC has no current plan to do so.

Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:

- Stabilizing transactions. The representatives may make bids for or purchases
of the shares for the purpose of pegging, fixing or maintaining the price of
the shares, so long as stabilizing bids do not exceed a specified maximum.

- Over-allotments and syndicate covering transactions. The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with this offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option.

- Penalty bids. If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.

Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.

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UNDERWRITING
--------------------------------------------------------------------------------

Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.

LEGAL MATTERS

Our counsel, Palmer & Dodge LLP, Boston, Massachusetts, will pass on the
validity of the shares of common stock offered by this prospectus. Michael E.
Lytton, a partner of Palmer & Dodge LLP, is our Secretary. Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, is acting as legal
counsel for the underwriters in connection with this offering.

EXPERTS

The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1999, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and special reports and proxy statements and other
information with the SEC. You may read and copy any document that we file at the
SEC's Public Reference Room at 450 Fifth Street, Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the Public Reference
Room. Our SEC filings are also available on the SEC's Web site at
http://www.sec.gov. Copies of certain information filed by us with the
Commission are also available on our Web site at http://www.arqule.com. Our Web
site is not part of this prospectus. Our common stock is listed on Nasdaq
National Market.

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<PAGE> 46

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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" information from other documents
that we file with them, which means that we can disclose important information
by referring to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 prior to the sale of all the shares covered by this
prospectus:

- Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and
September 30, 2000, filed with the SEC on May 11, 2000, August 4, 2000 and on
October 20, 2000, respectively.

- Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed
with the SEC on March 23, 2000.

- Current Report on Form 8-K, filed with the SEC on October 17, 2000.

- The description of our common stock contained in our Registration Statement on
Form 8-A, filed on September 25, 1996 including any amendment or reports filed
for the purpose of updating such description.

We also incorporate by reference additional documents that may be filed with the
SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
sale of all of the securities covered by this prospectus. These include periodic
reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, as well as proxy statements.

We will provide to you, without charge, upon your written or oral request, a
copy of any or all of the documents that we incorporate by reference, including
exhibits. Please direct requests to: ArQule, Inc., 19 Presidential Way, Woburn,
MA 01801, Attn: David C. Hastings, (781) 994-0300.

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ARQULE LOGO
<PAGE> 48
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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses to be borne by the Company in connection with the securities being
registered are as follows:

<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,353
NASD Filing Fee............................................. 6,000
Accounting fees and expenses................................ 25,000
Legal fees and expenses..................................... 30,000
Printing and photocopying expenses.......................... 75,000
Miscellaneous expenses...................................... 4,647
--------
Total................................................... $155,000
========
</TABLE>

All of the above figures, except the SEC registration, are estimates.

ITEM 15. 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), judgments, 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 our 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 our 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, acts or omissions
not in good faith,

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PART II
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intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.

ITEM 16. EXHIBITS

See the Exhibit Index immediately following the signature page.

ITEM 17. UNDERTAKINGS

(a) The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement 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.

(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the 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.

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.

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

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Signatures

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF WOBURN, COMMONWEALTH OF MASSACHUSETTS, ON OCTOBER 20,
2000.

ArQule, Inc.

By: /s/ STEPHEN A. HILL
--------------------------------------
Stephen A. Hill
President and Chief Executive Officer

Power of Attorney

Each individual whose signature appears below hereby constitutes and appoints
Stephen A. Hill, David C. Hastings and Michael E. Lytton, and each of them, his
true and lawful attorneys-in-fact and agents with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all pre- or post-effective amendments to this registration statement, any
subsequent registration statement for the same offering which may be filed under
Rule 462(b) under the Securities Act (a "Rule 462(b) registration statement")
and any and all pre- or post-effective amendments thereto, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing which they, or any of them, may deem necessary or advisable
to be done in connection with this registration statement or any Rule 462(b)
registration statement, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agent to any of them, or any substitution or substitutes
for any or all of them, may lawfully do or cause to be done by virtue hereof.

Witness our hands and common seal on the dates set forth below.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ STEPHEN A. HILL President and Chief Executive Officer October 20, 2000
------------------------------------------------ (Principal Executive Officer)
Stephen A. Hill

/s/ PHILIPPE BEY Senior Vice President of Research and October 20, 2000
------------------------------------------------ Development, Chief Scientific Officer
Philippe Bey

/s/ DAVID C. HASTINGS Vice President, Chief Financial October 20, 2000
------------------------------------------------ Officer and Treasurer (Principal
David C. Hastings Financial Officer and Principal
Accounting Officer)

/s/ LAURA AVAKIAN Director October 20, 2000
------------------------------------------------
Laura Avakian

/s/ WERNER CAUTREELS Director October 20, 2000
------------------------------------------------
Werner Cautreels
</TABLE>

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<PAGE> 51

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ ARIEL ELIA Director October 20, 2000
------------------------------------------------
Ariel Elia

/s/ L. PATRICK GAGE Director October 20, 2000
------------------------------------------------
L. Patrick Gage

/s/ TUAN HA-NGOC Director October 20, 2000
------------------------------------------------
Tuan Ha-Ngoc

/s/ MICHAEL ROSENBLATT Director October 20, 2000
------------------------------------------------
Michael Rosenblatt
</TABLE>

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Exhibit Index

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
---------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*

4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
our Registration Statement on Form S-1 (File No. 333-11105)
and incorporated herein by reference.

5.1 Opinion of Palmer & Dodge LLP. Filed herewith.

10.1+ Compound Discovery Collaboration Agreement between ArQule
and Genome Therapeutics Corporation dated October 17, 2000.

23.1 Consent of Counsel (contained in opinion of Palmer & Dodge
LLP filed as Exhibit 5.1).

23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith.

24 Power of Attorney. Included on signature page to this
Registration Statement.
</TABLE>

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

* To be filed by amendment.
+ This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.

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