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                                                                   EXHIBIT 10.37

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              EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                   COMPOUND DISCOVERY COLLABORATION AGREEMENT

         This Research Collaboration and License Agreement (this "AGREEMENT") is
entered into as of December 19, 2000 (the "EFFECTIVE DATE") by and between
ArQule, Inc. ("ARQULE"), a Delaware corporation, and ACADIA Pharmaceuticals,
Inc. ("ACADIA"), a Delaware corporation.

                                    RECITALS

         WHEREAS, ArQule and ACADIA previously entered into a Material Transfer
and Screening Agreement dated April 7, 1998 (the "MTA") pursuant to which ArQule
delivered certain of its Mapping Array(TM) compounds to ACADIA, and ACADIA
screened those compounds against certain of its targets;

         WHEREAS, ACADIA detected activity of certain ArQule compounds against
certain ACADIA targets; and

         WHEREAS, pursuant to the terms of the MTA, ArQule and ACADIA have
negotiated this Agreement to expand their joint research activities and to
pursue further development of the active compounds discovered by ACADIA.

         NOW, THEREFORE, ArQule and ACADIA hereby agree as follows:

1.       DEFINITIONS.

         1.1 "ACADIA TARGET" means each biological target nominated by ACADIA,
accepted by ArQule, and selected by the Research Committee for use in the
Collaboration, as further described in Subsection 3.3.1. below.

         1.2 "ACTIVE COMPOUND" means any ArQule Compound, Targeted Compound, or
Analog Compound which exhibits confirmed significant functional activity against
an ACADIA Target in a primary screen, as determined by the Research Committee.
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         1.3 "AFFILIATE" means any legal entity (such as a corporation,
partnership, or limited liability company) that is controlled by a party. For
the purposes of this definition, the term "control" means (i) beneficial
ownership of at least fifty percent (50%) of the voting securities of a
corporation or other business organization with voting securities or (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities.

         1.4 "ANALOG COMPOUND" means a chemical compound that (i) exhibits
[*****] to an identified Active Compound or Targeted Compound, (ii) was
discovered or developed using information obtained by screening one or more
Active Compounds or Targeted Compounds, or (iii) was [*****] parent ArQule
Compound or Targeted Compound [*****].

         1.5 "ARQULE COMPOUND" means a small organic chemical molecule in a
Mapping Array Set, Compass Array Set, or Biased Array Set (as described in the
Collaboration Plan) and provided by ArQule to ACADIA as directed by the Research
Committee under this Agreement or previously provided to ACADIA under the MTA.

         1.6 "AVAILABLE COMPOUND" means an ArQule Compound or Analog Compound
that is neither: (i) licensed or otherwise committed by ArQule or ACADIA to a
third party in the Field nor (ii) committed to an internal ArQule or ACADIA
program in the Field. In addition, all Targeted Compounds are Available
Compounds. "AVAILABLE ACTIVE COMPOUND" means an Active Compound that is also an
Available Compound.

         1.7 "AVAILABLE TARGET" means an ACADIA Target that is neither: (i)
licensed or otherwise committed by ACADIA or ArQule to a third party in the
Field nor (ii) committed to an internal ACADIA or ArQule program in the Field.

         1.8 "COLLABORATION" means the activities of ACADIA and ArQule carried
out in performance of, and the relationship, rights and obligations of the
parties established by, Articles 2 and 3 of this Agreement.

         1.9 "COLLABORATION PLAN" means the overall plan for research and
development activities for typical projects in the Collaboration, as set forth
on EXHIBIT A. The Steering Committee may modify the Collaboration Plan as needed
to advance the goals of the Collaboration.

         1.10 "COLLABORATION PRODUCT" means any product containing as one of its
constituents any Committed Compound or any Analog Compound based on a Committed
Compound.

         1.11 "COLLABORATION WORK PRODUCT" means, individually or collectively,
(i) any Committed Target or Committed Target Set and its corresponding Committed
Compounds or Committed Compound Set(s), GLP Toxicology Candidate, or IND
Candidate, as well as all

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Technology pertaining to any of the foregoing or the manufacture, use or sale
thereof, and (ii) all libraries of Targeted Compounds.

         1.12 "COMMERCIALIZATION PLAN" means a plan developed and approved by
the Steering Committee for the sale, license, or other transfer of commercial
rights in Collaboration Work Product to a third party, as described in Section
3.7.

         1.13 "COMMITTED COMPOUND" means (i) any Available Active Compound
designated by the Research Committee as a Committed Compound pursuant to
Subsection 3.4.2. and (ii) any Analog Compound developed by the parties in the
course of an optimization program as described in Section 3.5., provided that
such Analog Compound is an Available Compound as required under Section 3.5.

         1.14 "COMMITTED COMPOUND SET" means a set of Committed Compounds that
[*****] as determined by the Research Committee.

         1.15 "COMMITTED TARGET" means any Available Target designated by the
Research Committee as a Committed Target pursuant to Subsection 3.4.2.

         1.16 "COMMITTED TARGET SET" means a set of Committed Targets that are
so closely related that the Research Committee has decided to group those
Committed Targets into one optimization program under Section 3.5. or allocation
under Subsection 9.6.2.

         1.17 "CONFIDENTIAL INFORMATION" means any technical or business
information furnished by one party (the "DISCLOSING PARTY") to the other party
(the "RECEIVING PARTY") in connection with this Agreement. Such Confidential
Information may include, without limitation, the identity or use of a chemical
compound, the identity or use of a biological target, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, research and development activities, Steering Committee
reports, Research Committee reports, royalty reports, product and marketing
plans, clinical development plans, and customer and supplier information.

         1.18 "FIELD" means applications in human therapeutics and animal
health.

         1.19 "GLP TOXICOLOGY CANDIDATE" means a Committed Compound that meets
or exceeds the criteria established by the Research Committee for a compound
that is ready for submission to IND enabling toxicology studies, as documented
in the Research Plan.

         1.20 "GROSS REVENUES" means the aggregate amount of consideration
received from a third party by either party in connection with an agreement to
commercialize any Collaboration Work Product, including without limitation
license fees, milestone payments, royalties, and the premium portion of equity
payments at a premium to fair market value, but excluding funds specifically
allocated to and actually used for the research and development of Collaboration
Work Product. Gross Revenues shall be calculated without deduction of any costs,
fees, or expenses (e.g., legal fees or finders fees) paid by a party in
connection with the transaction. To

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                                       3.
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the extent that any Gross Revenues are transferred to a party in a form other
than cash, the amount of such Gross Revenues payable to the other party shall be
based on the fair market value of such non-monetary consideration on the date of
transfer, as determined in good faith by the parties.

         1.21 "IND" means an investigational new drug application filed with the
FDA prior to beginning clinical trials in humans or any comparable application
filed with the regulatory authorities of a country other than the United States,
prior to beginning clinical trials in humans in that country.

         1.22 "IND CANDIDATE" means a Committed Compound that meets or exceeds
the criteria established by the Research Committee for a compound that is ready
for human clinical trials, including data sufficient to support the filing of an
IND, as documented in the Research Plan.

         1.23 "PATENT RIGHTS" means any United States patent application and any
divisional, substitution, continuation, or continuation-in-part of such patent
application (to the extent the claims are directed to subject matter
specifically described therein) or inventor's certificate relating to such
patent application, as well as any patent issued thereon and any reissue,
reexamination, renewal, extension or term restoration of such patent, and any
foreign counterparts to such patents and patent applications. "ARQULE PATENT
RIGHTS" means Patent Rights that are either (i) assigned solely to ArQule, (ii)
assigned jointly to ArQule and a party other than ACADIA, or (iii) licensed to
ArQule, in each case to the extent that ArQule has the ability to license or
sublicense the rights required under this Agreement without payment to a third
party. "ACADIA PATENT RIGHTS" means Patent Rights that are either (i) assigned
solely to ACADIA, (ii) assigned jointly to ACADIA and a party other than ArQule,
or (iii) licensed to ACADIA, in each case to the extent that ACADIA has the
ability to license or sublicense the rights required under this Agreement
without payment to a third party. "JOINT PATENT RIGHTS" means Patent Rights (i)
in Committed Compounds and their use against Committed Targets; (ii) in Targeted
Compounds and their uses; or (iii) that are assigned to both ArQule and ACADIA
as joint owners or are otherwise jointly invented by one or more employees or
consultants of ACADIA and one or more employees or consultants of ArQule in
connection with the Collaboration.

         1.24 "RESEARCH COMMITTEE" means the Research Committee described in
Section 2.1. The Research Committee manages and directs the research and
development activities in the Collaboration.

         1.25 "RESEARCH MATERIALS" means any tangible research materials,
whether biological, chemical, physical, or otherwise. "PROPRIETARY RESEARCH
MATERIALS" means any Research Materials that a party designates as proprietary
or confidential, including without limitation (a) all ArQule Compounds, and (b)
all expressed proteins for ACADIA Targets provided by ACADIA in the
Collaboration.

         1.26 "RESEARCH PLAN" means the specific, detailed plan for research and
development activities in the Collaboration that is developed by the Research
Committee and approved by the

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Steering Committee. The parties anticipate that they will update the Research
Plan on at least a quarterly basis.

         1.27 "RESERVED COMPOUND" means an Available Compound that has been
reserved by the parties for the Collaboration as described in Subsection 3.4.1.

         1.28 "RESERVED COMPOUND SET" means a set of Reserved Compounds that
share substantial chemical or structure homology, and which exhibit significant
functional activity for the same Reserved Target, or which share other common
characteristics such that the Research Committee has decided, in its discretion,
to group those Reserved Compounds for evaluation under Section 3.4. or for
allocation under Subsection 9.6.2.

         1.29 "RESERVED TARGET" means an Available Target that has been reserved
by the parties for the Collaboration as described in Subsection 3.4.1.

         1.30 "RESERVED TARGET SET" means a set of Reserved Targets that are so
closely related that the Research Committee has decided, in its discretion, to
group those Reserved Targets for evaluation under Section 3.4. or allocation
under Subsection 9.6.2.

         1.31 "STEERING COMMITTEE" means the Steering Committee described in
Section 2.2. of this Agreement. The Steering Committee has overall authority
within the Collaboration, and specifically has approval authority over financial
decisions.

         1.32 "TARGETED COMPOUND" means a compound in a library focused on a
target class, which library is developed jointly by the parties within the
Collaboration, as more particularly described in the Collaboration Plan and
Research Plan.

         1.33 "TECHNOLOGY" means any proprietary development, idea, design,
concept, technique, process, invention, Research Material, discovery, or
improvement, whether or not patentable or copyrightable. "ARQULE TECHNOLOGY"
means Technology that is either (i) assigned solely to ArQule, (ii) assigned
jointly to ArQule and a party other than ACADIA, or (iii) licensed to ArQule, in
each case to the extent that ArQule has the ability to license or sublicense the
rights required under this Agreement without payment to a third party. "ACADIA
TECHNOLOGY" means Technology that is either (i) assigned solely to ACADIA, (ii)
assigned jointly to ACADIA and a party other than ArQule, or (iii) licensed to
ACADIA, in each case to the extent that ACADIA has the ability to license or
sublicense the rights required under this Agreement without payment to a third
party. "COLLABORATION TECHNOLOGY" means (i) all Committed Compounds and their
use against Committed Targets, (ii) all Targeted Compounds and their uses, and
(iii) any Technology that is developed, invented, or discovered jointly by one
or more employees or consultants of ACADIA and one or more employees or
consultants of ArQule in connection with the Collaboration.

2.       MANAGEMENT OF COLLABORATION.

         2.1 RESEARCH COMMITTEE.

                  2.1.1 CREATION OF RESEARCH COMMITTEE. The parties hereby
create a Research Committee with at least four (4) members, with equal
representation from each party. The

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members initially designated by ACADIA are [*****]and [*****] and the members
initially designated by ArQule are [*****] and [*****] Either party may change
its representatives on the Research Committee at any time upon written notice to
the other party. The chairperson of the Research Committee shall be designated
annually on an alternating basis between the parties. The chairperson shall
initially be [*****] The party not designating the chairperson shall designate
one of its representatives as secretary to the Research Committee for such
[*****].

                  2.1.2 MEETINGS OF THE RESEARCH COMMITTEE. Regular meetings of
the Research Committee shall be held within [*****] of the end of each calendar
quarter, or at such other times as the parties may deem appropriate, at such
times and places as the members of the Research Committee shall from time to
time agree. Special meetings of the Research Committee may be called by either
party on [*****] written notice to the other party unless notice is waived by
the parties. All meetings shall alternate between the offices of the parties
unless the parties otherwise agree. The chairperson shall be responsible for
sending notice of meetings to all members. In the event a Research Committee
member is unable to attend a meeting of the Research Committee, such Research
Committee member may designate an alternate member who will serve solely for
that Research Committee meeting.

                  2.1.3 DECISIONS OF RESEARCH COMMITTEE. A quorum of the
Research Committee shall be present at any meeting of the Research Committee if
at least one representative of each party is present at such meeting in person
or by telephone. If a quorum exists at any meeting, the unanimous consent of all
members of the Research Committee present at such meeting is required to take
any action on behalf of the Research Committee.

                  2.1.4 RESPONSIBILITIES OF RESEARCH COMMITTEE. The Research
Committee shall be responsible for the day-to-day conduct and progress of the
Collaboration, including without limitation:

                            (i) preparing, approving, and updating the Research
Plan and the annual budget;

                            (ii) managing all technical aspects of the
Collaboration, including all research and development activities;

                            (iii) providing a forum for the exchange of
scientific information among the scientists participating in the Collaboration;

                            (iv) resolving matters involving scientific
questions;

                            (v) determining the criteria of significant
functional activity necessary for an ArQule Compound, Targeted Compound, or
Analog Compound to qualify as an Active Compound and confirming that an ArQule
Compound, Targeted Compound, or Analog Compound qualifies as an Active Compound;

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                            (vi) maintaining records of Reserved Compounds and
Reserved Targets and establishing Reserved Compound Sets and Reserved Target
Sets;

                            (vii) designating Available Active Compounds as
Committed Compounds, establishing Committed Compound Sets, and adding and
removing compounds from Committed Compound Sets; and

                            (viii) designating Available Targets as Committed
Targets, establishing Committed Target Sets, and adding and removing targets
from Committed Target Sets.

                  2.1.5 RESEARCH COMMITTEE REPORTS. Within [*****] following
each meeting of the Research Committee held pursuant to Subsection 2.1.2., the
secretary of the Research Committee shall prepare and send to each party a
written report of actions taken at the meeting in such form and containing such
detail as shall be determined by the Research Committee.

                  2.1.6 DEADLOCK. In the event that the Research Committee
cannot reach agreement with respect to any matter that is subject to its
decision-making authority, then the matter shall be referred to the Steering
Committee for resolution.

         2.2 STEERING COMMITTEE.

                  2.2.1 CREATION OF STEERING COMMITTEE. The parties hereby also
create a Steering Committee with at least six 6) members, with equal
representation from each party. The members initially designated by ACADIA are
[*****]. The members initially designated by ArQule are [*****] Either party may
change its representatives on the Steering Committee at any time upon written
notice to the other party. The chairperson of the Steering Committee shall be
designated annually on an alternating basis between the parties. The initial
chairperson of the Steering Committee shall be [*****] The party not designating
the chairperson shall designate one of its representatives as secretary of the
Steering Committee for such [*****].

                  2.2.2 MEETINGS OF THE STEERING COMMITTEE. Regular meetings of
the Steering Committee shall be held within [*****] of the end of each calendar
year, or at such other times as the parties may deem appropriate, at such times
and places as the members of the Steering Committee shall from time to time
agree. Special meetings of the Steering Committee may be called by either party
on[*****] written notice to the other party unless notice is waived by the
parties. All meetings shall alternate between the offices of the parties unless
the parties otherwise agree. In the event a Steering Committee member is unable
to attend a meeting of the Steering Committee, such Steering Committee member
may designate an alternate member who will serve solely for that Steering
Committee meeting.

                  2.2.3 DECISIONS OF THE STEERING COMMITTEE. Unless otherwise
specifically designated as a responsibility of the Research Committee pursuant
to Subsection 2.1.4., all decisions regarding the contractual and financial
relationship created by this Agreement shall be made by the Steering Committee
acting in accordance with this Agreement or by agents duly authorized in writing
by the Steering Committee. A quorum of the Steering Committee shall be

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present at any meeting of the Steering Committee if at least one representative
of each party is present at such meeting in person or by telephone. If a quorum
exists at any meeting, the unanimous consent of all members of the Steering
Committee present at such meeting is required to take any action on behalf of
the Steering Committee.

                  2.2.4 RESPONSIBILITY OF STEERING COMMITTEE. The Steering
Committee shall be responsible for approving long-term objectives for, and
evaluating the progress of, the Collaboration, including without limitation:

                            (i) approving all updates to the Research Plan and
any changes to the Collaboration Plan;

                            (ii) approving the annual budget for the
Collaboration;

                            (iii) reviewing and approving involvement of third
parties in the Collaboration;

                            (iv) developing Commercialization Plans and managing
commercialization of Collaboration Work Product;

                            (v) resolving deadlocks of the Research Committee;
and

                            (vi) determining the number of members for both the
Research Committee and Steering Committee, beyond the minimum of four members.

                  2.2.5 STEERING COMMITTEE REPORTS. Within ten (10) days
following each meeting of the Steering Committee held pursuant to Subsection
2.2.2., the secretary of the Steering Committee shall prepare and send to the
members of the Steering Committee a detailed written report of actions taken at
the meeting in such form and containing such detail as shall be determined by
the Steering Committee.

                  2.2.6 DEADLOCK. In the event that the Steering Committee
declares a deadlock with respect to, or fails to reach agreement within sixty
(60) days as to, any matter relating only to specific activities under the
Collaboration (such as designation of Active Available Compounds as Committed
Compounds; designation of ACADIA Targets as Committed Targets; the initiation or
conduct of lead optimization or preclinical development activities; approval of
the annual budget or changes to the Research Plan; or approval of a
Commercialization Plan) the matter shall not be subject to dispute resolution
under Article 10, but shall be referred to the Chief Executive Officers of each
party for resolution within sixty (60) days after the date the deadlock is
reached, subject to extension by mutual agreement. If the Chief Executive
Officers fail to resolve the matter within the sixty-day period, or such other
period that the parties mutually establish, the Agreement will terminate
pursuant to Section 9.3. Any other unresolved disagreements within the Steering
Committee and relating to this Agreement shall be referred to dispute resolution
in accordance with the procedures set forth in Article 10.

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3.       CONDUCT OF COLLABORATION

         3.1 SCOPE OF COLLABORATION. During the Collaboration, the parties will
(i) perform lead generation activities using ArQule Compounds and multiple
ACADIA Targets to identify Active Compounds, (ii) perform lead qualification
activities on Reserved Compounds and Reserved Targets to select Committed
Compounds and Committed Targets for lead optimization efforts, (iii) perform
lead optimization activities on Committed Compound Sets to develop one or more
GLP Toxicology Candidates, and (iv) if appropriate, conduct work on one or more
GLP Toxicology Candidates to develop IND Candidates, in each case as further
described below. The parties may also develop libraries of Targeted Compounds
that are focused on a particular target class, and then use the Targeted
Compounds for lead generation, as described below. The overall objective of the
Collaboration is to discover and develop compounds that demonstrate potential as
human therapeutic products, and to sell, license, or otherwise transfer
commercial rights to those compounds to third parties.

         3.2 GENERAL RESPONSIBILITIES OF EACH PARTY. In general, the parties
intend that ACADIA will be responsible for biology-related tasks relating to the
ACADIA Targets and ArQule will be responsible for chemistry-related tasks
relating to the ArQule Compounds, but only until identification of a GLP
Toxicology Candidate. If the parties decide to develop a GLP Toxicology
Candidate into an IND Candidate, they will share responsibility for the
necessary preclinical activities through the Research Committee and Steering
Committee. This allocation of responsibilities reflects the expected
contributions from each party. However, the Research Committee has discretion to
allocate specific research and development tasks on a case-by-case basis to the
party that has the best current capability and capacity to complete the task and
advance the project. The actual responsibilities of each party will be
determined by the Research Committee and Steering Committee and described in the
Collaboration Plan or Research Plan.

         3.3 LEAD GENERATION.

                  3.3.1 TARGET SELECTION. The Research Committee will select
which ACADIA Targets to screen in the Collaboration from among those nominated
by ACADIA and accepted by ArQule. ACADIA will only nominate Available Targets
for ACADIA. ArQule will decline to accept any ACADIA Targets that are not
Available Targets for ArQule. The initial ACADIA Targets selected by the
Research Committee are set forth in the initial Research Plan. After the
Research Committee selects an ACADIA Target, ACADIA and ArQule agree to notify
the Research Committee as soon as possible before taking any actions which could
remove the status of that ACADIA Target as an Available Target. In such event,
the Research Committee will immediately remove that ACADIA Target from the
Collaboration.

                  3.3.2 COMPOUND SELECTION. The Research Committee will decide
which libraries of ArQule Compounds to screen in the Collaboration (e.g.,
Compass Array Sets, Biased Array Sets, or Mapping Array Sets, as described in
the Collaboration Plan). The Research Committee may also decide to screen
Targeted Compounds in focused libraries developed by the parties for a target
class, if any, as described in the Collaboration Plan. The Research Committee
may also decide to screen Analog Compounds developed by the parties for a
different ACADIA Target.

                                       9.
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                  3.3.3 PROCEDURES FOR ARQULE COMPOUNDS. The parties will screen
ArQule Compounds against ACADIA Targets as directed by the Research Committee
and described in the Collaboration Plan and Research Plan. Initially, ArQule
will not disclose structures of individual ArQule Compounds. ArQule will
disclose to ACADIA the structures of Active Compounds that are Available
Compounds for ArQule. ACADIA will then determine whether those Active Compounds
are Available Compounds for ACADIA. If an Active Compound is an Available
Compound for both parties, each party will preserve the availability of the
Active Compound and the corresponding ACADIA Target and proceed to confirm
activity as described in Section 3.4. and in the Collaboration Plan. In
contrast, if a party determines that an Active Compound is not an Available
Compound for such party, the parties shall immediately cease all information
disclosure and activities under this Agreement with respect to that Active
Compound; however, the parties shall use reasonable efforts to monitor whether
that Active Compound later becomes an Available Compound and, in such event,
shall notify the other party and then proceed in accordance with Section 3.4.
Any information regarding the activity of these Active Compounds that are not
Available Compounds for the ACADIA Targets shall remain subject to the
restrictions on Confidential Information set forth in Article 7.

                  3.3.4 PROCEDURES FOR TARGETED COMPOUNDS. If the parties
develop or one or more focused compound libraries of Targeted Compounds for a
target class, as described in the Collaboration Plan, the parties will screen
those Targeted Compounds against ACADIA Targets as directed by the Research
Committee and described in the Collaboration Plan and Research Plan. Both
parties shall have access to the structures of all Targeted Compounds and shall
maintain Targeted Compounds as Available Compounds during the Collaboration.
Therefore, unlike the procedures for ArQule Compounds, a determination of
availability is unnecessary.

         3.4 LEAD QUALIFICATION.

                  3.4.1 SELECTION OF RESERVED COMPOUNDS AND RESERVED TARGETS.
The parties expect to discover multiple series of Available Active Compounds
with activity for multiple ACADIA Targets in the course of screening under the
Research Plan. The Research Committee will group the various ACADIA Targets in
multiple batches for screening. After each batch of ACADIA Targets is screened,
the Research Committee will review the various combinations of Available Active
Compounds and ACADIA Targets for which activity was detected and decide which
Available Active Compounds and ACADIA Targets from that batch of screening, if
any, should progress to further qualification in secondary screens and ADMET
assays as described in the Collaboration Plan and Research Plan. For those
Available Active Compounds and ACADIA Targets that the Research Committee
decides to pursue, the parties will designate the Available Active Compounds as
Reserved Compounds and the ACADIA Targets as Reserved Targets under this
Agreement and reserve those compounds and targets exclusively for the
Collaboration for a period of [*****] subject to extension by the Research
Committee, while secondary screens and ADMET assays are conducted. The Research
Committee may also group Reserved Compounds as a Reserved Compound Set and
Reserved Targets as a Reserved Target Set. All remaining Available Active
Compounds and ACADIA Targets that the Research Committee has declined to advance
to secondary screening shall automatically be released from

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their reserved status; however, any information regarding the activity of these
Available Compounds for the ACADIA Targets shall remain subject to the
restrictions on Confidential Information set forth in Article 7.

                  3.4.2 SELECTION OF COMMITTED COMPOUNDS AND COMMITTED TARGETS.
The parties expect that the Research Committee will further qualify and
prioritize the various opportunities presented by the combinations of Reserved
Compounds and Reserved Targets as described in the Collaboration Plan and
Research Plan. In order to facilitate this process, ArQule shall disclose to
ACADIA the structures, but not the locations, of inactive ArQule Compounds from
each Mapping Array Set from which Reserved Compounds are selected. ArQule shall
also produce and deliver to ACADIA resynthesized samples of selected Reserved
Compounds, as directed by the Research Committee. ACADIA shall test the
resynthesis samples of Reserved Compounds in various assays as directed by the
Research Committee and in accordance with the Research Plan. The Research
Committee shall then review the data and, after consideration, designate [*****]
Reserved Targets and their corresponding Reserved Compounds as Committed Targets
and Committed Compounds under this Agreement. The Research Committee has
discretion to replace [*****] Committed Targets and their corresponding
Committed Compounds at any time as new batches of ACADIA Targets and ArQule
Compounds and Targeted Compounds are screened and new Reserved Targets and
Reserved Compounds are identified. The Research Committee may increase the
number of Committed Targets and their Committed Compounds at any time, with
approval of the Steering Committee. Any Reserved Targets and their corresponding
Reserved Compounds, if any, that have met the predefined criteria for
consideration as Committed Targets and Committed Compounds but which were not
selected by the Research Committee shall be allocated between the parties as
provided in Section 9.6. All other Reserved Targets and Reserved Compounds, if
any, shall automatically be released from their reserved status; however, any
information regarding the activity of these Reserved Compounds for the Reserved
Targets shall remain subject to the restrictions on Confidential Information set
forth in Article 7.

         3.5 LEAD OPTIMIZATION. The Research Committee will update the Research
Plan to provide for the accelerated lead optimization of the selected Committed
Compound Sets with Committed Targets in the Collaboration, subject to Steering
Committee approval. The Research Plan will set project priorities and define
success criteria for a GLP Toxicology Candidate. As described in the
Collaboration Plan, in a typical project the parties will iteratively develop
and test Analog Compounds based on Committed Compounds. The parties will
determine whether a proposed Analog Compound is an Available Compound before
synthesis, and only Available Compounds will proceed to synthesis and testing in
the Collaboration. The Analog Compounds developed by the parties shall
automatically become Committed Compounds under this Agreement and, therefore,
the Committed Compound Set for the Committed Target will likely expand as a
result of the lead optimization efforts. At the discretion of the Research
Committee, the parties may also use such Analog Compounds in primary screens
against other ACADIA Targets. The parties anticipate that lead optimization of
Committed Compounds will occur in two stages:

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<PAGE>   12
         (i)      In the first stage, the parties will develop Analog Compounds
                  as combinatorial libraries to explore the promise of the
                  Committed Compound Set for the Committed Target. The parties
                  will test these Analog Compounds for various properties
                  determined by the Research Committee to predict whether the
                  Committed Compound Set may eventually meet the defined success
                  criteria for a GLP Toxicology Candidate. The parties will
                  decide whether to proceed to stage two for a given Committed
                  Compound Set within [*****]

         (ii)     In the second stage, the parties intend to concentrate their
                  efforts on developing [*****] and [*****] corresponding
                  Committed Compound Set(s) to identify a GLP Toxicology
                  Candidate, with [*****] from the first stage. The parties
                  shall maintain a level of effort determined by the Research
                  Committee for the [*****] The Research Committee may release
                  Committed Targets and the corresponding Committed Compound
                  Set(s) that are no longer of interest to the Collaboration or
                  which are no longer the subject of the active efforts by the
                  parties, as determined by the Research Committee and subject
                  to Steering Committee approval, in which case the allocation
                  provisions of Section 9.6. shall apply. Lead optimization
                  activities will continue with respect to a Committed Target
                  until the Research Committee and Steering Committee decide to
                  stop further efforts. The parties anticipate that lead
                  optimization activities will continue with respect to a
                  Committed Target until the parties (i) develop an acceptable
                  GLP Toxicology Candidate, (ii) determine that they are
                  unlikely to develop an acceptable GLP Toxicology Candidate, or
                  (iii) decide to seek commercialization of the Committed
                  Compound Set(s) and Committed Target as described below.

         3.6 PRECLINICAL DEVELOPMENT. At the discretion of the Steering
Committee, the parties may decide to conduct the necessary preclinical
development activities to advance one or more GLP Toxicology Candidates to
become IND Candidates, as described in the Collaboration Plan. In such event,
the Research Committee will update the Research Plan to provide for such
activities, subject to approval of the Steering Committee. These preclinical
development activities will continue with respect to a GLP Toxicology Candidate
until the Research Committee and Steering Committee decide to stop further
efforts. The parties anticipate that these preclinical development activities
will continue with respect to a GLP Toxicology Candidate until the parties (i)
develop an acceptable IND Candidate, (ii) determine that they are unlikely to
develop an acceptable IND Candidate, or (iii) decide to seek commercialization
of the GLP Toxicology Candidate and the corresponding Committed Target as
described below.

         3.7 COMMERCIALIZATION. At any time during the Collaboration, the
Steering Committee may decide to sell, license, or otherwise transfer commercial
rights in Collaboration Work Product to a third party. In such event, the
Steering Committee will develop and approve a Commercialization Plan for such
Collaboration Work Product. Unless otherwise determined by the Steering
Committee, the Commercialization Plan will (i) describe the expectations of the
parties regarding the commercial value of the Collaboration Work Product and
potential Collaboration Products, (ii) set forth a marketing plan for the
Collaboration Work Product (e.g.,

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                                      12.
<PAGE>   13
best potential customers), and (iii) state the respective responsibilities of
each party for commercialization of the Collaboration Work Product (e.g., lead
negotiator). The Steering Committee will manage the commercialization process.
Alternatively, one party may purchase the interest of the other party in
particular Collaboration Work Product on negotiated terms in a voluntary
transaction. In such event, the separately negotiated agreement shall supersede
the terms of this Agreement with respect to that Collaboration Work Product. The
Steering Committee may also decide to sell, license, or otherwise transfer
commercial rights in one or more focused libraries of Targeted Compounds
developed by the parties during the Collaboration. In such event, the Steering
Committee will develop and approve a Commercialization Plan for this
Collaboration Work Product.

         3.8 REPORTS AND RECORDS. Each party agrees to promptly and regularly
communicate to the other party all research results from the Collaboration,
including quarterly reports to the Research Committee detailing all tests
conducted and results obtained by such party in connection with the
Collaboration. Each party shall prepare and maintain adequate records, including
bound laboratory notebooks maintained in accordance with standard scientific
procedures, containing all appropriate data reflecting all research results from
the Collaboration. In addition, each party shall retain under appropriate
conditions any necessary or desirable samples of research materials that are
developed or used in the Collaboration.

4.       ALLOCATION OF EXPENSES AND REVENUES.

         4.1 EXPENSES. The Research Committee shall establish an annual budget
for all activities in the Collaboration, subject to Steering Committee approval.
Each party shall bear the expenses of its respective activities under the
Research Plan in accordance with the annual budget, except that the parties will
share equally any expenses payable (i) to third party service providers or (ii)
incurred in connection with preclinical development activities under Section
3.6. above, provided such expenses are approved in advance by the Steering
Committee and included in the annual budget. The Research Committee and Steering
Committee shall use their best efforts to ensure that the resource and value
contributions of each party are approximately equal on an annual basis. Any
significant deviations from the annual budget must receive Steering Committee
approval. Each party shall also pay fifty percent (50%) of all direct expenses
(e.g., legal fees, travel) incurred by either party in connection with
commercialization activities approved by the Steering Committee pursuant to
Section 3.7. The Steering Committee has the right to refuse payment of expenses
that are not properly documented or are unreasonably excessive. Each party shall
promptly make payments to third parties, or reimburse the other party, for
expenses owed by such party as set forth in this Section.

         4.2 REVENUES. Each party shall receive fifty percent (50%) of all Gross
Revenues received in connection with Collaboration Work Product sold, licensed
or transferred to a third party under Section 3.7, provided that each party has
contributed approximately equal resources and value to the Collaboration in
accordance with the Research Plan and the annual budget. In the event that one
party expends greater resources or contributes greater value than the other
party in the Collaboration, as formally recognized by the Steering Committee and
documented in the Research Plan or annual budget, the Steering Committee will
compensate the party with the greater resource expenditure or value contribution
in a manner reasonably acceptable to both parties.

                                      13.
<PAGE>   14
         4.3 RECORDS. Each party shall establish separate and distinct
accounting records (but not necessarily separate general ledgers) such that the
expenditures for the Collaboration are direct and transparent. As a guideline,
each party should have separate project records supported by time records and
records of direct expenses attributable to the Collaboration. Each party shall
maintain these records for a period of at least [*****] after the conclusion of
the applicable calendar year. Each party shall have the right, at its own
expense, to cause an independent certified public accountant reasonably
acceptable to the other party to inspect such records during normal business
hours for the sole purpose of verifying the expenditures reported under this
Agreement. The accountant shall conduct the audit at a date and time reasonably
acceptable to the audited party but not later than [*****] after the audited
party is notified of the audit. Such accountant shall not disclose to the
requesting party any information other than information relating to the accuracy
of expenditures reported under this Agreement and shall provide the audited
party with a copy of any report given to the requesting party. In the event of
any discrepancy, the parties shall promptly reconcile the discrepancy to achieve
the results set forth in Sections 4.1. and 4.2. Each party may exercise its
audit right not more than [*****].

5.       INTELLECTUAL PROPERTY RIGHTS.

         5.1 LICENSE GRANTS.

                  5.1.1 CROSS-LICENSES AND CROSS-ASSIGNMENT.

                            (i) ArQule hereby grants ACADIA a worldwide,
royalty-free, non-exclusive license under the ArQule Patent Rights, Joint Patent
Rights, and other rights in ArQule Technology and Collaboration Technology to
[*****]

                            (ii) ACADIA hereby grants ArQule a worldwide,
royalty-free, non-exclusive license under the ACADIA Patent Rights, Joint Patent
Rights, and other rights in ACADIA Technology and Collaboration Technology to
[*****]

                            (iii) To the extent that any Patent Rights in any
Committed Compound or its use against any Committed Target or in any Targeted
Compound or its use are not assigned to, or controlled by, both ArQule and
ACADIA as joint owners or are not otherwise jointly invented by one or more
employees or consultants of ACADIA and one or more employees or consultants of
ArQule in connection with the Collaboration, [*****].

                  5.1.2 COMMERCIALIZATION LICENSES. In the event that the
parties sell, license, or otherwise transfer commercialization rights in
Collaboration Work Product to a third party pursuant to Section 3.7. above, each
party hereby covenants and agrees to grant to such third party any rights and
licenses under such party's Patent Rights and Technology as are reasonably
necessary for such third party to exploit such Collaboration Work Product in
accordance with the terms of a written agreement between the parties and such
third party that is consistent with the Commercialization Plan applicable to
such Collaboration Work Product, and to provide

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                                      14.
<PAGE>   15
reasonable warranties of title, further assurances, and similar customary
provisions in connection with such grant of rights or licenses.

         5.2 INTELLECTUAL PROPERTY DEVELOPED OUTSIDE OF THE COLLABORATION.
Except as expressly set forth in this Agreement, neither party shall have any
rights in Patent Rights and Technology that are developed or discovered by the
other party prior to the Effective Date or outside of the Collaboration.
Therefore, ArQule shall have no rights in ACADIA Targets other than as provided
in the Agreement, and ACADIA shall have no rights in ArQule Compounds other than
as provided in the Agreement. Each party shall have sole responsibility for and
control over Patent Rights claiming any of its Technology that was developed or
discovered prior to the Effective Date or outside of the Collaboration. Neither
party shall have any right to review or comment on such Patent Rights of the
other party.

         5.3 INTELLECTUAL PROPERTY ARISING FROM THE COLLABORATION.

                  5.3.1 COMMITTED COMPOUNDS AND COMMITTED TARGETS. Committed
Compounds and Committed Targets are exclusive to the Collaboration, which means
that except as otherwise expressly provided in this Agreement:

                            (i) ArQule shall not engage in any research and
development activities on Committed Compounds outside of the Collaboration;

                            (ii) ArQule shall not knowingly engage in any
research and development activities on Committed Targets outside of the
Collaboration except to the extent that a third party requires ArQule to perform
such activities under a binding contract (which ArQule will disclose in advance
to ACADIA);

                            (iii) ACADIA shall not engage in any research and
development activities on Committed Targets outside of the Collaboration; and

                            (iv) ACADIA shall not knowingly engage in any
research and development activities on Committed Compounds outside of the
Collaboration except to the extent that a third party requires Acadia to perform
such activities under a binding contract (which ACADIA will disclose in advance
to ArQule).

In the event that a party engages in research and development activities with a
third party with respect to Committed Compounds or Committed Targets under the
limited circumstances permitted under this Subsection, such party shall
establish and observe strict procedures to ensure that no information crosses
from one project to the other project. The other party shall have the right to
audit such procedures upon reasonable prior written notice. All Committed
Compounds and Committed Targets shall remain exclusive to the Collaboration
until the Collaboration terminates or the Steering Committee releases a
particular Committed Compound, Committed Compound Set, Committed Target, or
Committed Target Set.

                  5.3.2 RIGHT TO USE. Except as provided in Section 5.1. above
or otherwise expressly provided in this Agreement, each party shall have the
following rights and restrictions for the use of Patent Rights and Technology
arising from the Collaboration:

                                      15.
<PAGE>   16
                            (i) ArQule shall not have any right or license under
ACADIA Patent Rights or other rights in ACADIA Technology arising from the
Collaboration.

                            (ii) ACADIA shall not have any right or license
under ArQule Patent Rights or other rights in ArQule Technology arising from the
Collaboration.

                            (iii) During the Collaboration, neither party may
use Targeted Compounds outside of the Collaboration without the prior written
consent of the other party. After the expiration or termination of this
Agreement, the parties shall have co-exclusive rights to Targeted Compounds
(other than Targeted Compounds that are subject to the provisions of Section
9.6.2) as follows. Each party shall select, in turn, a biological target that
was not within the Collaboration (meaning that it was not an ACADIA Target for
which the Targeted Compounds were screened). First selection shall be determined
[*****]. Each party (the "Grantee") shall have, and the other party (the
"Grantor") hereby grants to the Grantee, the exclusive (even as to the Grantor),
worldwide right and license, with the right to sublicense through multiple tiers
of sublicense, under the Grantor's interest in the Joint Patent Rights and other
rights in Collaboration Technology that pertain to the composition and use of
any Targeted Compounds, for research, development, manufacture, use and sale of
the Targeted Compounds for uses that involve modulation of the Grantee's
selected targets, without payment to the Grantor. In addition, the Grantor
hereby agrees to grant to the Grantee any rights and licenses to its Patent
Rights and other rights in its Technology as reasonably necessary for the
Grantee to exploit the Targeted Compounds for its selected targets, without
payment to the Grantor. In order to avoid any potential overlap in development
and commercialization of Targeted Compounds, a party may reserve any Targeted
Compound or Analog Compound thereof [*****] Targeted Compound or Analog
Compound(but only if the discovery program [*****] involved its selected
targets) by providing written notice to the other party of such reservation, and
following the reservation by a party of a Targeted Compound or Analog Compound,
[*****] Targeted Compound or Analog Compound.

                            (iv) Except as otherwise provided in this Agreement,
each party shall have the right to use Joint Patent Rights and Collaboration
Technology consistent with the provisions of Article 7 without accounting to the
other party.

                  5.3.3 OWNERSHIP. Ownership of Patent Rights and Technology
arising from the Collaboration shall be allocated in the following manner:

                            (i) ArQule shall have sole ownership of all right,
title, and interest in ArQule Patent Rights and ArQule Technology;

                            (ii) ACADIA shall have sole ownership of all right,
title, and interest in ACADIA Patent Rights and ACADIA Technology; and

                            (iii) ArQule and ACADIA shall have joint ownership
of all right, title, and interest in Joint Patent Rights and Collaboration
Technology.

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Each party shall ensure that its employees, consultants, agents, and
representatives are contractually required to disclose and to assign to such
party all Patent Rights and other rights in Technology arising from the
Collaboration.

                  5.3.4 NOTICE. Each party shall provide prompt written notice
to the Research Committee of the internal disclosure of any significant
Technology developed by its personnel in connection with the Collaboration.

                  5.3.5 RESPONSIBILITY FOR PATENT RIGHTS. ArQule shall be
responsible for and shall control, at its expense, the preparation, filing,
prosecution, grant, and maintenance of any Patent Rights claiming only ArQule
Technology arising from the Collaboration and shall consult with ACADIA on, and
give ACADIA a reasonable opportunity to review, all such filings to the extent
they directly relate to the Collaboration. ACADIA shall be responsible for and
shall control, at its expense, the preparation, filing, prosecution, grant, and
maintenance of all Patent Rights claiming only ACADIA Technology arising from
the Collaboration and shall consult with ArQule on, and give ArQule a reasonable
opportunity to review, all such filings to the extent they relate directly to
the Collaboration. In the case of Collaboration Technology, the Research
Committee will decide whether to seek Joint Patent Rights claiming that
Technology or to maintain that Technology as a trade secret, subject to approval
of the Steering Committee. The Research Committee will also decide whether to
seek Patent Rights claiming both ArQule Technology and ACADIA Technology in one
filing (which also constitutes a Joint Patent Right), subject to approval of the
Steering Committee. If the parties decide to seek any Joint Patent Rights, the
parties shall jointly prepare, file, prosecute, and maintain such Patent Rights,
and all related expenses shall be borne equally by the parties. Notwithstanding
the foregoing, neither party shall file any Joint Patent Rights claiming the
composition or use of any Active Compound until the Research Committee has
properly designated that Active Compound as a Committed Compound in accordance
with Subsection 3.4.2.

                  5.3.6 ASSUMPTION OF RIGHTS BY OTHER PARTY. In the event that a
party desires to decline responsibility for obtaining or maintaining Patent
Rights in a country for any of its Technology that arises from the
Collaboration, such party will notify the other party before taking such action
and, upon request, will allow the other party to assume responsibility for, and
all expenses relating to, the relevant Patent Rights in those countries;
provided, however, that neither party shall have the right to seek patent
protection for any Technology that a party has decided, in its discretion, to
maintain as a trade secret. In the event that a party desires to cease further
payment of patent-related expenses for a Joint Patent Right in any country, such
party may assign to the other party all rights in that Joint Patent Right in
such country and thereafter have no further obligation to pay such expenses.

                  5.3.7 COOPERATION. Each party agrees to cooperate fully in the
preparation, filing, prosecution, and maintenance of all Patent Rights claiming
Technology arising from the Collaboration. Such cooperation includes, without
limitation, (i) promptly executing all papers and instruments, or requiring its
employees, consultants, and agents to execute such papers and instruments, as
reasonable and appropriate so as to enable one or both parties to file,
prosecute, and maintain such Patent Rights in any country; (ii) promptly
informing the other party of matters that may affect the preparation, filing,
prosecution, or maintenance of any such Patent

                                      17.
<PAGE>   18
Rights; and (iii) undertaking no actions that are potentially deleterious to the
preparation, filing, or prosecution of any such Patent Rights.

6.       RESEARCH MATERIALS.

         6.1 OWNERSHIP OF RESEARCH MATERIALS. In the course of this
Collaboration, one party (the "PROVIDER") may transfer to the other party (the
"RECIPIENT") certain of its Research Materials. The Recipient acknowledges and
agrees that such Research Materials are and shall be owned by the Provider. The
Recipient agrees to execute and deliver any documents of assignment or
conveyance to effectuate the ownership rights of the Provider in such Research
Materials. Specifically, ACADIA acknowledges and agrees that all ArQule
Compounds provided to ACADIA in the Collaboration and, previously, under the MTA
are proprietary to and owned by ArQule and are or may be covered by claims of
ArQule Patent Rights, and ArQule acknowledges and agrees that all expressed
proteins for ACADIA Targets provided by ACADIA in the Collaboration are
proprietary to and owned by ACADIA and are or may be covered by claims of ACADIA
Patent Rights.

         6.2 USE AND TRANSFER OF RESEARCH MATERIALS. Except as otherwise agreed
by the Research Committee, the Recipient agrees to use Research Materials
provided by the Provider solely for purposes set forth in this Agreement and
shall not distribute such Research Materials to any third party other than its
employees and consultants who are working on the Collaboration; provided that
the parties may provide Research Materials specific to Collaboration Work
Product to a third party for the purposes described in Section 3.7 and may
provide Research Materials specific to Targeted Compounds to a sublicensee of
such party's rights to such Targeted Compounds under Section 5.3.2(iii).

         6.3 ADDITIONAL RESTRICTIONS FOR PROPRIETARY RESEARCH MATERIALS. In the
case of Proprietary Research Materials furnished by a Provider, Recipient agrees
(i) not to transfer such Proprietary Research Materials to any third party
without the prior written consent of the Provider, (ii) to permit access to the
Proprietary Research Materials only to its employees and consultants requiring
such access, (iii) to inform such employees and consultants of the proprietary
nature of the Proprietary Research Materials, and (iv) to take reasonable
precautions, at least as stringent as those observed by Recipient to protect its
own proprietary materials, to ensure that such employees and consultants observe
the obligations of Recipient under this Section.

         6.4 DISPOSITION OF UNUSED RESEARCH MATERIALS. At the request of
Provider, Recipient will return or destroy any unused Research Materials
furnished by Provider.

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

                                      18.
<PAGE>   19
         6.6 LIMITATION OF LIABILITY. Any Research Materials delivered pursuant
to this Agreement are understood to be experimental in nature and may have
hazardous properties. Recipient should assume that the compounds are dangerous
and should use appropriate precautions. PROVIDER MAKES NO REPRESENTATIONS, AND
EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO
THE RESEARCH MATERIALS FURNISHED TO RECIPIENT. THERE ARE NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE
USE OF THE RESEARCH MATERIALS WILL NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL
PROPERTY RIGHTS OF A THIRD PARTY.

7.       CONFIDENTIAL INFORMATION.

         7.1 DESIGNATION OF CONFIDENTIAL INFORMATION. Confidential Information
that is disclosed in writing or electronically shall be marked with a legend
indicating its confidential status. Confidential Information that is disclosed
orally or visually shall be documented in a written notice prepared by the
Disclosing Party and delivered to the Receiving Party within [*****] of the date
of disclosure; such notice shall summarize the Confidential Information
disclosed to the Receiving Party and reference the time and place of disclosure.

         7.2 OBLIGATIONS OF RECEIVING PARTY. The Receiving Party agrees that it
shall:

         (i)      maintain all Confidential Information in strict confidence,
                  except that the Receiving Party may disclose or permit the
                  disclosure of any Confidential Information to (A) its
                  Affiliates, directors, officers, employees, consultants, and
                  advisors, (B) solely with respect to Confidential Information
                  specific to Collaboration Work Product, a third party for the
                  purposes described in Section 3.7 and (C) solely with respect
                  to Confidential Information specific to Targeted Compounds, a
                  sublicensee of such party's rights to such Targeted Compounds
                  under Section 5.3.2(iii), in each case which recipients are
                  obligated to maintain the confidential nature of such
                  Confidential Information and need to know such Confidential
                  Information for the purposes set forth in this Agreement;

         (ii)     use all Confidential Information solely for the purposes of
                  this Agreement and the permitted uses set forth in Section
                  7.6.; and

         (iii)    allow permitted recipients under Section 7.2(i) to reproduce
                  the Confidential Information only to the extent necessary to
                  effect the purposes set forth in this Agreement, with all such
                  reproductions being considered Confidential Information.

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         7.3 EXCEPTIONS. The obligations of the Receiving Party under Section
7.2. above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:

         (i)      was in the public domain prior to the time of its disclosure
                  under this Agreement;

         (ii)     entered the public domain after the time of its disclosure
                  under this Agreement through means other than an unauthorized
                  disclosure resulting from an act or omission by the Receiving
                  Party;

         (iii)    was independently developed or discovered by the Receiving
                  Party without use of any Confidential Information of the
                  Disclosing Party; or

         (iv)     is or was disclosed to the Receiving Party at any time,
                  whether prior to or after the time of its disclosure under
                  this Agreement, by a third party having no fiduciary
                  relationship with the Disclosing Party and having no
                  obligation of confidentiality or non-use to the Disclosing
                  Party with respect to such Confidential Information.

         7.4 PERMITTED DISCLOSURE. Notwithstanding any other provision of this
Agreement, disclosure of Confidential Information shall not be precluded if such
disclosure is required to comply with applicable laws or regulations (such as
disclosure to the FDA or the United States Patent and Trademark Office or to
their foreign equivalents), or to comply with a court or administrative order,
provided that the Disclosing Party receives prior written notice of such
disclosure and that the Receiving Party takes all reasonable and lawful actions
to obtain confidential treatment for such disclosure and, if possible, to
minimize the extent of such disclosure.

         7.5 RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this
Agreement, or earlier at the request of the Disclosing Party, the Receiving
Party shall return to the Disclosing Party all originals, copies, and summaries
of documents, materials, and other tangible manifestations of Confidential
Information in the possession or control of the Receiving Party, except that the
Receiving Party may retain one copy of the Confidential Information in the
possession of its legal counsel solely for the purpose of monitoring its
obligations under this Agreement.

         7.6 PERMITTED USE OF INFORMATION. ACADIA and ArQule may use the general
knowledge and expertise obtained [*****] with the ArQule Compounds and Analog
Compounds [*****] are Analog Compounds of Active Compounds and which are
intended for use with the ACADIA Target for which the activity was initially
identified (or other closely related target under circumstances where the party
effectively circumvents the restrictions of Section 7.2.). Under no
circumstances may either party use any information from lead

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                                      20.
<PAGE>   21
optimization activities or preclinical development activities for any purpose
other than the Collaboration.

         7.7 SURVIVAL OF OBLIGATIONS. The obligations set forth in this Article
shall remain in effect for an item of Confidential Information for a period of
[*****] after the date upon which a Receiving Party first received that
Confidential Information, except that the obligation of the Receiving Party to
return Confidential Information to the Disclosing Party shall survive until
fulfilled.

8.       INDEMNIFICATION AND INSURANCE.

         8.1 GENERAL INDEMNIFICATION. Each party (the "INDEMNIFYING PARTY")
shall indemnify and hold harmless the other party, its Affiliates, and their
respective directors, officers, employees and agents (collectively, the
"INDEMNITEES") from and against all claims, expenses or liability of whatever
nature arising from any default, act, omission, or negligence of the
Indemnifying Party, its agents or employees, or others exercising rights by,
through, or under the Indemnifying Party, or the failure of the Indemnifying
Party or such persons to comply with any applicable laws, rules, regulations,
codes, ordinances or directives of governmental authorities, in each case to the
extent the same are related, directly or indirectly, to the Collaboration
described herein; provided, however, that in no event shall the Indemnifying
Party be obligated under this section to indemnify the Indemnitees to the extent
that such claim, expense or liability results from any omission, fault,
negligence, or other misconduct of any of the Indemnitees.

         8.2 PRODUCT LIABILITY INDEMNIFICATION. Each Indemnifying Party further
agrees to defend, indemnify, and hold the Indemnitees harmless from all costs,
judgments, liabilities, and damages assessed by a court of competent
jurisdiction arising from claims asserted by a third party against the
Indemnitees as a result of (i) actual or asserted violations of any applicable
law or regulation by the Indemnifying Party, its Affiliates, sublicensees, or
third party manufacturers by virtue of which the Collaboration Products, or any
product containing as one of its constituents any Targeted Compound,
manufactured, distributed, or sold shall be alleged or determined to be
adulterated, misbranded, mislabeled, or otherwise not in compliance with such
applicable law or regulation; (ii) claims for bodily injury, death, or property
damage attributable to the manufacture, distribution, sale, or use of the
Collaboration Products, or any product containing as one of its constituents any
Targeted Compound, by the Indemnifying Party, or by its Affiliates,
sublicensees, or third party manufacturers; or (iii) a recall ordered by a
governmental agency, or required by a confirmed failure, as reasonably
determined by the parties, of Collaboration Products, or any product containing
as one of its constituents any Targeted Compound, manufactured, distributed, or
sold by the Indemnifying Party, or by its Affiliates, sublicensees or third
party manufacturers; provided, however, that in no event shall the Indemnifying
Party be obligated under this section to indemnify the Indemnitees to the extent
that such claim, expense or liability results from any omission, fault,
negligence, or other misconduct of any of the Indemnitees.

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         8.3 PROCEDURE. The Indemnitees agree to provide the Indemnifying Party
with prompt written notice of any claim, suit, action, demand, or judgment for
which indemnification is sought under this Agreement. If an Indemnitee fails to
provide such notice within a reasonable time, and if such failure prejudicially
affects the ability of the Indemnifying Party to defend such action, the
Indemnifying Party shall be relieved of its liability to such Indemnitee under
this Article 8. The Indemnifying Party agrees, at its own expense, to provide
attorneys reasonably acceptable to the Indemnitees to defend against any such
claim. The Indemnitees shall cooperate fully with the Indemnifying Party in such
defense and will permit the Indemnifying Party to conduct and control such
defense and the disposition of such claim, suit, or action (including all
decisions relative to litigation, appeal, and settlement); provided, however,
that any Indemnitee shall have the right to retain its own counsel, at the
expense of the Indemnifying Party, if representation of such Indemnitee by the
counsel retained by the Indemnifying Party would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. The Indemnifying Party agrees to keep
the other party informed of the progress in the defense and disposition of such
claim and to consult with such party with regard to any proposed settlement.
Neither party may settle a claim or action for which indemnification is sought
under this Agreement without the consent of the other party if such settlement
would impose any monetary obligation on the other party or require the other
party to submit to an injunction or otherwise limit the other party, its
Affiliates or their respective directors, officers, employees or agents.

         8.4 INSURANCE. Each party shall maintain, and shall require its
Affiliates and sublicensees to maintain, adequate product liability insurance or
self insurance with respect to development, manufacture, and sale of
Collaboration Products, or any product containing as one of its constituents any
Targeted Compound, by such party in such amount as that party customarily
maintains with respect to sales of its other products, and in no event less than
a reasonable amount. Each party shall maintain, and shall require its Affiliates
and sublicensees to maintain, such insurance for so long as that party continues
to manufacture or sell the Collaboration Products, and thereafter for so long as
that party maintains insurance for itself covering such manufacture or sale.

9.       TERM AND TERMINATION.

         9.1 TERM. This Agreement shall commence on the Effective Date and shall
continue for a period of five (5) years unless earlier terminated pursuant to
this Article 9.

         9.2 TERMINATION BY PARTY. Either party may terminate this Agreement for
any reason upon ninety (90) days written notice to the other party. In addition,
the Steering Committee may terminate this Agreement at any time by mutual
agreement of the parties.

         9.3 DEADLOCK. As described in Subsection 2.2.6., this Agreement shall
automatically terminate sixty (60) days (or such longer period as the parties
mutually agree) after the Steering Committee deadlocks on any matter relating
only to specific activities under the Collaboration, unless the matter is
resolved by the Chief Executive Officers of each party during such time period.

                                      22.
<PAGE>   23
         9.4 TERMINATION FOR DEFAULT. In the event that either party commits a
material breach of its obligations under this Agreement and fails to cure that
breach within [*****] after receiving written notice thereof, the other party
may terminate this Agreement immediately upon written notice to the party in
breach.

         9.5 FORCE MAJEURE. Neither party will be responsible for delays
resulting from acts beyond the control of such party, provided that the
nonperforming party uses commercially reasonable efforts to avoid or remove such
causes of nonperformance and continues performance hereunder with reasonable
dispatch whenever such causes are removed.

         9.6 DISPOSITION OF COLLABORATION WORK PRODUCT. Except as otherwise
agreed by the parties, the following provisions shall apply under the
circumstances specified in this Agreement or upon the expiration or termination
of this Agreement.

                  9.6.1 COMMERCIAL PRODUCTS. If any Collaboration Work Product
has been successfully commercialized pursuant to Section 3.7., the parties shall
share Gross Revenues attributable to that Collaboration Work Product as set
forth in Section 4.2.

                  9.6.2 RESIDUAL VALUE IN TARGETS AND COMPOUNDS. Except for
Collaboration Work Product that has been commercialized pursuant to Section
3.7., the parties will apportion rights in Reserved Targets, Reserved Compounds,
Committed Targets, and Committed Compounds as follows.

                            (i) The Research Committee will establish Reserved
Target Sets, Committed Target Sets, Reserved Compound Sets, and Committed
Compound Sets as necessary or desirable to prevent significant overlap between
the rights granted to each party under this Subsection. For example, if two
ACADIA Targets are receptor subtypes and if the Available Active Compounds for
those two ACADIA Targets are similar enough to form a single Reserved Compound
Set or Committed Compound Set, the Research Committee may group the ACADIA
Targets into a single Reserved Target Set or Committed Target Set to minimize
the risk of conflicting Patent Rights filed by each party. As another example,
if two dissimilar ACADIA Targets are found to have activity with respect to
Available Active Compounds that are within a single chemotype and have
substantial homology, the Research Committee has discretion to establish two
Reserved Compound Sets or Committed Compound Sets (i.e., one for each ACADIA
Target) based on different structure-activity profiles that are identified for
each ACADIA Target.

                            (ii) For Reserved Targets and the corresponding
Reserved Compounds that have met the requisite criteria for consideration as
Committed Targets and Committed Compounds but which the Research Committee has
declined to designate as Committed Targets and Committed Compounds, as described
in Subsection 3.4.2., each party shall select, in turn, and receive rights in a
Reserved Target or Reserved Target Set and its corresponding Reserved Compounds
or Reserved Compound Set. First selection shall be determined [*****]. The
parties shall complete this selection process within fifteen (15) business days
after the Research

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

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                      23.
<PAGE>   24
Committee selects or declines to select Committed Targets and Committed
Compounds from each batch of ACADIA Targets screened. Each party shall have the
exclusive, worldwide right and license to exploit its selected Reserved
Compounds or Reserved Compound Set and a non-exclusive right and license to
exploit its selected Reserved Target or Reserved Target Set, as described below,
with payment to the other party as described below.

                            (iii) For Committed Targets and the corresponding
Committed Compound Set(s) that the Research Committee has removed from the
Collaboration as described in Subsection 3.4.2. or Section 3.5. or which have
not been commercialized pursuant to Section 3.7. when the Agreement expires or
terminates, each party shall select, in turn, and receive rights in a Committed
Target or Committed Target Set and the corresponding Committed Compounds or
Committed Compound Set(s). First selection shall be determined [*****].The
parties shall complete this process within fifteen (15) business days after each
Committed Target or Committed Target Set and the corresponding Committed
Compounds or Committed Compound Set(s) becomes available for allocation. As an
example, if the Research Committee and Steering Committee removed target XYZ and
its Committed Compound Set from the Collaboration, then the party [*****] could
obtain rights to that Collaboration Work Product or pass the opportunity to the
other party. In either case, the party that did not obtain rights in the
Collaboration Work Product would obtain rights in the next available Committed
Target and Committed Compound Set (whether removed from the Collaboration or
available upon the expiration or termination of the Collaboration). Each party
shall have the exclusive right and license to exploit its selected Committed
Compound or Committed Compound Set, as described below, with payment to the
other party, as described below.

                            (iv) Each party hereby agrees to assign, transfer,
and convey to the other party, or to grant such other party an exclusive, fully
paid-up, worldwide, perpetual license, with the right to sublicense through
multiple tiers of sublicense, with respect to its interest under Joint Patent
Rights and other rights in Collaboration Technology in Reserved Compounds,
Reserved Compound Sets, Committed Compounds, and Committed Compound Sets
selected by such other party under this Subsection. In addition, each party
hereby agrees to grant to the other party any rights and licenses to its Patent
Rights and other rights in its Technology as reasonably necessary for the other
party to exploit its selected (a) Reserved Compounds or Reserved Compound Sets,
(b) Committed Compounds or Committed Compound Sets, (c) Reserved Targets or
Reserved Target Sets, and (d) Committed Targets or Committed Target Sets,
including without limitation a non-exclusive, worldwide, perpetual license under
its Patent Rights and other rights in Technology with respect to ACADIA Targets.
Finally, each party agrees to provide reasonable warranties of title, further
assurances, and similar customary provisions in connection with the grant of
rights or licenses under this Subsection.

                            (v) The parties shall enter into a Compound License
Agreement in substantially the form of the Compound License Agreement dated May
10, 2000 between ACADIA and ArQule for each (a) Reserved Target or Reserved
Target Set and its corresponding Reserved Compounds or Reserved Compound Set and
(b) Committed Target or Committed Target Set and its corresponding Committed
Compounds or Committed Compound Set, for

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

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                      24.
<PAGE>   25
which such party obtains rights under this Subsection. Each party acknowledges
and agrees that the Compound License Agreement provides for, among other things,
an annual license maintenance fee in the amount of [*****]

                  9.6.3 RIGHTS IN TARGETED COMPOUNDS. Except for Collaboration
Work Product that has been commercialized pursuant to Section 3.7., the rights
of each party to use Targeted Compounds continues after the Collaboration ends
as provided in Subsection 5.3.2., clause (iii), subject to the other provisions
of this Section 9.6.

         9.7 SURVIVAL. The following provisions shall survive the expiration or
termination of this Agreement: Articles 4, 6, 7, 8, and 10; Sections 5.1.2.,
5.3. (except 5.3.1), 9.6., 9.7., 11.7., and 11.9.

10.      DISPUTE RESOLUTION.

         10.1 PROCEDURES MANDATORY. Except as otherwise provided in Subsection
2.2.6., the parties agree that any dispute arising out of or relating to this
Agreement shall be resolved solely by means of the procedures set forth in this
Article, and that such procedures constitute legally binding obligations that
are an essential provision of this Agreement; provided, however, that all
procedures and deadlines specified in this Article may be modified by written
agreement of the parties. If either party fails to observe the procedures of
this Article, as modified by their written agreement, the other party may bring
an action for specific performance in any court of competent jurisdiction.

         10.2 DISPUTE RESOLUTION PROCEDURES.

                  10.2.1 NEGOTIATION. Except as otherwise provided in Subsection
2.2.6., in the event of any dispute arising out of or relating to this
Agreement, the affected party shall notify the other party, and the Steering
Committee shall attempt in good faith to resolve the matter within [*****] after
the date such notice is received by the other party (the "NOTICE DATE"). Any
disputes not resolved by good faith discussions within the Steering Committee
shall be referred to senior executives of each party, who shall meet at a
mutually acceptable time and location within thirty [*****] after the Notice
Date and attempt to negotiate a settlement.

                  10.2.2 MEDIATION. If the matter remains unresolved within
[*****] days after the Notice Date, or if the senior executives fail to meet
within [*****] after the Notice Date, either party may initiate mediation upon
written notice to the other party, whereupon both parties shall be obligated to
engage in a mediation proceeding under the then current Center for Public
Resources ("CPR") Model Procedure for Mediation of Business Disputes, except
that specific provisions of this Section shall override inconsistent provisions
of the CPR Model Procedure. The mediator will be selected from the CPR Panels of
Neutrals. If the parties cannot agree upon the selection of a mediator within
[*****] after the Notice Date, then upon the request of either party, the CPR
shall appoint the mediator. The parties shall attempt to resolve the dispute
through mediation until one of the following occurs: (i) the parties reach a
written settlement; (ii)

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

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                      25.
<PAGE>   26
the mediator notifies the parties in writing that they have reached an impasse;
(iii) the parties agree in writing that they have reached an impasse; or (iv)
the parties have not reached a settlement within [*****] after the Notice Date.

                  10.2.3 TRIAL WITHOUT JURY. If the parties fail to resolve the
dispute through mediation, or if neither party elects to initiate mediation,
each party shall have the right to pursue any other remedies legally available
to resolve the dispute; provided, however, that the parties expressly waive any
right to a jury trial in any legal proceeding under this Section.

         10.3 PRESERVATION OF RIGHTS PENDING RESOLUTION.

                  10.3.1 PERFORMANCE TO CONTINUE. Each party shall continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out of or relating to this Agreement; provided, however, that a
party may suspend performance of its obligations during any period in which the
other party fails or refuses to perform its obligations.

                  10.3.2 PROVISIONAL REMEDIES. Although the procedures specified
in this Article are the sole and exclusive procedures for the resolution of
disputes arising out of or relating to this Agreement, either party may seek a
preliminary injunction or other provisional equitable relief if, in its
reasonable judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.

                  10.3.3 STATUTE OF LIMITATIONS. The parties agree that all
applicable statutes of limitation and time-based defenses (such as estoppel and
laches) shall be tolled while the procedures set forth in Subsections 10.2.1.
and 10.2.2. are pending. The parties shall take any actions necessary to
effectuate this result.

11.      MISCELLANEOUS.

         11.1 PUBLICITY. No press release, advertising, promotional sales
literature, or other promotional oral or written statements to the public in
connection with or alluding to work performed under this Agreement or the
relationship between the parties created by it, having or containing any
reference to ArQule or ACADIA, shall be made by either party without the prior
written approval of the other party, except for restatements of
previously-approved statements and disclosures required by applicable law or
regulation.

         11.2 RELATIONSHIP OF PARTIES. For the purposes of this Agreement, each
party is an independent contractor and not an agent or employee of the other
party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or authorized in writing. In particular, (i) neither party shall represent to
creditors or vendors that such party has any authority to obligate or bind the
other party, and shall affirmatively correct any misconception to that effect
and (ii) neither party shall use the name of the other party in connection with
such transactions without the prior written consent of the other party, which
consent may be withheld in its sole discretion.

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

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                      26.
<PAGE>   27
         11.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

         11.4 HEADINGS. All headings in this Agreement are for convenience only
and shall not affect the meaning of any provision hereof.

         11.5 BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective lawful successors and assigns.

         11.6 ASSIGNMENT. This Agreement may not be assigned by either party
without the prior written consent of the other party, except that either of the
parties may assign this Agreement to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement; provided,
however, that in the event of such a transaction, no intellectual property
rights of any Affiliate or third party that is an acquiring party shall be
included in the technology subject to this Agreement.

         11.7 NOTICES. All notices, requests, demands and other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:

If to ACADIA:

                  ACADIA Pharmaceuticals
                  3911 Sorrento Valley Blvd.
                  San Diego, CA 92121-1402
                  Attn: Chief Executive Officer
                  Tel: (858) 320-8614
                  Fax: (858) 455-1751

         with a copy (which shall not constitute notice) to:

                  Pillsbury Madison & Sutro LLP
                  101 West Broadway, Suite 1800
                  San Diego, CA  92101-8219
                  Attn:  John M. Dunn
                  Tel: (858) 509-4015
                  Fax: (858) 236-1995

                                      27.
<PAGE>   28
         If to ArQule:

                  ArQule, Inc.
                  19 Presidential Way
                  Woburn, MA  01801
                  Attn:  President
                  Tel: (781) 994-0300
                  Fax: (781) 503-0009

         with a copy (which shall not constitute notice) to:

                  ArQule, Inc.
                  19 Presidential Way
                  Woburn, MA  01801
                  Attn:  Legal Department
                  Tel: (781) 994-0300
                  Fax: (781) 994-0676

Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section.

         11.8 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented,
or otherwise modified at any time, but only by means of a written instrument
signed by both parties. Any waiver of any rights or failure to act in a specific
instance shall relate only to such instance and shall not be construed as an
agreement to waive any rights or fail to act in any other instance, whether or
not similar.

         11.9 GOVERNING LAW. This Agreement and the legal relations among the
parties shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts irrespective of any conflict of laws principles.

         11.10 SEVERABILITY. In the event that any provision of this Agreement
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.

         11.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings including, without limitation, the MTA.

                                      28.
<PAGE>   29
         IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as a sealed instrument effective as of the date first above
written.

                                      ACADIA PHARMACEUTICALS, INC.

                                      By:       /s/ Uli Hacksell, Ph.D.
                                         -------------------------------------
                                          Uli Hacksell, Ph.D.
                                          Chief Executive Officer

                                      ARQULE, INC.

                                      By:     /s/ Stephen A. Hill, M.D.
                                         --------------------------------------
                                          Stephen A. Hill , M.D.
                                          President and Chief Executive Officer
<PAGE>   30
                                    EXHIBIT A

                                    [*****]

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

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                      29.<PAGE>   1
                                                                     Exhibit 4.2

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

                                NETSILICON, INC.

                                       and

                    AMERICAN STOCK TRANSFER AND TRUST COMPANY
                                 as Rights Agent

                                   ----------

                                RIGHTS AGREEMENT

                         Dated as of September 12, 2000

        ----------------------------------------------------------------
<PAGE>   2
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----

<S>                                                                                            <C>
Section 1.  Certain Definitions ..........................................................       1

Section 2.  Appointment of Rights Agent ..................................................       5

Section 3.  Issue of Right Certificates ..................................................       5

Section 4.  Form of Right Certificates ...................................................       7

Section 5.  Countersignature and Registration ............................................       7

Section 6.  Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated,
            Destroyed, Lost or Stolen Right Certificates .................................       8

Section 7.  Exercise of Rights; Purchase Price; Expiration Date of Rights ................       8

Section 8.  Cancellation and Destruction of Right Certificates ...........................       9

Section 9.  Status and Availability of Preferred Shares ..................................      10

Section 10.  Preferred Shares Record Date ................................................      10

Section 11.  Adjustment of Purchase Price, Number of Shares or Number of Rights ..........      11

Section 12.  Certificate of Adjustment ...................................................      17

Section 13.  Consolidation, Merger or Sale or Transfer of Assets or Earning Power ........      17

Section 14.  Fractional Rights and Fractional Shares .....................................      18

Section 15.  Rights of Action ............................................................      19

Section 16.  Agreement of Right Holders ..................................................      20

Section 17.  Right Certificate Holder Not Deemed a Stockholder ...........................      20

Section 18.  Concerning the Rights Agent .................................................      21

Section 19.  Merger or Consolidation or Change of Name of Rights Agent ...................      21

Section 20.  Duties of Rights Agent ......................................................      22

Section 21.  Change of Rights Agent ......................................................      23

Section 22.  Issuance of New Right Certificates ..........................................      24

Section 23.  Redemption ..................................................................      24

Section 24.  Exchange ....................................................................      25

Section 25.  Notice of Certain Events ....................................................      26

Section 26.  Notices .....................................................................      27

Section 27.  Supplements and Amendments ..................................................      28

Section 28.  Successors ..................................................................      28

Section 29.  Benefits of this Agreement ..................................................      28
</TABLE>

                                       i
<PAGE>   3
<TABLE>
<S>                                                                                            <C>
Section 30.  Severability ................................................................      28

Section 31.  Governing Law ...............................................................      28

Section 32.  Counterparts ................................................................      29

Section 33.  Descriptive Headings ........................................................      29

Section 34.  Administration ..............................................................      29

EXHIBITS:

Exhibit A    Form of Certificate of Designation of Series A Junior Participating Preferred
             Stock
Exhibit B    Form of Rights Certificate
Exhibit C    Summary of Rights to Purchase Preferred Shares
</TABLE>

                                       ii
<PAGE>   4
                                RIGHTS AGREEMENT

         Agreement, dated as of September 12, 2000, between NETsilicon, Inc., a
Massachusetts corporation (the "Company"), and American Stock Transfer and Trust
Company as rights agent (the "Rights Agent").

         WHEREAS, effective September 12, 2000, the Board of Directors of the
Company has authorized and declared a dividend of one preferred share purchase
right (a "Right") for each share of Common Stock, par value $.01 per share, of
the Company (the "Common Stock") outstanding on the Close of Business on
September 23, 2000 (the "Record Date") and has authorized the issuance of one
Right with respect to each additional share of Common Stock that shall become
outstanding between the Record Date and the earliest of Close of Business on the
Distribution Date, the Redemption Date and the Close of Business on the Final
Expiration Date, each Right representing the right to purchase one
one-thousandth of a Preferred Share (as hereinafter defined), or such different
amount and/or kind of securities as shall be hereinafter provided.

         NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:

         Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:

         "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the shares of Voting Stock of the Company then outstanding, or in
the case of the Grandfathered Stockholder, becomes the Beneficial Owner after
the date of this Agreement of an additional 1% or more of the shares of Voting
Stock of the Company then outstanding, but shall not include (i) the Company,
(ii) any Subsidiary of the Company, (iii) any employee benefit plan of the
Company or any Subsidiary of the Company, or (iv) any entity holding Voting
Stock for or pursuant to the terms of any such employee benefit plan.
Notwithstanding the foregoing:

                  (1) no Person shall become an "Acquiring Person" as the result
         of an acquisition of shares of Voting Stock by the Company which, by
         reducing the number of shares outstanding, increases the proportionate
         number of shares beneficially owned by such Person to 15% (or such
         other percentage as would otherwise result in such person becoming an
         Acquiring Person) or more of the shares of Voting Stock of the Company
         then outstanding; provided, however, that if a Person shall so become
         the Beneficial Owner of 15% (or such other percentage) or more of the
         shares of Voting Stock of the Company then outstanding by reason of an
         acquisition of shares of Voting Stock by the Company and shall, after
         such share purchases by the Company, become the Beneficial Owner of an
         additional 1% of the outstanding shares of Voting Stock of the Company,
         then such Person shall be deemed to be an "Acquiring Person"; and

                                       1
<PAGE>   5
                  (2) if the Board of Directors of the Company determines in
         good faith that a Person who would otherwise be an "Acquiring Person,"
         as defined pursuant to the foregoing provisions of this paragraph, has
         become such inadvertently and without any plan or intention to seek or
         affect control of the Company, and such Person enters into an
         irrevocable commitment with the Company to divest, and thereafter
         divests in accordance with the terms of such commitment a sufficient
         number of shares of Voting Stock so that such Person would no longer be
         an "Acquiring Person," as defined pursuant to the foregoing provisions
         of this paragraph, then such Person shall not be deemed to have become
         an "Acquiring Person" for any purposes of this Agreement.

         "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the Exchange Act and Regulations under the
Exchange Act, as in effect on the date of this Agreement.

         A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:

                  (i) which such Person or any of such Person's Affiliates or
         Associates beneficially owns, directly or indirectly, for purposes of
         Section 13(d) of the Exchange Act and Rule 13d-3 of the Exchange Act
         Regulations (or any comparable or successor law or regulation);

                  (ii) which such Person or any of such Person's Affiliates or
         Associates has (A) the right to acquire (whether such right is
         exercisable immediately or only after the passage of time) pursuant to
         any agreement, arrangement or understanding (other than customary
         agreements with and between underwriters and selling group members with
         respect to a bona fide public offering of securities), written or
         otherwise, or upon the exercise of conversion rights, exchange rights,
         rights (other than the Rights), warrants or options, or otherwise;
         provided, however, that a Person shall not be deemed to be the
         Beneficial Owner of, or to beneficially own, securities tendered
         pursuant to a tender or exchange offer made pursuant to, and in
         accordance with, the applicable rules and regulations promulgated under
         the Exchange Act by or on behalf of such Person or any of such Person's
         Affiliates or Associates until such tendered securities are accepted
         for purchase or exchange; or (B) the right to vote pursuant to any
         agreement, arrangement or understanding; provided, however, that a
         Person shall not be deemed the Beneficial Owner of, or to beneficially
         own, any security if the agreement, arrangement or understanding to
         vote such security (1) arises solely from a revocable proxy or consent
         given to such Person in response to a public proxy or consent
         solicitation made pursuant to, and in accordance with, the applicable
         rules and regulations promulgated under the Exchange Act and (2) is not
         also then reportable on Schedule 13D under the Exchange Act (or any
         comparable or successor report); or

                  (iii) which are beneficially owned, directly or indirectly, by
         any other Person (or any Affiliate or Associate thereof) with which
         such Person or any of such Person's Affiliates or Associates has any
         agreement, arrangement or understanding (other than

                                       2
<PAGE>   6
         customary agreements with and between underwriters and selling group
         members with respect to a bona fide public offering of securities),
         written or otherwise, for the purpose of acquiring, holding, voting
         (except to the extent contemplated by the proviso to section (B) of the
         immediately preceding paragraph (ii)) or disposing of any securities of
         the Company; provided, however, that in no case shall an officer or
         director of the Company be deemed (A) the Beneficial Owner of any
         securities beneficially owned by another officer or director of the
         Company solely by reason of actions undertaken by such persons in their
         capacity as officers or directors of the Company or (B) the Beneficial
         Owner of securities held of record by the trustee of any employee
         benefit plan of the Company or any Subsidiary of the Company for the
         benefit of any employee of the Company or any Subsidiary of the
         Company, other than the officer or director, by reason of any influence
         that such officer or director may have over the voting of the
         securities held in the plan.

         Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.

         "Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the Commonwealth of Massachusetts are
authorized or obligated by law or executive order to close.

         "Close of Business" on any given date shall mean 5:00 P.M., Boston,
Massachusetts time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Boston, Massachusetts time, on the next
succeeding Business Day.

         "Common Stock" when used with reference to the Company shall mean the
shares of common stock, par value $.01 per share, of the Company. "Common Stock"
when used with reference to any Person other than the Company shall mean the
capital stock (or equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.

         "Common Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii)(B)(3) hereof.

         "Company" shall have the meaning set forth in the recitals to this
Agreement.

         "Current Per Share Market Price" shall have the meaning set forth in
Section 11(d)(i) hereof.

         "Current Value" shall have the meaning set forth in Section
11(a)(iii)(A)(1) hereof.

         "Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.

                                       3
<PAGE>   7
         "Equivalent Preferred Shares" shall have the meaning set forth in
Section 11(b) hereof.

         "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

         "Exchange Act Regulations" shall mean the General Rules and Regulations
under the Exchange Act.

         "Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.

         "Final Expiration Date" shall mean September 12, 2010

         "Grandfathered Stockholder" shall mean Osicom Technologies, Inc.
("Osicom") and its Affiliates and Associates, other than any Person who or which
is not such an Affiliate or Associate on the date of this Agreement and who or
which subsequently acquires direct or indirect control of Osicom as a result of
which such Person, together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 15% or more of the shares of Voting Stock of the
Company then outstanding.

         "Person" shall mean any individual, firm, corporation, partnership,
limited partnership, limited liability partnership, business trust, limited
liability company, unincorporated association or other entity, and shall include
any successor (by merger or otherwise) of such entity.

         "Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company having such rights and
preferences upon adoption as are set forth in the form of Certificate of
Designation set forth as Exhibit A hereto.

         "Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.

         "Record Date" shall have the meaning set forth in the recitals to this
Agreement.

         "Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.

         "Right" shall have the meaning set forth in the recitals to this
Agreement.

         "Redemption Date" shall have the meaning set forth in Section 23(b)
hereof.

         "Right Certificate" shall mean a certificate evidencing a Right in
substantially the form of Exhibit B hereto.

         "Rights Agent" shall have the meaning set forth in the recitals to this
Agreement.

         "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.

                                       4
<PAGE>   8
         "Shares Acquisition Date" shall mean the earlier of the date of (i) the
public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such or (ii) the public disclosure of facts by the Company or
an Acquiring Person indicating that an Acquiring Person has become such.

         "Spread" shall have the meaning set forth in Section 11(a)(iii)(A)
hereof.

         "Subsidiary" of any Person shall mean any Person of which a majority of
the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person.

         "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof. "Summary of Rights" shall mean the Summary of Rights to
Purchase Preferred Shares in substantially the form of Exhibit C hereto.

         "Trading Day" shall have the meaning set forth in Section 11(d)(i)
hereof.

         "Voting Stock," as of the date of any determination, shall mean the
shares of Common Stock then outstanding and any other shares of capital stock of
the Company then outstanding which are entitled to vote upon matters submitted
to the shareholders of the Company for a vote.

         Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Stock) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable, upon ten (10) days' prior written notice to the Rights Agent. The
Rights Agent shall have no duty to supervise, and in no event be liable for, the
acts or omissions of any such Co-Rights Agent.

         Section 3. Issue of Right Certificates.

                  (a) Until the earlier of (i) the Close of Business on the
tenth calendar day after the Shares Acquisition Date or (ii) the tenth Business
Day (or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date of
the commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan) of, or of the first public announcement
of the intention of any Person (other than any of the Persons referred to in the
preceding parenthetical) to commence, a tender or exchange offer the
consummation of which would result in any Person becoming an Acquiring Person
(such date being herein referred to as the "Distribution Date"), (x) the Rights
will be evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Stock registered in the names of the holders thereof
(which certificates shall also be deemed to be Right Certificates) and not by
separate Right Certificates, and (y) the right to

                                       5
<PAGE>   9
receive Right Certificates will be transferable only in connection with the
transfer of Common Stock. As soon as practicable after the Distribution Date,
the Company will prepare and execute, the Rights Agent will countersign, and the
Company will send or cause to be sent (and the Rights Agent will, if requested,
send) by first-class, insured, postage-prepaid mail, to each record holder of
Common Stock as of the Close of Business on the Distribution Date, at the
address of such holder shown on the records of the Company, a Right Certificate
evidencing one Right for each share of Common Stock so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.

                  (b) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Stock as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for Common Stock outstanding as of
the Record Date, until the Close of Business on the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached thereto.
Until the Close of Business on the Distribution Date (or the earlier of the
Redemption Date or the Close of Business on the Final Expiration Date), the
surrender for transfer of any certificate for Common Stock outstanding on the
Record Date, with or without a copy of the Summary of Rights attached thereto,
shall also constitute the transfer of the Rights associated with the Common
Stock evidenced thereby.

                  (c) Certificates for Common Stock which become outstanding
(including, without limitation, reacquired Common Stock referred to in the last
sentence of this paragraph (c) after the Record Date but prior to the earliest
of the Close of Business on the Distribution Date, the Redemption Date or the
Close of Business on the Final Expiration Date shall have impressed on, printed
on, written on or otherwise affixed to them the following legend:

                  This certificate also evidences and entitles the holder hereof
                  to certain Rights as set forth in a Rights Agreement between
                  NETsilicon, Inc. and American Stock Transfer and Trust
                  Company, dated as of September 12, 2000 (the "Rights
                  Agreement"), the terms of which are hereby incorporated herein
                  by reference and a copy of which is on file at the principal
                  executive offices of NETsilicon, Inc. Under certain
                  circumstances, as set forth in the Rights Agreement, such
                  Rights will be evidenced by separate certificates and will no
                  longer be evidenced by this certificate. NETsilicon, Inc. will
                  mail to the holder of this certificate a copy of the Rights
                  Agreement without charge after receipt of a written request
                  therefor. Under certain circumstances, as set forth in the
                  Rights Agreement, Rights that are or were acquired or
                  beneficially owned by Acquiring Persons (as defined in the
                  Rights Agreement) may become null and void.

With respect to such certificates containing the foregoing legend, until the
Close of Business on the Distribution Date, the Rights associated with the
Common Stock represented by certificates

                                       6
<PAGE>   10
shall be evidenced by such certificates alone, and the surrender for transfer of
any such certificate shall also constitute the transfer of the Rights associated
with the Common Stock represented thereby. In the event that the Company
purchases or acquires any Common Stock after the Record Date but prior to the
Close of Business on the Distribution Date, any Rights associated with such
Common Stock shall be deemed canceled and retired so that the Company shall not
be entitled to exercise any Rights associated with the Common Stock which are no
longer outstanding.

         Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit B hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or transaction
reporting system on which the Rights may from time to time be listed, or to
conform to usage. Subject to the other provisions of this Agreement, the Right
Certificates shall entitle the holders thereof to purchase such number of one
one-thousandths of a Preferred Share as shall be set forth therein at the
Purchase Price, but the number of one one-thousandths of a Preferred Share and
the Purchase Price shall be subject to adjustment as provided herein.
Notwithstanding anything else set forth in this Agreement, no Distribution Date
shall be deemed to have occurred solely by reason of the execution and delivery
or amendment of the Merger Agreement, the Contribution Agreement or the Stock
Option Agreements and the transactions contemplated thereby.

         Section 5. Countersignature and Registration.

                  (a) The Right Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its
President, any of its Vice Presidents, or its Chief Financial Officer, either
manually or by facsimile signature, shall have affixed thereto the Company's
seal or a facsimile thereof, and shall be attested by the Secretary or any
Assistant Secretary of the Company, either manually or by facsimile signature.
The Right Certificates shall be countersigned by the Rights Agent and shall not
be valid for any purpose unless so countersigned, either manually or by
facsimile. In case any officer of the Company who shall have signed any of the
Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.

                  (b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office, books for registration of the
transfer of the Right Certificates issued

                                       7
<PAGE>   11
hereunder. Such books shall show the names and addresses of the respective
holders of the Right Certificates, the number of Rights evidenced on its face by
each of the Right Certificates and the date of each of the Right Certificates.

         Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.

                  (a) Subject to the provisions of Section 14 hereof, at any
time after the Close of Business on the Distribution Date, and prior to the
earlier of the Redemption Date or the Close of Business on the Final Expiration
Date, any Right Certificate or Right Certificates (other than Right Certificates
representing Rights that have become void pursuant to Section 11(a)(ii) hereof
or that have been exchanged pursuant to Section 24 hereof) may be transferred,
split up, combined or exchanged for another Right Certificate or Right
Certificates, entitling the registered holder to purchase a like number of one
one-thousandths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient for
any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.

                  (b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Right Certificate if mutilated, the Company will make and
deliver a new Right Certificate of like tenor to the Rights Agent for delivery
to the registered holder in lieu of the Right Certificate so lost, stolen,
destroyed or mutilated.

         Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.

                  (a) The registered holder of any Right Certificate (other than
a holder whose Rights have become void pursuant to Section 11(a)(ii) hereof or
have been exchanged pursuant to Section 24 hereof) may exercise the Rights
evidenced thereby in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at its principal
office, together with payment of the Purchase Price for each one one-thousandth
of a Preferred Share as to which the Rights are exercised, prior to the earliest
of (i) the Close of Business on the Final Expiration Date or (ii) the closing
date of the transactions contemplated by the Merger Agreement.

                                       8
<PAGE>   12
                  (b) The purchase price for each one one-thousandth of a
Preferred Share to be purchased upon the exercise of a Right shall initially be
Two-Hundred Dollars ($200.00) (the "Purchase Price"), shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.

                  (c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and certificate duly
executed, accompanied by payment of the Purchase Price for the number of one
one-thousandths of a Preferred Share to be purchased, and an amount equal to any
applicable transfer tax required, to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof in cash, or by certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Shares certificates for the number of one one-thousandths of a
Preferred Share to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) requisition from any
depository agent for the Preferred Shares depository receipts representing such
number of one one-thousandths of a Preferred Share as are to be purchased (in
which case certificates for the Preferred Shares represented by such receipts
shall be deposited by the transfer agent with the depository agent) and the
Company hereby directs the depository agent to comply with such request, (ii)
when appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional Preferred Shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depository receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by such
holder and (iv) when appropriate, after receipt, deliver such cash to or upon
the order of the registered holder of such Right Certificate.

                  (d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to such registered holder's duly authorized assigns, subject to
the provisions of Section 14 hereof.

                  (e) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.

         Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for

                                       9
<PAGE>   13
cancellation or in canceled form, or, if surrendered to the Rights Agent, shall
be canceled by it, and no Right Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Rights Agreement.
The Company shall deliver to the Rights Agent for cancellation and retirement,
and the Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all canceled Right Certificates to the Company,
or shall, at the written request of the Company, destroy such canceled Right
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.

         Section 9. Status and Availability of Preferred Shares.

                  (a) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Preferred Shares delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such Preferred Shares (subject to payment of the Purchase Price), be duly and
validly authorized and issued and fully paid and non-assessable shares.

                  (b) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Right
Certificates or of any Preferred Shares upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Right Certificates to a person other
than, or the issuance or delivery of certificates or depository receipts for the
Preferred Shares in a name other than that of, the registered holder of the
Right Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depository receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.

                  (c) The Company covenants and agrees that it will use its best
efforts to cause to be reserved and kept available, out of its authorized and
unissued Preferred Shares or any Preferred Shares held in its treasury, the
number of Preferred Shares that will be sufficient to permit the exercise in
full of all outstanding Rights in accordance with Section 7 hereof. Upon the
occurrence of any events resulting in an increase in the aggregate number of
shares of Preferred Stock (or other equity securities of the Company) issuable
upon exercise of all outstanding Rights above the number then reserved, the
Company shall make appropriate increases in the number of shares so reserved.

         Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made.
Prior to the exercise of the Rights evidenced thereby, the holder of a Right
Certificate shall not be entitled to any rights of a holder of Preferred Shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other

                                       10
<PAGE>   14
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.

         Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.

                  (a)      (i) In the event the Company shall at any time after
the date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any shares of its capital stock in a reclassification of the
Preferred Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), except as otherwise provided in this Section 11(a), the Purchase
Price in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately prior to such
date, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
If an event occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior, to any adjustment
required pursuant to Section 11(a)(ii).

                           (ii) Subject to the following paragraph of this
subparagraph (ii) and to Section 24 of this Agreement, in the event any Person
shall become an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of shares of Common
Stock of the Company as shall equal the result obtained by (x) multiplying the
then current Purchase Price by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable and dividing that product by (y) 50%
of the then current per share market price of the Company's Common Stock
(determined pursuant to Section 11(d) hereof) on the date such Person became an
Acquiring Person. In the event that any Person shall become an Acquiring Person
and the Rights shall then be outstanding, the Company shall not take any action
that would eliminate or diminish the benefits intended to be afforded by the
Rights.

         From and after the occurrence of such an event, any Rights that are or
were acquired or beneficially owned by such Acquiring Person (or any Associate
or Affiliate of such Acquiring Person) on or after the earlier of (x) the date
of such event and (y) the Distribution Date shall be void and any holder of such
Rights shall thereafter have no right to exercise such Rights under

                                       11
<PAGE>   15
any provision of this Agreement. No Right Certificate shall be issued pursuant
to Section 3 that represents Rights beneficially owned by an Acquiring Person
whose Rights would be void pursuant to the preceding sentence or any Associate
or Affiliate thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate thereof or to
any nominee of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be void pursuant to the preceding sentence or any Associate
or Affiliate thereof shall be canceled.

                           (iii) In the event that the number of shares of
Common Stock which are authorized by the Company's certificate of incorporation
and not outstanding or subscribed for, or reserved or otherwise committed for
issuance for purposes other than upon exercise of the Rights, are not sufficient
to permit the holder of each Right to purchase the number of shares of Common
Stock to which he would be entitled upon the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of paragraph (a) of this Section
11, or should the Board of Directors so elect, the Company shall: (A) determine
the excess of (1) the value of the Common Stock issuable upon the exercise of a
Right (calculated as provided in the last sentence of this subparagraph (iii))
pursuant to Section 11(a)(ii) hereof (the "Current Value") over (2) the Purchase
Price (such excess, the "Spread"), and (B) with respect to each Right, make
adequate provision to substitute for such Common Stock, upon payment of the
applicable Purchase Price, any one or more of the following having an aggregate
value determined by the Board of Directors to be equal to the Current Value: (1)
cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units of
shares, of preferred stock which the Board of Directors of the Company has
determined to have the same value as shares of Common Stock (such shares of
preferred stock, "common stock equivalents")), (4) debt securities of the
Company, (5) other assets ,any combination of the foregoing, having an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Board of Directors of the Company, based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of the
Company; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty (30) days
following the first occurrence of an event triggering the rights to purchase
Common Stock described in Section 11(a)(ii) (the "Section 11(a)(ii) Trigger
Date"), then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase Price, shares
of Common Stock (to the extent available) and then, if necessary, cash, which
shares and cash have an aggregate value equal to the Spread. If the Board of
Directors of the Company shall determine in good faith that it is likely that
sufficient additional shares of Common Stock could be authorized for issuance
upon exercise in full of the Rights, the thirty (30) day period set forth above
may be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares (such
period, as it may be extended, the "Substitution Period"). To the extent that
the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to the last paragraph of Section 11(a)(ii) hereof, that such
action shall apply uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of

                                       12
<PAGE>   16
the Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant to
such first sentence and to determine the value thereof. In the event of any such
suspension, the Company shall make a public announcement, and shall deliver to
the Rights Agent a statement, stating that the exercisability of the Rights has
been temporarily suspended. At such time as the suspension is no longer in
effect, the Company shall make another public announcement, and deliver to the
Rights Agent a statement, so stating. For purposes of this Section 11(a)(iii),
the value of the Common Stock shall be the current per share market price (as
determined pursuant to Section 11(d)(i) hereof) of the Common Stock on the
Section 11(a)(ii) Trigger Date and the value of any common stock equivalent
shall be deemed to have the same value as the Common Stock on such date.

                  (b) In the event that the Company shall fix a record date for
the issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the same
rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
then current per share market price of the Preferred Shares (as defined in
Section 11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be adjusted by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.

                  (c) In case the Company shall fix a record date for the making
of a distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those

                                       13
<PAGE>   17
referred to in Section 11(b) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.

                  (d)      (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date;
provided, however, that in the event that the current per share market price of
the Security is determined during a period following the announcement by the
issuer of such Security of (A) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such shares,
or (B) any subdivision, combination or reclassification of such Security and
prior to the expiration of 30 Trading Days after the ex-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the Nasdaq National Market System
("NASDAQ"), if the Security is not listed or admitted to trading on the NASDAQ,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use, or, if on any such date the Security is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Security selected by the
Board of Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security is listed
or admitted to trading is open for the transaction of business or, if the
Security is not listed or admitted to trading on any national securities
exchange, a Business Day.

                                       14
<PAGE>   18
                           (ii) For the purpose of any computation hereunder,
the "current per share market price" of the Preferred Shares shall be determined
in accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per share market
price of the Common Stock as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by 1,000. If neither
the shares of Common Stock nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent.

                  (e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one ten-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than three years
from the date of the transaction which requires such adjustment.

                  (f) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Company other than Preferred
Shares, the number of such other shares so receivable upon exercise of any Right
shall thereafter be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.

                  (g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.

                  (h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a Preferred Share (calculated to the nearest one
ten-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-thousandths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.

                                       15
<PAGE>   19
                  (i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights in substitution
for any adjustment in the number of one one-thousandths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one hundred-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Right Certificates have been distributed, shall be at least 10 days later
than the date of the public announcement. If Right Certificates have been
distributed, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of record
in substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates to be so distributed
shall be issued, executed and countersigned in the manner provided for herein
and shall be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.

                  (j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-thousandths of a Preferred Share issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-thousandths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.

                  (k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then par value of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
non-assessable Preferred Shares at such adjusted Purchase Price.

                  (l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall

                                       16
<PAGE>   20
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.

                  (m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that any (i) combination or subdivision of the
Preferred Shares, (ii) issuance wholly for cash of any Preferred Shares at less
than the current market price, (iii) issuance wholly for cash of Preferred
Shares or securities which by their terms are convertible into or exchangeable
for Preferred Shares, (iv) dividends on Preferred Shares payable in Preferred
Shares or (v) issuance of any rights, options or warrants referred to
hereinabove in Section 11(b), hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such stockholders.

                  (n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Stock payable in Common Stock or (ii) effect a
subdivision, combination or consolidation of the Common Stock (by
reclassification or otherwise other than by payment of dividends in shares of
Common Stock) into a greater or lesser number of shares of Common Stock, then in
any such case (i) the number of one one-thousandths of a Preferred Share
purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-thousandths of a Preferred Share
so purchasable immediately prior to such event by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately before
such event and the denominator of which is the number of shares of Common Stock
outstanding immediately after such event, and (ii) each share of Common Stock
outstanding immediately after such event shall have issued with respect to it
that number of Rights which each share of Common Stock outstanding immediately
prior to such event had issued with respect to it. The adjustments provided for
in this Section 11(n) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.

         Section 12. Certificate of Adjustment. Whenever an adjustment is made
as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare
a certificate setting forth such adjustment, and a brief statement of the facts
accounting for such adjustment, (b) file with the Rights Agent and with each
transfer agent for the Common Stock or the Preferred Shares a copy of such
certificate and (c) mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25 hereof. Notwithstanding the foregoing
sentence, the failure by the Company to make such certification or give such
notice shall not affect the validity of or the force or effect of the
requirement for such adjustment. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained.

         Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. In the event that, at any time after a Person becomes an
Acquiring Person, directly or indirectly, (i) the Company shall consolidate
with, or merge with and into, any other Person, (ii) any Person shall
consolidate with the Company, or merge with and into the Company and the Company
shall

                                       17
<PAGE>   21
be the continuing or surviving corporation of such merger and, in connection
with such merger, all or part of the shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other Person (or the
Company) or cash or any other property, or (iii) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person other than the Company or one or more of
its wholly-owned Subsidiaries, then, and in each such case, proper provision
shall be made so that (A) each holder of a Right (except as otherwise provided
herein) shall thereafter have the right to receive, upon the exercise thereof at
a price equal to the then current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of shares of Common Stock of such other Person (including the
Company as successor thereto or as the surviving corporation) as shall equal the
result obtained by (x) multiplying the then current Purchase Price by the number
of one one-thousandths of a Preferred Share for which a Right is then
exercisable and dividing that product by (y) 50% of the then current per share
market price of the Common Stock of such other Person (determined pursuant to
Section 11(d) hereof) on the date of consummation of such consolidation, merger,
sale or transfer; (B) the issuer of such Common Stock shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to this
Agreement; (C) the term "Company" shall thereafter be deemed to refer to such
issuer; and (D) such issuer shall take such steps (including, but not limited
to, the reservation of a sufficient number of its shares of Common Stock in
accordance with Section 9 hereof) in connection with such consummation as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to the Common Stock thereafter
deliverable upon the exercise of the Rights. The Company covenants and agrees
that it shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent a supplemental agreement so providing. The Company
shall not enter into any transaction of the kind referred to in this Section 13
if at the time of such transaction there are any rights, warrants, instruments
or securities outstanding or any agreements or arrangements which, as a result
of the consummation of such transaction, would eliminate or substantially
diminish the benefits intended to be afforded by the Rights. The provisions of
this Section 13 shall similarly apply to successive mergers or consolidations or
sales or other transfers. For purposes hereof, the "earning power" of the
Company and its Subsidiaries shall be determined in good faith by the Company's
Board of Directors on the basis of the operating earnings of each business
operated by the Company and its Subsidiaries during the three fiscal years
preceding the date of such determination (or, in the case of any business not
operated by the Company or any Subsidiary during three full fiscal years
preceding such date, during the period such business was operated by the Company
or any Subsidiary).

         Section 14. Fractional Rights and Fractional Shares.

                  (a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Right Certificates with regard to which such

                                       18
<PAGE>   22
fractional Rights would otherwise be issuable, an amount in cash equal to the
same fraction of the current market value of a whole Right. For the purposes of
this Section 14(a), the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable. The closing
price for any day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.

                  (b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-thousandth of a Preferred Share may, at the election of the Company, be
evidenced by depository receipts, pursuant to an appropriate agreement between
the Company and a depository selected by it; provided, that such agreement shall
provide that the holders of such depository receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depository receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one
one-thousandth of a Preferred Share, the Company shall pay to each registered
holder of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one Preferred Share as the fraction of one Preferred Share that such
holder would otherwise receive upon the exercise of the aggregate number of
rights exercised by such holder. For the purposes of this Section 14(b), the
current market value of a Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to the second sentence of Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.

                  (c) The holder of a Right by the acceptance of the Right
expressly waives any right to receive fractional Rights or fractional shares
upon exercise of a Right (except as provided above).

         Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the

                                       19
<PAGE>   23
respective registered holders of the Right Certificates (and, prior to the
Distribution Date, the registered holders of the Common Stock); and any
registered holder of any Right Certificate (or, prior to the Distribution Date,
of the Common Stock) may, without the consent of the Rights Agent or of the
holder of any other Right Certificate (or, prior to the Distribution Date, of
the Common Stock), on his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Agreement.

         Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:

                  (a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Stock;

                  (b) after the Distribution Date, the Right Certificates are
transferable only on the registry books maintained by the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer with a completed form of
certification; and

                  (c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.

         Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.

                                       20
<PAGE>   24
         Section 18. Concerning the Rights Agent.

                  (a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim or
liability in connection therewith.

                  (b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or certificate for Preferred Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons.

         Section 19. Merger or Consolidation or Change of Name of Rights Agent.

                  (a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.

                  (b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.

                                       21
<PAGE>   25
         Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations expressly set forth in this Agreement and no implied
duties or obligations shall be read into this Agreement against the Rights
Agent. The Rights Agent shall perform those duties and obligations upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:

                  (a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.

                  (b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.

                  (c) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct.

                  (d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.

                  (e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any adjustment required under the provisions of
Sections 11 or 13 hereof or responsible for the manner, method or amount of any
such adjustment or the ascertaining of the existence of facts that would require
any such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Preferred Shares to be issued
pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.

                                       22
<PAGE>   26
                  (f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.

                  (g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, a Vice President, the
Secretary or the Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer.

                  (h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.

                  (i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.

         Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Stock and the Preferred Shares by registered or certified mail,
and to the holders of the Right Certificates by first-class mail. The Company
may remove the Rights Agent or any successor Rights Agent upon 30 days' notice
in writing, mailed to the Rights Agent or successor Rights Agent, as the case
may be, and to each transfer agent of the Common Stock and the Preferred Shares
by registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of any state of the United States, in good standing, having an office in the
State of California which is authorized under such laws to exercise corporate
trust powers and is subject to supervision or

                                       23
<PAGE>   27
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $100
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.

         Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the Final Expiration Date, the Company (a) shall, with respect
to shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee benefit plan or arrangement or upon the exercise,
conversion or exchange of securities of the Company currently outstanding or
issued at any time in the future by the Company and (b) may, in any other case,
if deemed necessary or appropriate by the Board of Directors of the Company,
issue Rights Certificate representing the appropriate number of Rights in
connection with such issuance or sale; provided, however, that (i) no such
Rights Certificate shall be issued and this sentence shall be null and void ab
initio if, and to the extent that, such issuance or this sentence would create a
significant risk of or result in material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued or would
create a significant risk of or result in such options' or employee plans' or
arrangements' failing to qualify for otherwise available special tax treatment
and (ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.

         Section 23. Redemption

                  (a) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (i) the Close of Business on the tenth
calendar date following the Shares Acquisition Date, or (ii) the Final
Expiration Date, redeem all but not less than all of the then outstanding Rights
at a redemption price of $0.01 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights by the Board of Directors may be made
effective at such time, on such basis and subject to such conditions as the
Board of Directors in its sole discretion may establish.

                                       24
<PAGE>   28
                  (b) Immediately upon the time of the effectiveness of the
redemption of the Rights pursuant to paragraph (a) of this Section 23 or such
earlier time as may be determined by the Board of Directors of the Company in
the action ordering such redemption (although not earlier than the time of such
action) (such time the "Redemption Date"), and without any further action and
without any notice, the right to exercise the Rights shall terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price. The Company shall promptly give public notice of any such
redemption; provided, however, that the failure to give, or any defect in, any
such notice shall not affect the validity of such redemption. Within 10 days
after such action of the Board of Directors ordering the redemption of the
Rights pursuant to paragraph (a), the Company shall mail a notice of redemption
to all the holders of the then outstanding Rights at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. If the payment of the
Redemption Price is not included with such notice, each such notice shall state
the method by which the payment of the Redemption Price will be made. Neither
the Company nor any of its Affiliates or Associates may redeem, acquire or
purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, other than in
connection with the purchase of Common Stock prior to the Distribution Date.

         Section 24. Exchange.

                  (a) The Board of Directors of the Company may, at its option,
at any time after any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 11(a)(ii) hereof)
for shares of Common Stock at an exchange ratio of one share of Common Stock per
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any such Subsidiary, or any entity
holding Common Stock for or pursuant to the terms of any such plan), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of a majority of the Common Stock then outstanding.

                  (b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common Stock
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of

                                       25
<PAGE>   29
the Rights Agent. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the Common Stock for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.

                  (c) In any exchange pursuant to this Section 24, the Company,
at its option, may substitute Preferred Shares or common stock equivalents for
shares of Common Stock exchangeable for Rights, at the initial rate of one
one-thousandth of a Preferred Share (or an appropriate number of common stock
equivalents) for each share of Common Stock, as appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of
each share of Common Stock shall have the same voting rights as one share of
Common Stock.

                  (d) In the event that there shall not be sufficient shares of
Common Stock, Preferred Shares or common stock equivalents authorized by the
Company's certificate of incorporation and not outstanding or subscribed for, or
reserved or otherwise committed for issuance for purposes other than upon
exercise of Rights, to permit any exchange of Rights as contemplated in
accordance with this Section 24, the Company shall take all such action as may
be necessary to authorize additional Common Stock, Preferred Shares or common
stock equivalents for issuance upon exchange of the Rights.

                  (e) The Company shall not be required to issue fractions of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to the registered holders of the Right Certificates with regard to
which such fractional shares of Common Stock would otherwise be issuable an
amount in cash equal to the same fraction of the current per share market value
of a whole share of Common Stock. For the purposes of this paragraph (e), the
current per share market value of a whole share of Common Stock shall be the
closing price of a share of Common Stock (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of exchange pursuant to this Section 24.

         Section 25. Notice of Certain Events.

                  (a) In case the Company shall after the Distribution Date
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50%

                                       26
<PAGE>   30
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to, any other Person, (v) to effect the liquidation,
dissolution or winding up of the Company, or (vi) to declare or pay any dividend
on the Common Stock payable in shares of Common Stock or to effect a
subdivision, combination or consolidation of the Common Stock (by
reclassification or otherwise than by payment of dividends in shares of Common
Stock), then, in each such case, the Company shall give to each holder of a
Right Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Stock and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Stock and/or Preferred Shares, whichever shall be the
earlier.

                  (b) In case any event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.

         Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:

                     NETsilicon, Inc.
                     411 Waverley Oaks Road, Building 227
                     Waltham, Massachusetts 02452

                     Attention: Chief Financial Officer

                     Copy to:

                     Testa, Hurwitz & Thibeault, LLP
                     125 High Street
                     Boston, Massachusetts  02110

                     Attention: Edwin L. Miller, Jr., Esq.

         Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:

                                       27
<PAGE>   31
                     American Stock Transfer and Trust Company
                     6201 15th Avenue
                     3rd Floor
                     Brooklyn, NY  11219

                     Attention: Legal Department

         Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.

         Section 27. Supplements and Amendments. The Company may from time to
time, and the Rights Agent shall, if the Company so directs, supplement or amend
this Agreement without the approval of any holders of Right Certificates in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
or to make any change to or delete any provision hereof or to adopt any other
provisions with respect to the Rights which the Company may deem necessary or
desirable; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended or supplemented
in any manner which would adversely affect the interests of the holders of
Rights (other than an Acquiring Person and its Affiliates and Associates). Any
supplement or amendment authorized by this Section 27 will be evidenced by a
writing signed by the Company and the Rights Agent.

         Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

         Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or entity other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Stock) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Stock).

         Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.

         Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for

                                       28
<PAGE>   32
all purposes shall be governed by and construed in accordance with the laws of
such State applicable to contracts to be made and performed entirely within such
State.

         Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.

         Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

         Section 34. Administration. The Board of Directors of the Company shall
have the exclusive power and authority to administer and interpret the
provisions of this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors or the Company or as may be necessary or
advisable in the administration of this Agreement. All such actions,
calculations, determinations and interpretations which are done or made by the
Board of Directors in good faith shall be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties and
shall not subject the Board of Directors to any liability to the holders of the
Rights.

                                       29
<PAGE>   33
         IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and their respective corporate seals to be
hereunder affixed and attested, all as of the day and year first above written.

Attest:                                     NETSILICON, INC.

___________________________                 By:___________________________

Attest:                                     AMERICAN STOCK TRANSFER AND
                                            TRUST COMPANY

___________________________                 By:___________________________

                                       30
<PAGE>   34
                                                                       EXHIBIT A

                                      FORM

                                       of

                           CERTIFICATE OF DESIGNATION
                                       of

                  SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
                                       of

                                NETSILICON, INC.
                 -----------------------------------------------

         NETsilicon, Inc., a corporation organized and existing under the
Business Corporation Law of the Commonwealth of Massachusetts (hereinafter
called the "Corporation"), hereby certifies that the following resolution was
adopted by the Board of Directors of the Corporation as required by Section 59
of Chapter 156B of the Business Corporation Law at a meeting duly called and
held on September 12, 2000:

         RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Articles of Organization, as amended, of the Corporation (the "Articles of
Organization"), the Board of Directors hereby creates a series of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:

         Section 1. Designation and Amount. The shares of this series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be one hundred thousand (100,000). Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.

         Section 2. Dividends and Distributions.

                  (a) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any other stock) ranking prior and superior to the
Series A Preferred Stock with respect

                                      A-1
<PAGE>   35
to dividends, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the last day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount (if any) per share
(rounded to the nearest cent), subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate per share amount of
all cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.

                  (b) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).

                  (c) Dividends due pursuant to paragraph (A) of this Section
shall begin to accrue and be cumulative on outstanding shares of Series A
Preferred Stock from the Quarterly Dividend Payment Date next preceding the date
of issue of such shares, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series A Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.

                                      A-2
<PAGE>   36
         Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:

                  (a) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

                  (b) Except as otherwise provided in the Articles of
Organization, including any other Certificate of Designations creating a
series of Preferred Stock or any similar stock, or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
and any other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.

                  (c) Except as set forth herein, or as otherwise required by
law, holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.

         Section 4. Certain Restrictions.

                  (a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:

                  (i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;

                  (ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled; or

                                      A-3
<PAGE>   37
                  (iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock.

                  (b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

         Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein or in
the Restated Articles of Organization, as amended, including any Certificate of
Designations creating a series of Preferred Stock or any similar stock, or as
otherwise required by law.

         Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock plus an amount equal to any accrued and unpaid dividends.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.

         Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by

                                      A-4
<PAGE>   38
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

         Section 8. Amendment. The Restated Articles of Organization, as
amended, shall not be amended in any manner, including in a merger or
consolidation, which would alter, change, or repeal the powers, preferences or
special rights of the Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, voting together as a single
class.

         Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and upon liquidation, dissolution and winding up,
junior to all series of Preferred Stock.

                                      A-5
<PAGE>   39
                                                                       EXHIBIT B

Form of Right Certificate
Certificate No. R- _______ Rights

NOT EXERCISABLE AFTER SEPTEMBER 12, 2010 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES,
RIGHTS THAT ARE OR WERE ACQUIRED OR BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR
ANY ASSOCIATES OR AFFILIATES THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.

                                Right Certificate
                                NETsilicon, Inc.

         This certifies that _______________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of September 12, 2000 (the "Rights Agreement"),
between NETsilicon, Inc., a Delaware corporation (the "Company"), and American
Stock Transfer and Trust Company (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such term is defined in the
Rights Agreement) and prior to 5:00 P.M., Boston, Massachusetts time, on
September 12, 2010, at the principal office of the Rights Agent, or at the
office of its successor as Rights Agent, one one-thousandth of a fully paid
non-assessable share of Series A Junior Participating Preferred Stock, par value
$0.01 per share (the "Preferred Shares"), of the Company, at a purchase price of
$200.00 per one one-thousandth of a Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate with the certification and
the Form of Election to Purchase duly executed. The number of Rights evidenced
by this Right Certificate (and the number of one one-thousandths of a Preferred
Share which may be purchased upon exercise hereof) set forth above, and the
Purchase Price set forth above, are the number and Purchase Price as of
September 23, 2000, based on the Preferred Shares as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number of one
one-thousandths of a Preferred Share which may be purchased upon the exercise of
the Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.

         From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.

                                      B-1
<PAGE>   40
         This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.

         This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.

         Subject to the provisions of the Rights Agreement, at the Company's
option, the Rights evidenced by this Certificate (i) may be redeemed by the
Company at a redemption price of $0.01 per Right or (ii) may be exchanged in
whole or in part for shares of the Company's Common Stock, par value $0.01 per
share, or Preferred Shares.

         No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depository receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.

         No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.

         This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.

                                      B-2
<PAGE>   41
         WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of September 12, 2000.

Attest:                                        NETSILICON, INC.

_____________________________                  By:_____________________________

Countersigned:

AMERICAN STOCK TRANSFER AND TRUST COMPANY

By:_________________________
   Authorized Signature

                                      B-3
<PAGE>   42
                    Form of Reverse Side of Right Certificate

                    FORM OF ASSIGNMENT

                    (To be executed by the registered holder if such
                    holder desires to transfer the Right Certificate.)

         FOR VALUE RECEIVED _________________________________ hereby sells,
assigns and transfers unto______________________________________________________
                          (Please print name and address of transferee)

this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________________,
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.

Dated: _____________ ___, _____

                                               _________________________________
                                               Signature

Signature Guaranteed:

         Signatures must be guaranteed by an eligible guarantor institution (a
bank, stockbroker, savings and loan association or credit union with membership
in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15
of the Securities Exchange Act of 1934.

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

                                   CERTIFICATE

         The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).

                                               _________________________________
                                               Signature

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

                                      B-4
<PAGE>   43
                         Form of Reverse Side of Right Certificate  continued

                         FORM OF ELECTION TO PURCHASE

                         (To be executed if holder desires to
                         exercise the Right Certificate.)

To NETsilicon, Inc.:

         The undersigned hereby irrevocably elects to exercise ________________
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:

Please insert social security
or other identifying number

________________________________________________________________________
(Please print name and address)
________________________________________________________________________

         If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance remaining of such
Rights shall be registered in the name of and delivered to:

Please insert social security
or other identifying number

________________________________________________________________________
(Please print name and address)
________________________________________________________________________

________________________________________________________________________

Dated: _____________ ___, _____

                                            _________________________________
                                            Signature

Signature Guaranteed:

         Signatures must be guaranteed by an eligible guarantor institution (a
bank, stockbroker, savings and loan association or credit union with membership
in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15
of the Securities Exchange Act of 1934.

                                      B-5
<PAGE>   44
Form of Reverse Side of Right Certificate  continued

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

         The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).

                                           __________________________________
                                           Signature

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

                                     NOTICE

         The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.

         In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.

                                      B-6
<PAGE>   45
                                                                       EXHIBIT C

                                NETSILICON, INC.
                          SUMMARY OF RIGHTS TO PURCHASE
                                PREFERRED SHARES

         On September 12, 2000, the Board of Directors of NETsilicon, Inc.
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock, par value $.01 per share (the "Common Stock")
outstanding on September 23, 2000 (the "Record Date") to the stockholders of
record on that date. Each Right entitles the registered holder to purchase from
the Company one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Preferred Shares"), of the
Company, at a price of $200.00 per one one-thousandth of a Preferred Share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and Rights Agents (the "Rights Agent").

         Until the earlier to occur of (i) the tenth calendar day after a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or, in the case of
Osicom Technologies, Inc. (the "Grandfathered Stockholder"), an additional 1%,
or more of the outstanding voting securities of the Company or (ii) 10 business
days (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or, in the case of the Grandfathered
Stockholder, an additional 1%, or more of such outstanding voting securities of
the Company (the earlier of such dates being called the "Distribution Date"),
the Rights will be evidenced, with respect to any of the Common Stock
certificates outstanding as of the Record Date, by such Common Stock certificate
with a copy of this Summary of Rights attached thereto.

         The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Stock certificates issued after the Record Date or upon transfer or new
issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
shares of Common Stock outstanding as of the Record Date, even without such
notation or a copy of this Summary of Rights being attached thereto, will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of the
Close of Business on the Distribution Date and such separate Right Certificates
alone will evidence the Rights.

         The Rights are not exercisable until the Distribution Date. The Rights
will expire on

                                      C-1
<PAGE>   46
September 12, 2010 (the "Final Expiration Date"), unless the Final Expiration
Date is extended or unless the Rights are earlier redeemed by the Company, in
each case, as described below.

         The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).

         The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in shares of Common Stock or subdivisions,
consolidations or combinations occurring, in any such case, prior to the
Distribution Date.

         Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1,000 times the dividend declared per share of Common Stock. In the
event of liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1,000 times the aggregate payment made per share of Common
Stock. Each Preferred Share will have 1,000 votes, voting together with the
Common Stock. In the event of any merger, consolidation or other transaction in
which Common Stock are exchanged, each Preferred Share will be entitled to
receive 1,000 times the amount received per share of Common Stock. These rights
are protected by customary antidilution provisions.

         Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.

         From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.

         In the event that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder

                                      C-2
<PAGE>   47
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right. In the event that any
person becomes an Acquiring Person, proper provision shall be made so that each
holder of a Right, other than Rights beneficially owned by the Acquiring Person
and its Affiliates and Associates (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of shares of
Common Stock having a market value of two times the exercise price of the Right.
If the Company does not have sufficient shares of Common Stock to satisfy such
obligation to issue Common Stock, or if the Board of Directors so elects, the
Company shall deliver upon payment of the exercise price of a Right an amount of
cash or securities equivalent in value to the Common Stock issuable upon
exercise of a Right; provided that, if the Company fails to meet such obligation
within 30 days following the later of (x) the first occurrence of an event
triggering the right to purchase Common Stock and (y) the date on which the
Company's right to redeem the Rights expires, the Company must deliver, upon
exercise of a Right but without requiring payment of the exercise price then in
effect, Common Stock (to the extent available) and cash equal in value to the
difference between the value of the Common Stock otherwise issuable upon the
exercise of a Right and the exercise price then in effect. The Board of
Directors may extend the 30-day period described above for up to an additional
90 days to permit the taking of action that may be necessary to authorize
sufficient additional shares of Common Stock to permit the issuance of Common
Stock upon the exercise in full of the Rights.

         At any time after any Person becomes an Acquiring Person and prior to
the acquisition by any person or group of a majority of the outstanding Common
Stock, the Board of Directors of the Company may exchange the Rights (other than
Rights owned by such person or group which have become void), in whole or in
part, at an exchange ratio of one share of Common Stock per Right (subject to
adjustment).

         With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depository
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.

         At any time prior to the tenth day following the time any Person
becomes an Acquiring Person, the Board of Directors of the Company may redeem
the Rights in whole, but not in part, at a price of $0.01 per Right (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time, on such basis and with such conditions as the Board of Directors in its
sole discretion may establish. Immediately upon any redemption of the Rights,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.

         The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any

                                      C-3
<PAGE>   48
person becomes an Acquiring Person no such amendment may adversely affect the
interests of the holders of the Rights (other than the Acquiring Person and its
Affiliates and Associates).

         Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.

         A copy of the Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to a Registration Statement on Form 8-A dated September
13, 2000 . A copy of the Agreement is available free of charge from the Company.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Agreement, which is hereby
incorporated herein by reference.

                                      C-4
<PAGE>   49
                       FIRST AMENDMENT TO RIGHTS AGREEMENT

         First Amendment, dated as of January 12, 2001, between NETsilicon,
Inc., a Massachusetts corporation (the "Company"), and American Stock Transfer
and Trust Company as rights agent (the "Rights Agent").

         WHEREAS, the Company and the Rights Agent are parties to a Rights
Agreement dated as of September 12, 2000;

         WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent desire to amend the Rights Agreement as set forth below;

         NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereby agree as follows:

         1. The definition of "Acquiring Person" under Section 1 of the Rights
Agreement is hereby amended in its entirety to read as follows:

         "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the shares of Voting Stock of the Company then outstanding,
provided that, for a Grandfathered Stockholder, (x) in the case of Osicom
Technologies, Inc. ("Osicom"), becomes the Beneficial Owner after the date of
this Agreement of an additional 1% or more of the shares of Voting Stock of the
Company then outstanding, or (y) in the case of Firsthand Capital Management,
Inc. ("Firsthand"), becomes the Beneficial Owner after the date of this First
Amendment to the Rights Agreement of an additional 1% or more of the shares of
Voting Stock of the Company then outstanding, but shall not include (i) the
Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of
the Company or any Subsidiary of the Company, or (iv) any entity holding Voting
Stock for or pursuant to the terms of any such employee benefit plan.
Notwithstanding the foregoing:

                  (1) no Person shall become an "Acquiring Person" as the result
         of an acquisition of shares of Voting Stock by the Company which, by
         reducing the number of shares outstanding, increases the proportionate
         number of shares beneficially owned by such Person to 15% (or such
         other percentage as would otherwise result in such person becoming an
         Acquiring Person) or more of the shares of Voting Stock of the Company
         then outstanding; provided, however, that if a Person shall so become
         the Beneficial Owner of 15% (or such other percentage) or more of the
         shares of Voting Stock of the Company then outstanding by reason of an
         acquisition of shares of Voting Stock by the Company and shall, after
         such share purchases by the Company, become the Beneficial Owner of an
         additional 1% of the outstanding shares of Voting Stock of the Company,
         then such Person shall be deemed to be an "Acquiring Person"; and

                  (2) if the Board of Directors of the Company determines in
         good faith that a Person who would otherwise be an "Acquiring Person,"
         as defined pursuant to the foregoing provisions of this paragraph, has
         become such inadvertently and without any
<PAGE>   50
         plan or intention to seek or affect control of the Company, and such
         Person enters into an irrevocable commitment with the Company to
         divest, and thereafter divests in accordance with the terms of such
         commitment a sufficient number of shares of Voting Stock so that such
         Person would no longer be an "Acquiring Person," as defined pursuant to
         the foregoing provisions of this paragraph, then such Person shall not
         be deemed to have become an "Acquiring Person" for any purposes of this
         Agreement.

         2. The definition of "Grandfathered Stockholder" under Section 1 of the
Rights Agreement is hereby amended in its entirety to read as follows:

                  "Grandfathered Stockholder" shall mean (a) Osicom and its
         Affiliates and Associates and (b) Firsthand and its Affiliates and
         Associates.

         3. Section 3(c) of the Rights Agreement is hereby amended in its
entirety to read as follows:

         (c) Certificates for Common Stock which become outstanding (including,
without limitation, reacquired Common Stock referred to in the last sentence of
this paragraph (c) after the Record Date but prior to the earliest of the Close
of Business on the Distribution Date, the Redemption Date or the Close of
Business on the Final Expiration Date shall have impressed on, printed on,
written on or otherwise affixed to them the following legend:

             This certificate also evidences and entitles the holder hereof
             to certain Rights as set forth in a Rights Agreement between
             NETsilicon, Inc. and American Stock Transfer and Trust
             Company, dated as of September 12, 2000, as amended on January
             12, 2001 (the "Rights Agreement"), the terms of which are
             hereby incorporated herein by reference and a copy of which is
             on file at the principal executive offices of NETsilicon, Inc.
             Under certain circumstances, as set forth in the Rights
             Agreement, such Rights will be evidenced by separate
             certificates and will no longer be evidenced by this
             certificate. NETsilicon, Inc. will mail to the holder of this
             certificate a copy of the Rights Agreement without charge
             after receipt of a written request therefor. Under certain
             circumstances, as set forth in the Rights Agreement, Rights
             that are or were acquired or beneficially owned by Acquiring
             Persons (as defined in the Rights Agreement) may become null
             and void.

With respect to such certificates containing the foregoing legend, until the
Close of Business on the Distribution Date, the Rights associated with the
Common Stock represented by certificates shall be evidenced by such certificates
alone, and the surrender for transfer of any such certificate shall also
constitute the transfer of the Rights associated with the Common Stock
represented thereby. In the event that the Company purchases or acquires any
Common Stock after the Record Date but prior to the Close of Business on the
Distribution Date, any Rights associated with such Common Stock shall be deemed
canceled and retired so that the Company
<PAGE>   51
shall not be entitled to exercise any Rights associated with the Common Stock
which are no longer outstanding.

         2. All capitalized terms used herein which are not defined herein shall
have the meanings assigned to them in the Agreement.

         3. Except as contemplated by this Amendment, all other terms of the
Agreement shall remain in full force and effect.

         4. This Amendment may be executed in any number of counterparts, each
of which shall be deemed to be an original, and all of which together shall
constitute one and the same document.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>   52
         IN WITNESS WHEREOF, the parties have caused this First Amendment to
Rights Agreement to be executed as of the date first written above.

Attest:                                NETSILICON, INC.

/s/ Mary E. Seaver                     By: /s/ Daniel J. Sullivan
--------------------------                 -------------------------------------

Attest:                                AMERICAN STOCK TRANSFER AND TRUST COMPANY

/s/ Isaac Kagan                        By:  /s/ Herbert J. Lemer
--------------------------                  ------------------------------------

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