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Exhibit 10.1
 
EMPLOYMENT AGREEMENT
 
This Employment Agreement (the “Agreement”) dated as of June 17, 2008 (the
“Execution Date”) is made by and between ArQule, Inc., a Delaware corporation
(the “Company”) with its principal offices at 19 Presidential Way, Woburn,
Massachusetts  01801, and Brian Schwartz (“Executive”) whose current principal
residential address is 18 October Hill Road, Woodbridge, Connecticut 06525.
 
WHEREAS, the Company desires to employ Executive as its Chief Medical Officer
and Vice President and to enter into an agreement embodying the terms of such
employment; and
 
WHEREAS, Executive desires to accept such employment and enter into such an
agreement;
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the Company and
Executive (collectively, the “Parties”) hereby agree as follows:
 
 

 
1.                                       Term of Employment.  The Company hereby
agrees to employ Executive, and Executive hereby accepts such employment with
the Company, upon the terms and subject to the conditions set forth in this
Agreement.  Executive’s employment shall commence on July 14, 2008 (the
“Effective Date”) and shall continue until terminated in accordance with the
provisions of Section 5 of this Agreement (the “Employment Term”).

 
 

 
2.                                       Title; Duties.  During the Employment
Term, Executive shall serve as the Chief Medical Officer and Vice President of
the Company.  Executive hereby agrees to undertake the duties and
responsibilities inherent in such position and such other duties and
responsibilities consistent with such position as the President or Chief
Executive Officer of the Company shall from time to time reasonably assign to
Executive.

 
 

 
3.                                       No Conflict.  During the Employment
Term, Executive shall devote substantially all of Executive’s business time and
efforts to the performance of Executive’s duties hereunder and shall not,
directly or indirectly, engage in any other business, profession or occupation
for compensation or otherwise which would conflict with the rendition of such
duties.  Notwithstanding the foregoing, Executive may engage in other
activities, such as activities involving charitable, educational, religious,
trade association, civic and similar types of organizations, speaking
engagements and membership on the Board of Directors or equivalent of other
organizations (“Outside Activities”), provided that Executive shall obtain the
President’s written consent before engaging in any such Outside Activities, and
provided further that Executive’s participation in such Outside Activities shall
not be in violation of any of Executive’s obligations to the Company, including
but not limited to those set forth in the Company’s Code of Conduct.  Executive
represents and warrants that Exhibit A attached hereto states all Outside
Activities which Executive is participating in as of the Effective Date, and to
which the Company hereby consents.

 
 
 

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4.                                       Compensation and Benefits.

 
 

 
4.1                                 Base Salary.  During the Employment Term,
the Company shall pay Executive for Executive’s services hereunder a base salary
at the initial annual rate of $325,000, payable in substantially equal
installments in accordance with the Company’s usual payment practices and
subject to annual review and adjustment by the Company in its sole discretion. 
Such amount (as it may be adjusted upward or downward from time to time in
accordance with this Section 4.1) shall be referred to herein as the “Base
Salary.”

 
 

 
4.2                                 Bonus Compensation.  For each calendar year
during the Employment Term, Executive shall be eligible to receive a
discretionary annual cash bonus, the target amount of which shall be thirty-five
(35) percent of Executive’s Base Salary.  The award of an annual cash bonus, if
any, shall be in the Company’s sole discretion and shall be based on Company and
individual performance.  For calendar year 2008, the annual cash bonus award, if
any, shall be prorated based on the portion of the year actually worked by
Executive.  The annual cash bonus typically is paid during the first quarter of
the following calendar year, and, except as otherwise expressly provided herein,
Executive must be actively employed with the Company as of the payment date in
order to receive the discretionary annual cash bonus, if any.  Executive shall
also be eligible to participate in any and all other bonus plans and packages
that are made available to the Company’s executives, on a basis consistent with
Executive’s position and then-current Base Salary and in accordance with the
policies and practices of the Company and the Company’s Board of Directors.

 
 

 
4.3                                 Stock Option Grant.  As further compensation
for Executive’s services hereunder, the Company shall grant to Executive, on the
Effective Date, a stock option (the “Execution Stock Option”) to purchase
200,000 shares of the Company’s Common Stock, $0.01 par value per share (the
“Common Stock”), pursuant to the Company’s Amended and Restated 1994 Equity
Incentive Plan (the “Plan”) and in accordance with the terms, and subject to a
vesting schedule pursuant to which twenty-five percent of the shares shall vest
annually commencing on the first anniversary of the Effective Date, and other
conditions, set forth in substantially the form of Option Certificate attached
hereto as Exhibit B.  The method of determining the exercise price of the
Execution Stock Option is set forth in the attached Exhibit C.  In its sole
discretion, the Company may grant to Executive from time to time other stock
options to purchase additional shares of Common Stock, also pursuant to the Plan
and such other terms and conditions set forth at the time of such grant (the
Execution Stock Option and such other stock options, collectively, the “Stock
Options”) and may also grant stock awards.  The Execution Stock Option is
intended to be an “incentive stock option” to the extent permissible under
Section 422 of the Internal Revenue Code of 1986 (the “Code”), including the
$100,000 limitation of Code Section 422(d).]

 
 

 
4.4                                 Executive Benefits.  During the Employment
Term, Executive shall be eligible to participate in all employee benefit plans
and perquisite plans and policies

 
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(including fringe benefits, 401(k) plan participation, life, health dental,
accident and short and long term disability insurance) which the Company may, in
its sole and absolute discretion, make available to its similarly-situated
employees, whether such benefits are now in effect or hereafter adopted, subject
to the terms and conditions of each such plan or policy.  The Company may alter,
modify, add to or delete its employee benefit plans and its perquisite plans and
policies at any time as it, in its sole judgment, determines to be appropriate,
without recourse by Executive.
 
 

 
4.5                                 Paid Time Off.  Executive shall be entitled
to four weeks (20 working days) of paid time off (“PTO”) per annum during the
Employment Term, which will accrue pursuant to the Company’s policies and
practices and is to be taken at such time or times as shall be mutually
convenient for the Company and Executive; provided, however, that the Company
may elect to increase the annual time to which Executive shall be entitled to
PTO.  Unused PTO shall be allocated pursuant to the Company’s policies and
practices.

 
 

 
4.6                                 Business Expenses and Perquisites.  Upon
delivery of adequate documentation of expenses incurred in accordance with the
policies and practices of the Company, Executive shall be entitled to
reimbursement by the Company for reasonable travel, entertainment and other
business expenses incurred by Executive in the performance of Executive’s duties
hereunder in accordance with such policies as the Company may from time to time
have in effect.

 
 

 
4.7                                 Relocation Expenses.  Upon delivery of
adequate documentation of expenses incurred in relocation of Executive’s primary
residence to Massachusetts, the Company shall reimburse Executive, in an amount
not to exceed $75,000, for reasonable expenses incurred by Executive in the
course of such relocation, subject to the ArQule Relocation Policy Guidelines. 
The Company’s decision on which relocation expenses are reimbursable under this
paragraph shall be conclusive.  Executive shall not be entitled to reimbursement
under this paragraph if he does not submit a request and provide documentation
for such reimbursement within two years of the Effective Date of this
Agreement.  The reimbursement provided under this paragraph shall not apply to
more than one relocation by Executive.  In the event that Executive resigns his
employment with the Company or is terminated for Cause within one year of
receiving any reimbursement as provided under this paragraph, Executive shall be
required to repay to the Company any and all reimbursement amounts received
pursuant to this paragraph.

 
 

 
4.8                                 Deductions and Withholdings. 
Notwithstanding any other provision of this Agreement, any payments or benefits
hereunder shall be subject to the withholding of such amounts, if any, relating
to tax and other payroll deductions, as the Company reasonably determines it
should withhold pursuant to any applicable law or regulation.

 
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4.9                                 Annual Review.  Executive shall receive an
annual review of his performance by the President of the Company.

 
 

 
5.                                       Termination.

 
 

 
5.1                                 Without Cause by the Company. The Company
may terminate Executive’s employment hereunder at any time without Cause (as
defined in Section 5.2) upon not less than fourteen (14) days prior written
notice from the Company to Executive.  The effective date of Executive’s
termination shall be referred to herein as the “Termination Date.”  If
Executive’s employment is terminated by the Company pursuant to this
Section 5.1, all compensation and benefits provided to Executive by the Company
pursuant to this Agreement or otherwise shall cease as of the Termination Date,
except that the Company shall pay Executive all Base Salary owed to Executive
for work performed prior to the Termination Date, plus the cash value of any
accrued but unused PTO, as of the Termination Date.

 
 

 
5.1.1                        The Severance Package.  In the event the Company
terminates Executive’s employment without Cause, and provided that Executive
first executes a general release in a form and of a scope reasonably acceptable
to the Company within sixty (60) days of the Termination Date, the Company shall
provide, following the effective date of such general release, the following
severance benefits to Executive (the “Severance Package”):

 
 

 
(a)                                  A payment (the “Severance Payment”) in the
following amount:

 
 

 
(i)                                     An amount equal to Executive’s Base
Salary through the end of the twelve (12) month period commencing on the
Termination Date; plus

 
 

 
(ii)                                  An amount equal to the average annual
discretionary cash bonus, if any, awarded by the Company to Executive with
respect to the two years preceding the year in which the Termination Date
occurs, provided that, for purposes of this paragraph only, Executive shall be
deemed to have received his thirty-five percent of Base Salary bonus target for
any year within such two-year period in which Executive was not paid a bonus
solely because Executive was not employed by the Company, and provided further
that for purposes of this sub-paragraph only, the annual discretionary cash
bonus, if any, awarded by the Company shall not be pro-rated.  Attached at
Exhibit D is a series of examples of the manner in which this portion of the
Severance Payment shall be calculated.

 
 

 
(b)                                 Payment of the costs associated with
continuing the benefits which Executive is entitled to receive pursuant to
Section 4.4 of this Agreement at the level in effect as of the Termination Date

 
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(subject to any employee contribution requirements applicable to Executive on
the Termination Date) through the twelve (12) month period commencing on the
Termination Date, to the extent such benefits may continue beyond the
Termination Date (for example, among other things, Executive’s coverage under
the Company’s life and disability insurance policies will terminate as of the
Termination Date).
 
 

 
(c)                                  The Severance Payment shall be paid to
Executive in substantially equal installments, according to the Company’s
regular payroll schedule, over the twelve (12) month period beginning on the
first regular payroll date following the effective date of the general release
executed by Executive as provided above, subject to Section 5.8 below.

 
 

 
5.1.2                        Deemed Termination.  For purposes of this
Section 5.1, a “termination without Cause” by the Company shall be deemed to
have occurred where Executive has complied with the “Deemed Termination Process”
(hereinafter defined) following the occurrence of any of the following events (a
“Deemed Termination Condition”) without the Executive’s prior written consent:

 
 

 
(a)                                  A diminution of Executive’s Base Salary
below $325,000 on an annualized basis (other than in connection with a
Company-wide decrease in salary affecting all or substantially all senior
management employees of the Company);

 
 

 
(b)                                 A diminution in Executive’s authority,
duties or responsibilities without Cause;

 
 

 
(c)                                  A material change in the geographic
location of Executive’s place of employment (for purposes of this paragraph, a
“material change” shall be deemed to occur only if the Company relocates
Executive’s place of employment by a distance of more then fifty (50) miles,
excluding any relocation to the Company’s existing offices in Woburn, MA); or

 
 

 
(d)                                 The Company materially breaches any of its
obligations to Executive pursuant to this Agreement.

 
“Deemed Termination Process” shall mean that (i) the Executive reasonably
determines in good faith that a Deemed Termination Condition has occurred;
(ii) the Executive provides written notice to the Company of the occurrence of
the Deemed Termination Condition within 45 days of the initial occurrence of
such condition; (iii) the Executive cooperates in good faith with the Company’s
efforts, for a period not less than 30 days following such notice (the “Cure
Period”), to remedy the Deemed
 
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Termination Condition; (iv) notwithstanding such efforts, the Deemed Termination
Condition continues to exist; and (v) the Executive provides the Company with a
Notice of Termination, which establishes a Termination Date within 30 days after
the end of the Cure Period.  If the Company cures the Deemed Termination
Condition during the Cure Period, a “termination without Cause” shall be deemed
not to have occurred.
 
 

 
5.2                                 For Cause by the Company.  Notwithstanding
any other provision of this Agreement, Executive’s employment hereunder may be
terminated by the Company at any time for Cause.  For purposes of this
Agreement, “Cause” shall mean: (i) Executive’s failure to follow the reasonable
instructions of the President or Chief Executive Officer or otherwise perform
Executive’s duties hereunder (other than as a result of a Disability (as defined
in Section 5.3)) for thirty (30) days after a written demand for performance is
delivered to Executive on behalf of the Company, which demand specifically
identifies the manner in which the Company alleges that Executive has not
substantially followed such instructions or otherwise performed Executive’s
duties; (ii) material violation by Executive of the Company’s Code of Conduct;
(iii) Executive’s willful misconduct that is materially injurious to the Company
(whether from a monetary perspective or otherwise); (iv) Executive’s willful
commission of an act constituting fraud with respect to the Company;
(v) conviction of Executive for a felony under the laws of the United States or
any state thereof; or (vi) Executive’s material breach of Executive’s
obligations under Sections 7 or 8 hereof.

 
If Executive’s employment is terminated by the Company for Cause, all
compensation and benefits provided to Executive by the Company pursuant to this
Agreement or otherwise shall cease as of the Termination Date, except that the
Company shall pay Executive all Base Salary owed to Executive for work performed
prior to the Termination Date, plus the cash value of any accrued but unused
PTO, as of the Termination Date.
 
 
5.3                                 Disability.  Subject to the requirements of
the Americans with Disabilities Act, Massachusetts General Laws Chapter 151B and
any other applicable laws, Executive’s employment hereunder may be terminated by
the Company at any time in the event of the Disability of Executive.  For
purposes of this Agreement, “Disability” shall mean the inability of Executive
to perform the essential functions of Executive’s position, with or without
reasonable accommodation, due to physical or mental disablement which continues
for a period of four (4) consecutive months during the Employment Term, as
determined by an independent qualified physician mutually acceptable to the
Company and Executive (or Executive’s personal representative) or, if the
Company and Executive (or such representative) are unable to agree on an
independent qualified physician, as determined by a panel of three physicians,
one designated by the Company, one designated by Executive (or such
representative) and one designated by the two physicians so designated.  If
Executive’s employment is terminated by the Company for Disability, all
compensation and benefits provided

 
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to Executive by the Company pursuant to this Agreement or otherwise shall cease
as of the Termination Date, except that (a) the Company shall pay Executive all
Base Salary owed to Executive for work performed prior to the Termination Date,
plus the cash value of any accrued but unused PTO, as of the Termination Date;
and (b) provided that Executive first executes a general release in a form and
of a scope reasonably acceptable to the Company within sixty (60) days of the
Termination Date, Executive shall be entitled to the Severance Package, except
that the portion of the Severance Payment based on Executive’s Base Salary paid
as a part of the Severance Package shall be reduced by the amount of Base
Salary, salary continuation (short-term disability), and cash disability
benefits (long-term disability) paid to Executive for the corresponding period
under the Company’s employee benefit plans as then in effect.
 
 

 
5.4                                 Death.  Executive’s employment hereunder
shall automatically terminate in the event of Executive’s death.  If Executive’s
employment is terminated by the death of Executive, all compensation and
benefits provided to Executive by the Company pursuant to this Agreement or
otherwise shall cease as of the Termination Date, except that (a) the Company
shall pay to Executive’s estate or legal representative all Base Salary owed to
Executive for work performed prior to the Termination Date, plus the cash value
of any accrued but unused PTO, as of the Termination Date; and (b) provided that
Executive’s estate first executes a general release in a form and of a scope
reasonably acceptable to the Company within ninety (90) days of the Termination
Date, Executive shall be entitled to the Severance Package.

 
 

 
5.5                                 Termination by Executive.  Executive’s
employment hereunder may be terminated by Executive at any time upon not less
than thirty (30) days prior written notice from Executive to the Board. 
Executive agrees that such notice period is reasonable and necessary in light of
the duties assumed by Executive pursuant to this Agreement and fair in light of
the consideration Executive is receiving pursuant to this Agreement.  If
Executive terminates Executive’s employment with the Company pursuant to this
Section 5.5, all compensation and benefits provided to Executive by the Company
pursuant to this Agreement or otherwise shall cease as of the Termination Date,
except that the Company shall pay Executive all amounts owed to Executive for
work performed prior to the Termination Date, plus the cash value of any accrued
but unused PTO as of the Termination Date.

 
 

 
5.6                                 Notice of Termination.  Any purported
termination of employment by the Company or by Executive shall be communicated
by written Notice of Termination to the other Party in accordance with
Section 11 hereof.  For purposes of this Agreement, a “Notice of Termination”
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of employment under
the provision so indicated.

 
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5.7                                 Survival.  The provisions of Sections 7, 8
and 9 shall survive the termination of this Agreement.

 
 

 
5.8                                 Section 409A of the Code.  It is the
intention of the parties to this Agreement that, to the extent possible, no
payment or entitlement pursuant to this Agreement will give rise to any adverse
tax consequences to Executive under Section 409A of the Internal Revenue Code
(“Code”) and Department of Treasury regulations and other interpretive guidance
issued thereunder, including that issued after the date hereof (collectively,
“Section 409A”).  The Agreement shall be interpreted to that end and consistent
with that objective.  Notwithstanding any other provision herein, if Executive
is a “specified employee” as defined in, and pursuant to, Treas. Reg.
Section 1.409A-1(i) on the Termination Date, no payment of compensation under
this Agreement shall be made to Executive during the period lasting six
(6) months from the Termination Date.  If any payment to Executive is delayed
pursuant to the foregoing sentence, such payment instead shall be made in a lump
sum payment on the first business day following the expiration of the six-month
period referred to in the prior sentence, and, as of the first business day
following the expiration of such six-month period, all such payments shall
resume in accordance with the schedule for such payments.

 
 

Each payment under this Agreement shall be designated as a “separate payment”
within the meaning of Section 409A of the Code.  To the extent any reimbursement
or in-kind benefit due to Executive under this Agreement constitutes “deferred
compensation” under Section 409A of the Code, any such reimbursement or in-kind
benefit shall be paid to Executive in a manner consistent with Treas. Reg.
Section 1.409A-3(i)(1)(iv).
 
 

 
6.                                       Accelerated Vesting in Change of
Control.  In the event that both (i) a Change of Control occurs and (ii) the
Company terminates Executive’s employment without Cause (or is deemed to
terminate Executive’s employment without Cause) within the period commencing
three months prior to the latest possible date of a Change of Control and ending
one year after the latest possible date of a Change of Control, any Stock Option
held by Executive shall become immediately exercisable as to all option shares
without regard to the vesting schedule set forth on the applicable Option
Certificate, and any shares of Restricted Stock previously granted shall
immediately be free and clear of any restrictions.  For purposes of this
Agreement, any one of the following events shall be considered a “Change of
Control” of the Company:

 
 

 
(a)                                  Acquisition by any “person” (as such term
is defined in Section 3(a)(9) of the Securities Exchange Act of 1934) of any
amount of the Company’s Common Stock so that such person holds or controls fifty
percent (50%) or more of the Company’s Common Stock;

 
 

 
(b)                                 Merger or consolidation of the Company with
or into any other entity in which the holders of the Company’s outstanding
shares of capital stock immediately before such merger or consolidation do not,
immediately after such merger or

 
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consolidation, retain capital stock representing a majority of the voting power
of the surviving entity of such merger or consolidation;
 
 

 
(c)                                  Sale of all or substantially all of the
assets of the Company to a third party;

 
 

 
(d)                                 Within any twenty-four (24) month period,
the election by the stockholders of the Company of twenty percent (20%) or more
of the directors of the Company other than pursuant to nomination by the Board,
or its designated committee; or

 
 

 
(e)                                  Execution of a legally binding, definitive
agreement approved by the Board of Directors providing for any of the events set
forth in (a), (b), (c) or (d) above.

 
 

 
7.                                       Confidentiality.

 
 

 
7.1                                 Definitions.  As used herein, the term
“Confidential Information” shall mean any and all ideas, inventions,
information, know-how, compounds, materials and other items (whether patentable
or not) that are confidential or proprietary to the Company (or to its
affiliates, collaborators, consultants, suppliers, or customers) whether
disclosed in written, oral, tangible or other form and whether or not labeled or
otherwise identified as confidential or proprietary.  Confidential Information
shall include, without limitation, the following to the extent proprietary to
the Company (or to its affiliates, collaborators, consultants, suppliers or
customers) and not publicly available:

 
 

 
(a)                                  inventions, trade secrets, discoveries and
computer programs, and any improvements or modifications thereto;

 
 

 
(b)                                 engineering, research, development and
design projects, data, designs, drawings and specifications;

 
 

 
(c)                                  manufacturing, development and other
technical processes, applications, methods, apparatus and equipment;

 
 

 
(d)                                 business information such as lists of
approved components and sources, price lists, product costs, production
schedules, business plans, sales information, profit and loss information, and
customer and collaborator lists;

 
 

 
(e)                                  any and all reagents, substances, chemical
compounds, subcellular constituents, cells or cell lines, organisms and progeny,
and mutants, as well as any and all derivatives or replications derived from or
relating to such materials; and

 
 

 
(f)                                    any and all information, materials and
other items supplied by third parties to the Company (or generated by the
Company for third parties) under an obligation of confidentiality.

 
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7.2                                 Non-Disclosure.  Executive shall not at any
time (whether during or after Executive’s employment with the Company) disclose
or use any Confidential Information for Executive’s own benefit or purposes or
the benefit or purposes of any other person, firm, partnership, joint venture,
association, corporation or other organization, entity or enterprise (a
“Person”) other than the Company.

 
 

 
7.3                                 Exceptions.  Notwithstanding any other
provision in the Agreement, Confidential Information shall not include any
information or material which:

 
 

 
(g)                                 is or becomes generally available to the
public other than as a result of disclosure thereof by Executive;

 
 

 
(h)                                 is lawfully received by Executive on a
non-confidential basis from a third party that is not itself under an obligation
of confidentiality or non-disclosure to the Company with respect to such
information;

 
 

 
(i)                                     can be shown by Executive to have been
independently developed by Executive;

 
 

 
(j)                                     Executive establishes by competent proof
was in Executive’s possession at the time of disclosure by the Company and was
not acquired, directly or indirectly from the Company; or

 
 

 
(k)                                  is required to be publicly disclosed by law
or by regulation; provided, however, that in such event Executive shall provide
the Company with prompt advance notice of such disclosure so that the Company
has the opportunity if it so desires to seek a protective order or other
appropriate remedy.

 
 

 
7.4                                 Return of Company Property.  Executive
agrees that upon termination of Executive’s employment hereunder, Executive
shall return immediately to the Company any proprietary materials, any materials
containing Confidential Information and any other Company property then in
Executive’s possession or under Executive’s control, including, without
limitation all notes, drawings, lists, memoranda, magnetic disks or tapes, or
other recording media containing such Confidential Information, whether alone or
together with non-confidential information, all documents, reports, files,
memoranda, records, software, credit cards, door and file keys, telephones,
PDAs, computers, computer access codes, disks and instructional manuals, or any
other physical property that Executive received, prepared, or helped prepare in
connection with Executive’s employment under this Agreement.  Upon termination,
Executive shall not retain any copies, duplicates, reproductions, or excerpts of
Confidential Information, nor shall Executive show or give any of the above to
any third party.  Executive further agrees that Executive shall not retain or
use for Executive’s account at any time any trade name, trademark, service mark,
logo or other proprietary business designation used or owned in connection with
the business of the Company.

 
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7.5           Other Agreements.  Executive represents and warrants that
Executive is not bound by any agreement or any other previous or existing
business relationship which conflicts with or prevents the full performance of
Executive’s duties and obligations to the Company (including Executive’s duties
and obligations under this or any other agreement with the Company).  If
Executive is prevented from performing his duties under this Agreement for any
period of time by order of a court of competent jurisdiction as a result of the
exercise of any legal or equitable remedy available to ZIOPHARM Oncology, Inc.
(“ZIOPHARM”) under that certain Invention, Non-Disclosure and Non-Competition
Agreement dated June 1, 2006 between Executive and ZIOPHARM, then as of the date
of such court order the Company may exercise its right to terminate Executive’s
employment for Cause pursuant to Section 5.2 of this Agreement.  Executive
understands that the Company does not desire to acquire from Executive any trade
secrets, know-how, or confidential or proprietary business information that
Executive may have acquired from others.  Therefore, Executive agrees that
during the Employment Term and thereafter, Executive shall not, through, for or
on behalf of the Company, improperly use or disclose any confidential or
proprietary information or trade secrets of any former or concurrent employer,
or any other person or entity with whom Executive has an agreement or to whom
Executive owes a duty to keep such information in confidence, and Executive
further agrees that any such improper use or disclosure of any such confidential
or proprietary information or trade secrets shall be a material breach of this
Agreement.

 
 

 
8.             Non-Competition; Non-Solicitation.

 
 

 
8.1           Non-Competition.  During Executive’s employment with the Company
or any of its affiliates and for a period of one (1) year after the termination
or cessation of such employment for any reason, Executive shall not directly or
indirectly, alone or through any other organization or entity, including without
limitation becoming an employee, investor (except as provided below), officer,
agent, partner, member or director of any such organization or entity, engage or
prepare to engage in any Competitive Activity.  For purposes of this Agreement,
the term “Competitive Activity” means any area of business that the Company or
any of its affiliates worldwide (which affiliates shall not include any entity
that purchases the Company or otherwise acquires all or substantially all of the
Company’s assets and any of such purchasing or acquiring entity’s affiliates)
conducted or actively planned to conduct at any time during Executive’s
employment, including but not limited to oncological drug development and kinase
platform drug development.  Notwithstanding the foregoing, Executive shall not
be deemed to be engaged directly or indirectly in any Competitive Activity if
Executive participates in any such business solely as a passive investor in up
to one percent (1%) of the equity securities of a company or partnership.  For
purposes of this Section, Executive shall be deemed to be engaging in
Competitive Activity as of the date that Executive accepts employment or
consulting engagement with any other person or entity, regardless of when
Executive actually begins providing services under such employment or consulting
engagement, but only if Executive is preparing to engage in Competitive Activity
during such period.  Nothing in this Section shall

 
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be construed to affect in any way Executive’s confidentiality obligations as set
forth in Section 7 of this Agreement.  Nothing in this Section shall be
construed to prohibit Executive from seeking permission from the Company to
engage in any activity which may otherwise fall within the definition of
Competitive Activity as set forth in this Section, provided that a grant of
permission from the Company, if any, must be in writing.
 
 

 
8.2                                 Non-Solicitation.  During Executive’s
employment with the Company or any of its affiliates and for a period of one
(1) year after the termination or cessation of such employment for any reason
thereafter, Executive will not directly or indirectly: (a) solicit, divert or
take away, or attempt to divert or take away, the business or patronage of any
of the clients, customers or accounts, or prospective clients, customers or
accounts of the Company or its affiliates with whom the Company or its
affiliates has or is actively negotiating a written agreement as of the
Termination Date; (b) recruit, solicit or hire any person who is, or within the
six (6) month period preceding the Termination Date was, an officer, director or
employee of the Company or any of its affiliates or was a scientific consultant
with an exclusive arrangement with the Company or any of its affiliates; or
(c) induce or attempt to induce any officer, director, employee consultant,
agent or representative of the Company or any of its affiliates to discontinue
his or her relationship with the Company or any of its affiliates or to commence
an employment or other business relationship with another entity.

 
 

 
9.                                       Injunctive Relief and Other Remedies. 
Executive acknowledges and agrees that the Company’s remedies at law for a
breach or threatened breach of any of the provisions of Sections 7 and 8 would
be inadequate and, in recognition of this fact, Executive agrees that, in the
event of such a breach or threatened breach, in addition to any remedies at law,
the Company, without posting any bond, shall be entitled to obtain equitable
relief in the form of specific performance, temporary restraining orders,
temporary or permanent injunctions or any other equitable remedy which may then
be available.  In addition, in the event that Executive breaches any provision
of Sections 7 or 8 of this Agreement, the applicable time periods set forth in
such Sections, shall be extended for a period of time equal to the period of
time during which Executive was in breach of the Agreement, up to a maximum of
twelve (12) months, and if the Company is required to seek relief from such
breach in any judicial proceedings, then such time limitations shall extend for
a period of time equal to the pendency of any such proceedings, including all
appeals, up to a maximum of twenty-four months.  In connection with the
restrictions in Sections 7 and 8, Executive represents that his economic means
are such that those provisions will not prevent him from providing for himself
and his family on a basis satisfactory to Executive.  Further, in addition to
any other remedies available to the Company, in the event Executive breaches any
of the provisions of this Agreement, including but not limited to Sections 7 or
8, Executive agrees that any post-termination payments and benefits, if any,
flowing to Executive from the Company, including but not limited to the
Severance Package, shall be subject to termination, reduction, disgorgement or
cancellation.

 
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10.           Notices.  Any notice hereunder by either Party to the other shall
be given in writing by personal delivery, telex, facsimile, overnight courier or
certified mail, return receipt requested, addressed, if to the Company, to the
attention of the President at the Company’s executive offices or to such other
address as the Company may designate in writing at any time or from time to time
to Executive, and if to Executive, to Executive’s most recent address on file
with the Company.  Notice shall be deemed given, if by personal delivery or by
overnight courier, on the date of such delivery or, if by telex or facsimile, on
the business day following receipt of answer back or facsimile information or,
if by certified mail, on the date shown on the applicable return receipt.

 
 

 
11.           Assignment.  This Agreement may not be assigned by either Party
without the prior written consent of the other Party, provided, however, that
the Company may assign this Agreement without Executive’s consent in the event
of a merger, acquisition, or transfer of all or substantially all of the assets
of the Company with or to a third party (a “Merger”).  In the event of a Merger,
the Company shall require in writing any successor Person to assume and agree to
perform this Agreement; failure to so assume and agree shall constitute a Deemed
Termination Condition for purposes of Section 5.1.2(d).

 
 

 
12.           Entire Agreement.  This Agreement constitutes the entire agreement
between the Parties with respect to the subject matter hereof and there have
been no oral or other agreements of any kind whatsoever as a condition precedent
or inducement to the signing of this Agreement or otherwise concerning this
Agreement or the subject matter hereof.

 
 

 
13.           Expenses.  The Parties shall each pay their own respective
expenses incident to the enforcement or interpretation of, or dispute resolution
with respect to, this Agreement, including all fees and expenses of their
counsel for all activities of such counsel undertaken pursuant to this
Agreement.

 
 

 
14.           Waivers and Further Agreements.  Any waiver of any terms or
conditions of this Agreement shall not operate as a waiver of any other breach
of such terms or conditions or any other term or condition, nor shall any
failure to enforce any provision hereof operate as a waiver of such provision or
of any other provision hereof; provided, however, that no such written waiver,
unless it, by its own terms, explicitly provides to the contrary, shall be
construed to effect a continuing waiver of the provision being waived and no
such waiver in any instance shall constitute a waiver in any other instance or
for any other purpose or impair the right of the Party against whom such waiver
is claimed in all other instances or for all other purposes to require full
compliance with such provision.  Each of the Parties agrees to execute all such
further instruments and documents and to take all such further action as the
other Party may reasonably require in order to effectuate the terms and purposes
of this Agreement.

 
 

 
15.           Amendments.  This Agreement may not be amended, nor shall any
waiver, change, modification, consent or discharge be effected except by an
instrument in writing executed by both Parties.

 
 

 
16.           Severability.  If any provision of this Agreement shall be held or
deemed to be, or shall in fact be, invalid, inoperative or unenforceable as
applied to any particular case in any

 
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jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because
of the conflict of any provision with any constitution or statute or rule of
public policy or for any other reason, such circumstance shall not have the
effect of rendering the provision or provisions in question invalid, inoperative
or unenforceable in any other jurisdiction or in any other case or circumstance
or of rendering any other provision or provisions herein contained invalid,
inoperative or unenforceable to the extent that such other provisions are not
themselves actually in conflict with such constitution, statute or rule of
public policy, but this Agreement shall be reformed and construed in any such
jurisdiction or case as if such invalid, inoperative or unenforceable provision
had never been contained herein and such provision reformed so that it would be
valid, operative and enforceable to the maximum extent permitted in such
jurisdiction or in such case.
 
 

 
17.           Counterparts.  This Agreement maybe executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

 
 

 
18.           Section Headings.  The headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.

 
 

 
19.           Governing Law and Forum.  This Agreement shall in all events and
for all purposes be governed by, and construed in accordance with, the laws of
the Commonwealth of Massachusetts without regard to any choice of law principle
that would dictate the application of the laws of another jurisdiction.  Any
action, suit or other legal proceeding which may be commenced to resolve any
matter arising under or relating to any provision of this Agreement shall be
commenced only in a court of the Commonwealth of Massachusetts (or, if
appropriate, a federal court located within Massachusetts), and the parties
hereby consent to the jurisdiction of such court with respect to any action,
suit or proceeding commenced in such court.

 
IN WITNESS WHEREOF, the Parties have executed or caused to be executed this
Agreement as of the Execution Date.
 
 

 
 

ARQULE, INC.
 
EXECUTIVE
By:   /s/ Paolo Pucci                               By: /s/ Brian
Schwartz                                     
Name: Paolo Pucci
 
Name: Brian Schwartz
Title: Chief Executive Officer
             

 
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EXHIBIT A
 
Outside Activities
 
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EXHIBIT B
 
ARQULE, INC. AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN
Stock Option Terms And Conditions
 
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES WHICH HAVE
BEEN ISSUED UNDER THE 1994 EQUITY INCENTIVE PLAN AND REGISTERED UNDER THE
SECURITIES ACT OF 1933.
 
 
1.                                       Plan Incorporated by Reference.  This
Option is issued pursuant to the terms of the Plan and may be amended as
provided in the Plan.  Capitalized terms used and not otherwise defined in this
certificate have the meanings given to them in the Plan.  This certificate does
not set forth all of the terms and conditions of the Plan, which are
incorporated herein by reference.  The Committee administers the Plan and its
determinations regarding the operation of the Plan are final and binding. 
Copies of the Plan may be obtained upon written request without charge from the
Company.  This Option is intended to be an “incentive stock option” to the
extent permissible under Section 422 of the Internal Revenue Code of 1986 (the
“Code”), including the $100,000 limitation of Code Section 422(d).

 
 

 
2.                                       Option Price.  The price to be paid for
each share of Common Stock issued upon exercise of the whole or any part of this
Option is the Option Price set forth on the face of this certificate.

 
 

 
3.                                       Vesting Schedule.  This Option may be
exercised at any time and from time to time over the number of shares and in
accordance with the vesting schedule set forth on the face of this certificate,
but only for the purchase of whole shares, provided that if Option Holder’s
employment is terminated by the Company pursuant to Section 5.1 (including
5.1.2), 5.3 or 5.4 of the Employment Agreement between the Company and Option
Holder dated April 15, 2008  (“Employment Agreement”), then this Option may be
exercised at any time and from time to time over the number of shares and in
accordance with the vesting schedule set forth in the applicable Section of the
Employment Agreement and subject to the terms and conditions of such applicable
Section of the Employment Agreement.  Notwithstanding the foregoing, this Option
may not be exercised as to any shares after the Expiration Date.

 
 

 
4.                                       Method of Exercise.  To exercise this
Option, the Option Holder shall deliver written notice of exercise to the
Company specifying the number of shares with respect to which the Option is
being exercised accompanied by payment of the Option Price for such shares in
cash, by certified check or in such other form, including shares of Common Stock
of the Company valued at their Fair Market Value on the date of delivery, as the
Committee may approve.  Promptly following such a notice, the Company will
deliver to the Option Holder a certificate representing the number of shares
with respect to which the Option is being exercised.

 
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5.                                       Rights as a Stockholder or Employee. 
The Option Holder shall not have any rights in respect of shares as to which the
Option shall not have been exercised and payment made as provided above.  The
Option Holder shall not have any rights to continued employment by the Company
or any group company by virtue of the grant of this Option.

 
 

 
6.                                       Recapitalization, Mergers, Etc.  As
provided in the Plan, in the event of a corporate transaction affecting the
Company’s outstanding Common Stock, the Committee shall equitably adjust the
number and kind of shares subject to this Option and the exercise price
hereunder or make provision for a cash payment.  If such transaction involves a
consolidation or merger of the Company with another entity, the sale or exchange
of all or substantially all of the assets of the Company or a reorganization or
liquidation of the Company, then in lieu of the foregoing, the Committee may
upon written notice to the Option Holder provide that this Option shall
terminate on a date not less than 20 days after the date of such notice unless
theretofore exercised.  In connection with such notice, the Committee may in its
discretion accelerate or waive any deferred exercise period.

 
 

 
7.                                       Option Not Transferable.  This Option
is not transferable by the Option Holder other than upon the death of the Option
Holder, in accordance with the Plan.

 
 

 
8.                                       Exercise of Option After Termination of
Employment  Except as expressly set forth in this Paragraph 9 of this Agreement,
if the Option Holder’s employment with (a) the Company, (b) a corporation (or
parent or subsidiary corporation of such corporation) issuing or assuming a
stock option in a transaction to which section 424(a) of the Code applies, is
terminated for any reason, the Option Holder may exercise the rights which were
available to the Option Holder at the time of such termination only within three
months from the date of termination.  Upon the death of the Option Holder, his
or her Designated Beneficiary shall have the right, at any time within twelve
months after the date of death, to exercise in whole or in part any rights that
were available to the Option Holder at the time of death.  It is understood and
agreed, however, that any part of the Option intended to be an “incentive stock
option” that is not exercised within three months following the date of
termination will lose incentive stock option qualification and automatically
convert to a Nonstatutory Stock Option for the remainder of the applicable
exercise period.  Notwithstanding the foregoing, no rights under this Option may
be exercised after the Expiration Date.

 
 

 
9.                                       Exercise of Option Upon Retirement. 
Upon Retirement, as defined below, any unvested shares set forth on the face of
this certificate shall vest, and this Option may be exercised in whole or part
until the earlier of up to two years from the date of Retirement or the
Expiration Date.  “Retirement” as to any Option Holder shall mean such person’s
leaving the employment of the Company or an Affiliate after reaching age 55 with
ten (10) years of full-time continuous service with the Company; provided, that
the sum of the Option Holder’s age plus the number of years of continuous
service equals or exceed seventy (70).

 
 

 
10.                                 Compliance with Securities Laws.  It shall
be a condition to the Option Holder’s right to purchase shares of Common Stock
hereunder that the Company may, in its discretion,

 
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require (a) that the shares of Common Stock reserved for issue upon the exercise
of this Option shall have been duly listed, upon official notice of issuance,
upon any national securities exchange or automated quotation system on which the
Company’s Common Stock may then be listed or quoted, (b) that either (i) a
registration statement under the Securities Act of 1933 with respect to the
shares shall be in effect, or (ii) in the opinion of counsel for the Company,
the proposed purchase shall be exempt from registration under that Act and the
Option Holder shall have made such undertakings and agreements with the Company
as the Company may reasonably require, and (c) that such other steps, if any, as
counsel for the Company shall consider necessary to comply with any law
applicable to the issue of such shares by the Company shall have been taken by
the Company or the Option Holder, or both.  The certificates representing the
shares purchased under this Option may contain such legends as counsel for the
Company shall consider necessary to comply with any applicable law.
 
 

 
11.           Payment of Taxes.  To the extent applicable: The Option Holder
shall pay to the Company, or make provision satisfactory to the Company for
payment of, any taxes required by law to be withheld with respect to the
exercise of this Option.  The Committee may, in its discretion, require any
other Income taxes imposed on the sale of the shares to be paid by the Option
Holder.  In the Committee’s discretion, such tax obligations may be paid by
entering into some other arrangements to ensure that such amount is available to
them or it (whether by authorizing the sale of some or all of the shares and
payment to the Company or the member of the Group (as the case may be) of the
requisite amount of the proceeds of sale or otherwise). The Company and any
group company may, to the extent permitted by law, deduct any such tax
obligations from any payment of any kind otherwise due to the Option Holder.

 
 

 
12.           Transfer of Personal Data.  By acknowledging and accepting this
award, you understand that, in order to perform its requirements under the Plan,
the Company may transfer and process personal data and/or sensitive personal
data about you.  Such data may include but is not limited to personal and
financial data about you and sale of shares purchased under the Plan from time
to time.  You also hereby give explicit consent to the Company to transfer and
process any such personal data and/or sensitive data outside the country in
which you work or are employed including countries which may be outside the
European Economic Area where there may be no legislation in relation to an
individual’s rights concerning personal data.  This may also apply to other
companies in the Company group, third party advisers and administrators or
regulatory authorities.

 
 

 
13.           Special Tax Consequences.  The Option Holder acknowledges that, to
the extent the aggregate Fair Market Value of stock with respect to which
“incentive stock options” (within the meaning of Section 422 of the Code, but
without regard to Section 422(d) of the Code), including this Option, are
exercisable for the first time by the Option Holder during any calendar year
(under the Plan and all other incentive stock option plans of the Company, any
Subsidiary and any parent corporation thereof (within the meaning of Section 422
of the Code)) exceeds $100,000, such options shall be treated as Nonstatutory
Options to the extent required by Section 422 of the Code.  The Option Holder
further acknowledges that the rule set forth in the preceding sentence shall be
applied by taking

 
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options into account in the order in which they were granted.  For purposes of
these rules, the Fair Market Value of stock shall be determined as of the time
the Option with respect to such stock is granted.
 
19
 
 
 
 

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EXHIBIT C
 
Determination of Option Price
 
The exercise price of the Execution Stock Option is the Fair Market Value of
ArQule’s Common Stock (as defined below) as of the Effective Date as defined in
Section 1 of the Employment Agreement between the Company and Executive.
 
The Fair Market Value of ArQule’s Common Stock shall be the closing price of the
Common Stock as reported by the NASDAQ National Market on the trading day of the
commencement of Executive’s employment with the Company.
 
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EXHIBIT D
 
Calculation of the Severance Payment
 
Pursuant to Section 5.1.1(a)(ii), the portion of Executive’s Severance Payment
based on annual discretionary cash bonuses (“Bonus Severance”) awarded to
Executive, if any, would be calculated in the following manner (in all examples,
Executive’s Base Salary is assumed to be an annual rate of $325,000):
 
Example #1 — Executive terminated in 2008.
 
Bonus Severance = $113,750 (average of 35% deemed amount for two-year lookback
period where Executive did not work for the Company).
 
Example #2 — Executive awarded a 30% bonus for 2008, terminated during 2009.
 
Bonus Severance = $105,625 (average of 30% Year 1 award ($97,500) and 35% deemed
amount ($113,750) for the year during the two-year lookback period where
Executive did not work for the Company).
 
Example #3 — Executive awarded a 30% bonus for 2008, a 0% bonus for 2009,
terminated during 2010.
 
Bonus Severance = $48,750 (average of year 1 and year 2 bonuses actually
awarded).
 
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