Document:

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                                                                   EXHIBIT 10.09

                                      LEASE

         THIS INDENTURE OF LEASE dated as of this 18th day of February, 1998, by
and between FIVE N ASSOCIATES, a New Hampshire general partnership with a
principal place of business at 40 Temple Street, Nashua, Hillsborough County,
New Hampshire, (hereinafter called "Lessor"), and SkillSoft Corporation of 9
Chickadee Court, Bedford, New Hampshire (hereinafter called "Lessee").

                                   WITNESSETH

                                    SECTION 1

                                 LEASED PREMISES

         Lessor hereby leases to Lessee and the Lessee hereby leases from
Lessor, upon and subject to the terms and provisions of this Lease, a portion of
20 Industrial Park Drive, Nashua, New Hampshire (which portion is sometimes
hereinafter referred to as the "Leased Premises") containing 5,515 gross square
feet on the third floor and cross-hatched on Exhibit A annexed hereto and made a
part hereof.

         The Leased Premises shall extend to the exterior faces of exterior
walls or to the building line where there is no wall, or the center line of
those walls separating said Premises from other Leased Premises in 20 Industrial
Park Drive, Nashua, New Hampshire, together with the appurtenances specifically
granted in this Lease, but reserving and excepting to Lessor the right to
install, maintain, use, repair and replace pipes, duct work, conduits, utility
lines and wires through hung ceiling space, column space and partitions, in or
beneath the floor slab, or above or below the Leased Premises, or other parts of
20 Industrial Park Drive, Nashua, New Hampshire, except that Lessor shall not
unreasonably interfere with or interrupt the business operations of Lessee
within the Leased Premises and except where necessary as determined by Lessor's
architect, no pipes, conduits, utility lines or wires installed by Lessor shall
be exposed in the office area of the Leased Premises.

                                    SECTION 2

                                  TERM OF LEASE

         2.1      The term of this Lease shall be for a period of three (3)
years, which period shall commence March 1, 1998 and shall end on February 28,
2001.

         2.2      In the event Lessee shall hold over after the expiration of
this term, such holding over shall not extend the term of this

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Lease, but shall create a month-to-month tenancy upon all the terms and
conditions of this Lease; provided, however, that during such holdover, monthly
rent during such holdover shall equal 150% of the monthly rent assessed for the
last month of the expired term.

                                    SECTION 3

                                      RENT

         3.1      Lessee covenants and agrees to pay Lessor at the place
provided herein for the giving of notice to Lessor, as annual base rent for said
Premises the sum of Thirty Five Thousand Eight Hundred Forty-Seven Dollars and
Fifty Cents ($35,847.50) payable in monthly installments Two Thousand Nine
Hundred Eighty-Seven Dollars and Twenty-Nine Cents ($2,987.29) for each month.
Each monthly installment shall be paid in advance on the FIRST DAY of each and
every calendar month during the term hereof. If the term of this lease shall
begin on a day other than the 1st of a month, the Lessee shall pay a PRO RATA
portion of a month's rent on the day the term commences and thereafter the
Lessee shall pay a succeeding monthly installment on the 1st day of each
succeeding month. Under no circumstances shall Lessee be entitled to withhold
any rent due hereunder or setoff against the same on account of Lessor's
purported failure to perform any of its obligations hereunder.

         3.2      Any payment by Lessee or acceptance by Lessor of a lesser
amount than shall be due from Lessee to Lessor shall be treated as a payment on
account. The acceptance by Lessor of a check or payment for a lesser amount with
an endorsement or statement thereon, or upon any letter accompanying such a
check or payment, that such lesser amount is payment in full, shall be given no
effect and Lessor may accept such check or payment without prejudice to any
other rights or remedies which Lessor may have against Lessee.

         3.3      Lessee covenants and agrees to pay Lessor at the place
provided herein for the giving of notice to Lessor, as additional rent during
the term hereof Lessee's PRO RATA share, which is hereby defined and agreed as
being 19.626% of the charges, costs and expenses defined in paragraphs 6.3, 7.2,
10.1 and 19.1 of this Lease. Lessee shall pay Lessor such additional rent in
monthly installments coincidental with the monthly base rental payments as set
forth in paragraph 3.1 hereof. Lessee acknowledges that Lessor may adjust, once
every month, the amount of Lessee's monthly installments to cover any difference
between the actual charges, costs and expenses incurred by Lessor and the amount
of the monthly installments paid by Lessee. It is agreed that Lessee's
additional rent in monthly installments shall be One Thousand Six Hundred Eight
Dollars and Fifty-Four Cents ($1,608.54) until notification of further
adjustment in accordance with this Lease. In addition to the foregoing, Lessor
may make assessments for expenses incurred

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which are over and above the monthly installments paid by Lessee, for any period
during the term of this Lease.

         3.4      If Lessee shall fail to make payment of any installment of
Base Rent or any Additional Rent after the date when such payment is due, Lessee
shall pay to Lessor, in addition to such installment of Base Rent or such
Additional Rent, as the case may be, as a late charge and as Additional Rent, a
sum equal to two (2%) percent per annum above the then current prime rate
charged by Bank of New Hampshire, Nashua, New Hampshire or its successor of the
amount unpaid computed from the date such payment was due to and including the
date of payment.

                                    SECTION 4

                                SECURITY DEPOSIT

         The Lessee hereby deposits the sum of Two Thousand Nine Hundred
Eighty-Seven Dollars and Twenty-Nine Cents ($2,987.29) with the Lessor, the
receipt of which is hereby acknowledged, as security for the full and faithful
performance by the Lessee of each and every term, covenant and condition of this
Lease. Lessee shall maintain the full amount of the security deposit throughout
the term of this Lease. In the event that the Lessee defaults with respect to
any terms, provisions, covenants and conditions of this Lease, including but not
limited to payment of any rentals, the Lessor may use, apply or retain the whole
or any part of the security so deposited for the payment of any such rentals in
default or for any such sums which Lessor may expend or be required to expend by
reason of the Lessee's default, including any damages or deficiency in the
reletting of the Demised Premises, whether such damages or deficiency may accrue
before or after summary proceedings or other reentry by the Lessor. In the event
that the Lessee shall fully and faithfully comply with all terms, provisions,
covenants and conditions of this Lease, the security or the balance thereof will
be returned to the Lessee after the time fixed as the expiration thereof. The
Lessee shall not be entitled to any interest on the security. In the absence of
evidence satisfactory to the Lessor of any assignment of the right to receive
this security, or the remaining balance thereof, the Lessor may return the
security to the original Lessee, regardless of one or more assignments of the
Lease itself.

         Prior to the time when the Lessee shall be entitled to return of the
security deposit, the Lessor shall be entitled to intermingle such deposit with
its own funds and to use such funds for purposes as the Lessor may determine.

         In the event of a bona fide sale, subject to this Lease, the Lessor
shall have the right to transfer the security deposit to the vendee for the
benefit of the Lessee, and the Lessor shall be considered released by the Lessee
from all liability for return of

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such sum, and the Lessee agrees to look to the new landlord solely for the
return of the security, and it is agreed that this apply to every transfer or
assignment made of the security to a new landlord.

                                    SECTION 5

                                 QUIET ENJOYMENT

         Lessor shall put Lessee into possession of the Leased Premises at the
beginning of the term hereof, and Lessee, upon paying the rent and observing the
other covenants and conditions herein, upon its part to be observed, shall
peaceably and quietly hold and enjoy the Leased Premises.

                                    SECTION 6

                        COMMON AREAS; MAINTENANCE THEREOF

         6.1      Lessor hereby further grants and gives to Lessee, its
customers, business invitees, employees, agents and suppliers, the privilege
during the term of this Lease and any renewal thereof, in common with Lessor,
its successors, assigns and other tenants, and others, of using, for purposes of
ingress and egress and parking, the parking areas and ways developed and to be
developed by the Lessor on or about the Leased Premises, and serving 20
Industrial Park Drive, Nashua, New Hampshire of which the Leased Premises are a
part, provided, however:

         A.       No officers, employees or agents of Lessee shall park vehicles
of their own overnight on any portions of said parking areas unless verbal
approval is given by Lessor. Lessor agrees to provide suitable and adequate
parking facilities for Lessee's officers, employees or agents which are
reasonably accessible to the Leased Premises;

         B.       Said rights of ingress and egress and parking shall be subject
to all easements, rights and other claims of record;

         C.        Lessee shall not obstruct the use of the sidewalks adjacent
to the Leased Premises;

         D.       Lessee shall not conduct an auction, fire, bankruptcy, going
out of business or similar sale, in the Leased Premises without the prior
written approval of Lessor;

         E.       Lessee shall not deposit any garbage or refuse on the walkways
or other common areas and shall cause all garbage and refuse to be removed to
trash dumpsters provided by the Lessor;

         F.       Lessee shall not burn any trash on or near the Leased

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Premises or cause any offensive odors to be emitted from the Leased Premises;

         G.       Lessee shall not permit or cause to be used on the Leased
Premises any device such as a public address system, neon or excessively bright,
changing, flashing or flickering lights, or any similar devices, the effect of
which shall be visible or audible from the exterior of the Leased Premises;

         H.       Lessee shall conform to all reasonable rules established by
Lessor and uniformly applied by Lessor relative to the operation and use of 20
Industrial Park Drive, Nashua, New Hampshire;

         I.       Lessor reserves the right from time to time to close the
common areas in such manner as it shall deem necessary for the maintenance,
operation, replacement or expansion of 20 Industrial Park Drive, Nashua, New
Hampshire, or to prevent the acquisition of any rights by public or others with
respect thereto, and such interruption shall be done in a manner to reasonably
minimize any business interruption of the Lessee. Under the above circumstances
shall the Lessor not be liable for any interruption of the Lessee's business.

         6.2      Lessor agrees to provide reasonably suitable area lighting for
the common areas of 20 Industrial Park Drive, Nashua, New Hampshire, maintenance
of pavement on all parking areas, maintenance of all utilities serving 20
Industrial Park Drive, Nashua, New Hampshire, and generally, all other services
in the nature of maintenance, repairs and/or renovations as are reasonably
required in order to maintain all common areas, and improvements, serving such
common areas, in 20 Industrial Park Drive, Nashua, New Hampshire as a whole.

         6.3      Lessee shall pay to Lessor, as additional rent during the term
hereof and as set forth in paragraph 3.3 of this Lease, its PRO RATA share of
the operating costs of the Common Area. "Operating costs" shall mean the total
cost and expense incurred in operating, maintaining and managing 20 Industrial
Park Drive, Nashua, New Hampshire and the Common Area, including without
limitation, painting of the building, roof repair, gardening and landscaping,
planting, care of trees and shrubs, repairs, line painting (striping), lighting,
removal of snow, trash, rubbish and other refuse, sanitary control, sweeping,
cleaning, fixing potholes, resurfacing and sealing parking lot, depreciation of
machinery and equipment used in maintenance, and the cost of personnel to
implement such service,s including directing parking and policing the Common
Area.

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                                    SECTION 7

                         CONDITION OF PREMISES; REPAIRS

         7.1      Except as set forth below, Lessee shall accept the building,
improvements and any equipment or fixtures on or in the Leased Premises "as is"
and in their existing condition and agrees that no representation, statement or
warranty, express or implied, has been made by or on behalf of Lessor as to such
condition, or as to the use that may be made of such property in accordance with
all laws, statutes, requirements and permits.

         7.2      Lessee shall pay to the Lessor, as additional rent during the
term hereof and set forth in paragraphs 3.3 of this Lease, its pro rata share of
the repair and maintenance costs performed by the Lessor on the heating, air
conditioning, electrical and plumbing systems of the Leased Premises and of the
Common Areas.

         7.3      Lessor covenants and agrees that it will maintain in good
repair the exterior walls of the Leased Premises, the structural beams,
structural columns and other structural parts of the Leased Premises. Lessee
covenants and agrees that it will keep, during the term hereof, at its own cost
and expense, the interior of the Leased Premises, in as good condition as the
same was at the commencement of the term hereof, taking by eminent domain and
damage due to fire or casualty insured against excepted. Lessee also agrees to
replace, at its own cost and expense, all window glass of the same kind and
quality, taking by eminent domain and damage due to fire or other casualty
insured against excepted. Lessee further agrees to replace and/or repair, at its
own cost and expense, all light bulbs and lighting fixtures which are damaged,
broken or cease to function during the term hereof, with bulbs or fixtures of
the same kind and quality.

         7.4      The Lessee shall not, without written consent of the Lessor,
store any materials, goods or equipment outside the Leased Premises.

         7.5      The Lessee shall at its expense make any alterations or
changes in the leased premises which may be necessary to meet the regulations
and standards promulgated and established under the Occupational Safety and
Health Act of 1970.

         7.6      With the exception of the removal of the interior wall which
shall be the Lessor's responsibility, during the term of this lease, the Lessee
shall be responsible for any repairs or alterations to the leased premises
deemed necessary by local, state or federal officials, in order to meet
compliance with any changes in local, state or federal regulations during the
term of this lease.

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         7.7      During the term of this lease, in the event of a claim brought
under the Americans with Disabilities Act on the Leased Premises, exclusive of
the common area of which Lessee shall pay its pro rata share as described in
Section 6.3 of this Lease, Lessee shall be responsible for ensuring satisfaction
therewith.

                                    SECTION 8

                             IMPROVEMENTS BY LESSEE

         8.1      Lessee may, with the prior written approval of Lessor, make
such alterations, additions or improvements to the Leased Premises, excluding,
however, the exterior of the Leased Premises, as it shall deem necessary or
desirable; provided, however:

         A.       No such alteration, addition or improvement shall lessen the
fair market value of the Leased Premises;

         B.       Lessee shall not make any alterations to the structure of the
Leased Premises;

         C.       Any such alteration, addition or improvement shall be made in
accordance with previously prepared plans and specifications, and if the
estimated cost of such alteration, addition or improvement exceeds One Thousand
Dollars ($1,000.00) such plans and specifications shall have the written
approval of Lessor before any work thereon shall be commenced;

         D.       That prior to the commencement of work on any such alteration,
addition or improvement, Lessee shall procure, at its own cost and expense, all
necessary permits; furthermore, the plans and specifications covering the same
shall have been submitted to and approved by (i) all municipal or other
governmental departments or agencies having jurisdiction over the subject matter
thereof, and (ii) any mortgagee having an interest in or lien upon the Leased
Premises if required by the terms of the mortgage, it being understood that
Lessor will not unreasonably refuse to join in any application to any such
mortgagee to obtain such approval with respect to any alteration, addition or
improvement;

         E.       In carrying out all such alterations, additions and
improvements, Lessee agrees to comply with the standards, guidelines and
specifications imposed by all municipal, state and federal departments or other
governmental departments and agencies having jurisdiction over the same,
including without limitation, all building codes, all ADA codes and to construct
all improvements in a workmanlike manner;

         F.       That prior to the commencement of work on any such alteration,
addition or improvement, the Lessee shall have procured

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and delivered to Lessor the policy of Builder's Risk insurance hereinafter
referred to in Section 18 hereof or additional fire and extended coverage
insurance as required by Section 18 hereof whichever is applicable;

         G.       That Lessee shall pay the increased premiums, if any, for the
regular insurance coverage of the Leased Premises resulting from any additional
risk during the course of construction or installation of any such alteration,
addition or improvement;

         H.       Any such alteration, addition or improvement made by Lessee
pursuant to the terms hereof shall, at the expiration of the term hereof or at
the expiration of any renewal term, become and remain the property of Lessor,
provided, however, that Lessor may, at its option and upon notice to Lessee not
less than One Hundred Twenty (120) days prior to such expiration, require Lessee
to remove any such alterations, additions and improvements and to restore the
Leased Premises to their condition as at the beginning of the term hereof,
reasonable wear and tear, taking be eminent domain and damage due to fire or
other casualty insured against excepted.

                                    SECTION 9

                     MACHINERY AND EQUIPMENT; TRADE FIXTURES

         Lessee agrees that all machinery and equipment, and appurtenances
thereto, installed in the Leased Premises by it or by any employee, agent or
subcontractor of Lessee, or by any subtenant of Lessee, which cannot be removed
from the Leased Premises, as determined by Lessor in its sole discretion, shall
be and become part of the realty and shall be and become the property of Lessor
and shall not be removed from the Leased Premises without the written consent of
Lessor. Lessor agrees that (a) all machinery and equipment and appurtenances
thereto, installed in the Leased Premises by Lessee, or by any employee, agent
or subcontractor of Lessee, or by any subtenant of Lessee, which may be removed
from the Leased Premises without permanent and substantial damage to the Leased
Premises, as determined by Lessor in its sole discretion, and (b) all furniture,
furnishings and movable trade fixtures installed in the Leased Premises shall be
deemed to remain personal property and that all such machinery, equipment,
appurtenances, furniture, furnishings and movable trade fixtures of Lessee or of
any employee, agent or subcontractor of subtenant of Lessee, may be removed
prior to the expiration of this Lease or its earlier termination for any cause
herein provided for; but Lessee shall repair any damage occasioned by such
removal and shall restore the Leased Premises to their condition as at the
beginning of the term hereof, taking by eminent domain and damage due to fire or
other casualty insured against excepted. Any such property which may be removed
pursuant to the preceding sentence and which is not so

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removed prior to the expiration or earlier termination of this Lease may be
removed from the Leased Premises by Lessor and stored for the account of Lessee;
and if Lessee shall fail to reclaim such property within thirty (30) days
following such expiration or earlier termination of this Lease, such property
shall be deemed to have been abandoned by Lessee, and may be appropriated, sold,
destroyed or otherwise disposed of by Lessor without notice to Lessee and
without obligation to account therefor. Lessee shall pay to Lessor the cost
incurred by Lessor in removing, storing, selling, destroying or otherwise
disposing of any such property.

                                   SECTION 10

                                    UTILITIES

         10.1     Lessee shall make arrangements for and shall pay when due all
charges for gas, electricity, heat, lighting, power, water and sewerage provided
to the Leased Premises and the Common Areas. Lessee shall pay to Lessor, as
additional rent during the term hereof and as set forth in paragraph 3.3 of this
Lease, Lessee's PRO RATA share of the charges for gas, electricity, heat,
lighting, power, water and sewerage, provided to the Leased Premises and Common
Areas Lessee also agrees to pay for its pro rata share of all changes and
improvements in said, water, sewerage, heat and electrical systems required by
governmental authorities having jurisdiction over said services, in the event
that there are changes in the current statutory requirements.

                                   SECTION 11

                                 USE OF PREMISES

         11.1     Without the prior written consent of Lessor, Lessee agrees
that it will use the Leased Premises only as a software development facility and
for services and purposes reasonably incident thereto.

         11.2     Lessee agrees and acknowledges that for itself, any subtenant
or any assignee, it shall neither occupy nor use the Leased Premises or permit
the same to be occupied or used for any business or use which, under the Zoning
Ordinances of the City of Nashua, New Hampshire, requires a number of parking
spaces which is greater than 19.626% percent of all the parking spaces provided
on the site of 20 Industrial Park Drive, Nashua, New Hampshire. The Lessee
agrees that for itself or any subtenant, it shall use no more than 19.626%
percent of all the parking spaces provided on the site of 20 Industrial Park
Drive, Nashua, New Hampshire.

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         11.3     In its use of the Leased Premises, Lessee shall comply with
all statutes, ordinances and regulations applicable to the use thereof,
including, without limiting the generality of the foregoing, the Zoning
Ordinances of the City of Nashua, New Hampshire, as now in effect or as
hereafter amended, and comply with all reasonable insurance requirements. If in
the Lessee's use of the leased premises it engages in any action that would
increase the cost of any insurance on 20 Industrial Park Drive, Nashua, New
Hampshire possessed by the Lessor, the Lessee shall either pay for any increase
in the cost of such insurance or meet the necessary insurance requirements and
make the necessary improvements to eliminate the insurance cost increase.

         11.4     Lessee shall not injure or deface, or commit waste with
respect to the Leased Premises nor occupy or use the Leased Premises, or permit
or suffer any part thereof to be occupied or used, for any unlawful or illegal
business, use or purpose, nor for any business, use or purpose deemed to be
disreputable or high-hazard, nor in such manner as to constitute a nuisance of
any kind, nor for any purpose in any manner in violation of any present or
future laws, rules, requirements, orders, directions, ordinances or regulations
of any governmental or lawful authority including Boards of Fire Underwriters.
Lessee shall, immediately upon the discovery of any such unlawful, illegal,
disreputable or high-hazard use, take, at its own cost and expense, all
necessary steps, legal and equitable, to compel the discontinuance of such use
and to oust and remove the subtenants, occupants or other persons guilty of such
unlawful, illegal, disreputable or high-hazard use.

         11.5     Lessee agrees not to use the Leased Premises for the
generation, storage or treatment of hazardous waste, and hereby certifies that
his operations or other use of the Leased Premises will not involve same. For
purposes of this Lease, the term "hazardous waste" shall be defined by
cumulative reference to the following sources as amended from time to time: (1)
The Resource Conservation and Recovery Act of 1976, 42 USC Sections 901 et seq
(RCRA); (2) EPA Federal Regulations promulgated thereunder and codified in 40
C.F.R. Parts 260-265 and Parts 122-124; (3) New Hampshire R.S.A. ch 147 and
147-A; (4) New Hampshire Regulations promulgated thereunder by any agency or
department of state.

         11.6     Lessee shall procure any licenses or permits required by any
use of the Leased Premises by Lessee.

                                   SECTION 12

                             ASSIGNMENT; SUBLEASING

         Lessee shall not, without prior written consent of Lessor, assign this
Lease or sublease the Leased Premises, in whole or in

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part. Any assignment or sublease to which Lessor consents in writing shall be on
the express terms and conditions of this Lease.

                                   SECTION 13

                               ALL RISK INSURANCE

         13.1     In addition to the rent heretofore reserved, Lessee shall pay
to Lessor, as additional rent during the term hereof and within ten (10) days
following presentation of invoices thereof, the Lessee's PRO RATA share, which
is hereby defined and agreed as being 19.626% of (a) the real property taxes
upon the land and/or building comprising 20 Industrial Park Drive, Nashua, New
Hampshire and (b) any assessment, betterment charge or other special levy
against or upon such land and building.

         13.2     "Real estate taxes" shall mean all real estate taxes, sewer
taxes and any other charges made by a public authority which upon assessment or
failure of payment become a lien or liens upon the Leased Premises or any part
thereof, or upon any buildings or appurtenances thereto, or any parts thereof,
or which may become due and payable with respect thereto. Real estate taxes
shall not include any franchise, estate, inheritance, succession, capital levy
or transfer tax of Lessor or any income tax of Lessor.

         13.3     Lessee shall automatically pay and discharge all taxes which
shall or may during the term of this Lease be charged, laid, levied or imposed
upon or become a lien upon the personal property of Lessee attached to or used
in connection with Lessee's business conducted on the Leased Premises. Nothing
herein contained shall require Lessee to pay any taxes on the rent reserved to
Lessor hereunder.

         13.4     Lessee shall have the right to contest or review (in the name
of Lessee, or of Lessor, or both, as Lessee shall elect) by appropriate
proceedings which, if instituted, shall be conducted promptly at Lessee's own
expense free of all expense to Lessor, any tax, charge or other governmental
imposition aforementioned upon condition that before instituting any such
proceeding Lessee shall pay (under protest) such tax, charge or other
governmental imposition aforementioned, or furnish to Lessor a surety company
performance bond in a company acceptable to Lessor or other security
satisfactory to Lessor sufficient to cover the amount of the contested item or
items with interest for the period which such proceedings may reasonably be
expected to take and costs securing the payment of such contested item or items
and all interest and costs in connection therewith when finally determined.
Notwithstanding the furnishing of any such bond or security, Lessee shall pay
all such items before the date when the Leased Premises or any part thereof
would, under applicable law, be forfeited. Lessor shall timely file the annual
inventory required by Chapter

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74:7 of the Revised Statutes Annotated of New Hampshire, the filing of which, by
virtue of Chapter 76:16 of such Revised Statutes Annotated, is a condition
precedent to tax abatement.

         13.5     Lessor, at its option, may, but shall not be obligated to,
contest or review by any appropriate proceedings, and at Lessor's expense, any
tax, charge or other governmental imposition aforementioned which shall not be
contested or reviewed as aforesaid by Lessee, and unless Lessee shall promptly
join with Lessor in such contest or review, Lessor shall be entitled to receive
and retain any refund payable by the taxing authorities with respect thereto.
The Lessor shall notify the Lessee promptly of the institution of any such
proceedings.

                                   SECTION 14

                                 MECHANIC'S LIEN

         In the event of the filing in the Hillsborough County Registry of Deeds
of any notice of a builder's, supplier's or mechanic's lien on the Leased
Premises arising out of any work performed by or on behalf of Lessee, Lessee
shall cause without delay proper proceedings to be instituted to test the
validity of the lien claimed, and before the end of the term to discharge the
same by the posting of bond or otherwise; and during the pendency of any such
proceeding, Lessee shall completely defend and indemnify Lessor against any such
claim or lien and all costs of such proceedings wherein the validity of such
lien is contested by Lessee, and during the pendency of such proceeding such
lien may continue until disposition of such proceeding, and after disposition
thereof, Lessee shall cause said lien to be released and discharged.

                                   SECTION 15

                                 EMINENT DOMAIN

         In the event that the Leased Premises shall be lawfully condemned or
taken by any public authority either in their entirety or in such proportion
that they are no longer suitable for the intended use by Lessee, this Lease
shall automatically terminate without further act of either party hereto on the
date when possession of the Leased Premises shall be taken by such public
authority, and each party hereto shall be relieved of any further obligation to
the other except that Lessee shall be liable for and shall promptly pay to
Lessor any rent or other payments due hereunder then in arrears or the Lessor
shall promptly rebate to Lessee a PRO RATA portion of any rent or other such
payments paid in advance. In the event the proportion of the Leased Premises so
condemned or taken is such that they are still suitable for the intended use by
Lessee, this Lease shall continue in effect in

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accordance with its terms and a portion of the rent and other payments due
hereunder shall abate equal to the proportion of the rental value of the Leased
Premises so condemned or taken. In either of the above events, the award for the
property so condemned or taken shall be payable solely to Lessor except that if
the property so condemned or taken includes in whole or in part (a) the land
thereon at the beginning of the term hereof and (b) machinery, equipment and
appurtenances constructed or installed thereon by Lessee at its expense after
the beginning of the term hereof which would have been removable by Lessee
pursuant to Section 21 hereof, then such award shall be apportioned between
Lessor and Lessee in accordance with the then relative values of the property
described in clause (a) and clause (b) above, so condemned or taken.

                                   SECTION 16

                                    LIABILITY

         Except for injury or damage caused by the willful act of Lessor, its
servants or agents, Lessor shall not be liable for any injury or damage to any
person happening on or about the Leased Premises or for any injury or damage to
the Leased Premises or to any property of Lessee or to any property of any third
person, firm, association or corporation on or about the Leased Premises. The
Lessee shall, except for injury or damage caused as aforesaid, defend, indemnify
and save the Lessor harmless from and against any and all liability and damages,
costs and expenses, including reasonable attorney's fees, and from and against
any and all suits, claims and demands of any kind or nature whatsoever, by and
on behalf of any person, firm, association or corporation arising out of or
based upon any incident, occurrence, injury or damage which shall or may happen
on or about the Leased Premises and from and against any matter or thing growing
out of the condition, maintenance, repair, alteration, use, occupation or
operation of the Leased Premises or the installation of any property therein or
the removal of any property therefrom.

                                   SECTION 17

                               LIABILITY INSURANCE

         Lessee shall, from the date on which it takes possession of the Leased
Premises even if such date precedes the commencement of the term hereof and
throughout the term hereof procure and carry at its expense comprehensive
liability insurance on the Leased Premises with an insurance company authorized
to do business in New Hampshire and acceptable to Lessor. Such insurance shall
be carried in the name of and for the benefit of Lessee and Lessor; shall be
written on an "occurrence" basis; and shall provide coverage of at lease One
Million Dollars ($1,000,000) in case of death of or injury to one person, Two
Million Dollars ($2,000,000)

                                       13
<PAGE>   14

in case of death of or injury to more than one person in the same occurrence,
and One Hundred Thousand Dollars ($100,000) in case of loss, destruction or
damage to property. If applicable, Lessee shall comply with the requirements of
the Boilers and Unfired Pressure Vessels Law (RSA 157-A), and in such event the
policy or policies referred to above shall contain an endorsement providing
pressure vessels insurance coverage and naming Lessor as an additional insured.
Lessee shall furnish to Lessor a certificate of such insurance which shall
provide that the insurance indicated therein shall not be cancelled without at
least ten (10) days' written notice to Lessor. At the end of the first term of
this Lease and every three (3) years thereafter, Lessee shall increase the
insurance coverages provided herein if requested to do so by Lessor to such
amounts which are then adequate to protect against increases in insurance awards
whether caused by inflation or otherwise. Lessee shall also maintain insurance
for all glass and all signs installed in the Leased Premises.

                                   SECTION 18

                            BUILDER'S RISK INSURANCE

         During any period or periods of construction by Lessee on the Leased
Premises, the construction of which (a) is of a type to which Builder's Risk
insurance is applicable and (b) requires the advance written approval of Lessor
pursuant to Section 8(F) hereof, Lessee shall obtain and maintain in effect
standard Builder's Risk insurance written on a completed value basis, including
extended coverage, and utilizing a maximum value at date of completion not less
than the greater of (a) the aggregate contract price or prices for the
construction of such facilities or (b) the amount which may be required by a
mortgagee which is financing such construction. Such insurance shall be obtained
from an insurance company authorized to do business in New Hampshire and
acceptable to Lessor, and there shall be furnished to Lessor a certificate of
such insurance which shall provide that the insurance indicated therein shall
not be cancelled without at least ten (10) days' written notice to Lessor. If
such construction by Lessee is of a type to which Builder's Risk insurance is
not applicable, Lessee shall provide the necessary additional coverage under the
policies referred to herein.

                                   SECTION 19

                         SPECIAL FORM PROPERTY INSURANCE

         19.1     Lessor shall procure and continue in force during the term
hereof Special Form Property insurance upon the facilities constructed, erected
or installed on the Leased Premises by Lessor on a full value, repair or
replacement basis. In accordance with

                                       14
<PAGE>   15

paragraph 3.3 of this Lease, Lessee shall reimburse Lessor for Lessee's pro RATA
share of the premiums paid for such insurance as additional rent.

         19.2     During the term hereof, Lessee shall procure and continue in
force insurance which contains all risk coverage on a full value, repair or
replacement basis upon machinery, equipment and appurtenances constructed ,
erected or installed on or in the Leased Premises by Lessee and which have or
may be the property of Lessor pursuant hereto. The policies evidencing such
insurance shall provide that loss, if any, payable thereunder shall be payable
to Lessor and/or Lessee and/or mortgagee of the Leased Premises as their
respective interests may appear, and all such policies together with evidence of
payment of the premiums thereon shall be delivered to Lessor and/or any such
mortgagee. All such policies shall be taken in such responsible companies
authorized to do business in New Hampshire as Lessor shall approve (which
approval shall not be unreasonably withheld) and shall be in form satisfactory
to the Lessor. Upon receipt of a copy of notice of cancellation of any insurance
which is the responsibility of Lessee hereunder, Lessor may pay the premiums
necessary to reinstate the same. The amount so paid shall constitute additional
rent payable by Lessee at the next rental payment date. Payment of premiums by
Lessor shall not be deemed a waiver or release by Lessor of the default by
Lessee in failing to pay the same or of any action which Lessor may take
hereunder as a result of such default. Lessee shall not violate, nor permit any
person, firm, association or corporation to violate, any of the terms,
conditions and provisions of such policies. In the event of loss, Lessor shall
promptly initiate action to effect a settlement with the insurer, Lessee shall
cooperate with Lessor and any mortgagee in connection with the proceeding and
collection of claims, and shall execute and deliver to Lessor such proofs of
loss, releases and other instruments as may be necessary to settle any such
claims and obtain the proceeds thereof, and in the event Lessee shall fail or
neglect so to cooperate or to execute and deliver any such instrument Lessor
may, as the agent or attorney in fact of Lessee, execute and deliver any such
instrument, and Lessee here by nominates and appoints Lessor the proper and
legal attorney in fact of Lessee for such purpose, hereby ratifying all that
Lessor may lawfully do as such attorney in fact.

         19.3     If and to the extent permitted without prejudice to any rights
of Lessor under the applicable insurance policies, Lessee shall be held free and
harmless from liability for loss or damage to the Leased Premises by fire, the
extended coverage perils, sprinkler leakage, vandalism and malicious mischief if
and to the extent actually insured against, whether or not such loss or damage
be the result of the negligence of Lessee, its employees or agents. This
subsection does not impose any added obligation or expense upon Lessor nor
require that it carry any insurance of any kind and

                                       15
<PAGE>   16

is to be construed only as a limitation upon the rights of the insurance
carriers to subrogation.

         19.4     If and to the extent permitted without prejudice to any rights
of the Lessee under the applicable insurance policies, Lessor shall be held free
and harmless from liability for loss or damage to personal property of Lessee in
the Leased Premises by fire, the extended coverage perils, sprinkler leakage,
vandalism and malicious mischief if and to the extent actually insured against,
whether or not such loss or damage be the result of the negligence of Lessor,
their employees or agents. This subsection does not impose any added obligation
or expense upon Lessee nor require that it carry any insurance of any kind and
is to be construed only as a limitation upon the rights of the insurance
carriers to subrogation.

                                   SECTION 20

                              DESTRUCTION OR DAMAGE

         In the event that the Leased Premises shall be totally destroyed by
fire or other casualty insured against, or shall be so damaged that repairs and
restoration cannot, in the opinion of Lessor in its sole discretion, be
accomplished within a period of one hundred twenty (120) days from the date of
such destruction or damage, this Lease shall automatically terminate without
further act of either party hereto, and each party shall be relieved of any
further obligation to the other except for the rights and obligations of the
parties under Sections 18 and 19 hereof, and except that Lessee shall be liable
for and shall promptly pay Lessor any rent then in arrears or Lessor shall
promptly rebate to Lessee a PRO RATA portion of any rent paid in advance. In the
event such facilities shall be so damaged that repairs and restoration can be
accomplished within a period of one hundred twenty (120) days from the date of
such destruction or damage, this Lease shall continue in effect in accordance
with its terms; such repairs and restoration shall, unless otherwise agreed by
Lessor and Lessee, be performed as closely as practicable to the original
specifications (utilizing therefor the proceeds of the insurance applicable
thereto without any apportionment thereof for damages to the leasehold interest
created by this Indenture), and until such repairs and restoration have been
accomplished a portion of the rent shall abate equal to the proportion of the
Leased Premises rendered unusable by the damage. It is understood that Lessor's
obligation to restore, replace or rebuild such facilities shall not exceed in
amount the sum of the insurance proceeds paid to it and/or released to it by any
mortgagee with which settlement was made. Lessee agrees to execute and deliver
to Lessor all instruments and documents necessary to evidence the fact that the
right to such insurance proceeds is vested in Lessor. Lessor shall

                                       16
<PAGE>   17

notify Lessee within fifteen (15) days of such casualties whether or not the
Lessor will repair the Leased Premises.

                                   SECTION 21

                             REPOSSESSION BY LESSOR

         At the expiration of this Lease or upon the earlier termination of this
Lease for any cause herein provided for, Lessee shall peaceably and quietly quit
the Leased Premises and deliver possession of the same to Lessor together in
good working condition and in a state of repair and readiness for the same use,
with the facilities thereon at the beginning of the term hereof and all
facilities constructed thereon by Lessee which are not removed pursuant to the
terms hereof and all machinery, equipment and appurtenances installed therein
which have become part of the Leased Premises, or which are not to be removed
pursuant to Section 9 hereof. Lessee covenants and agrees that at the time of
delivery of possession to Lessor at the expiration of this Lease any and all
machinery, equipment and appurtenances constructed or installed on or in the
Leased Premises by Lessee at its expense after the beginning of the term hereof
and which have become the property of Lessor pursuant to Section 9 hereof shall
be free and clear of any mortgage, lien, pledge or other encumbrance or charge.

                                   SECTION 22

                                  MORTGAGE LIEN

         Lessee agrees that this Lease and all rights of Lessee hereunder are
and shall be subject and subordinate to the lien of (a) any mortgage or deed of
trust constituting a first lien on the Leased Premises, or any part thereof, at
the date hereof, and (b) the lien of any mortgage or deed of trust hereafter
executed to a person, bank, trust company, insurance company or other recognized
lending institution to provide permanent financing or refinancing of the
facilities on the Leased Premises, and (c) any renewal, modification,
consolidation or extension of any mortgage or deed of trust referred to in
clause (a) or (b), and Lessee shall, upon demand at any time or times, execute,
acknowledge and deliver to Lessor without any expense to the Lessor, any an all
instruments that may be necessary or proper to subordinate this Lease and all
rights of Lessee hereunder to the lien of any mortgage, deed of trust or other
instrument referred to in clause (b) or clause (c) of the preceding sentence;
provided, however, that the subordination of this Lease shall be conditioned
upon the execution and delivery by the mortgagee or trustee of an agreement (i)
that so long as Lessee is not in default under the terms of this Indenture the
mortgagee or trustee, or any person succeeding to the

                                       17
<PAGE>   18

rights of the mortgagee or trustee, or any purchaser at a foreclosure sale under
said mortgage or deed of trust, shall not disturb the peaceful possession of
Lessee hereunder, and (ii) that the proceeds of insurance policies held by it
will be applied to the cost of repairs and restoration in those instances in
which Lessor is obligated to repair and restore pursuant to the provisions
hereof.

                                   SECTION 23

                                     DEFAULT

         In the event (i) any installment of rent or additional rent shall not
be paid within ten (10) days after it's due date; or (ii) failure to remove snow
and ice from sidewalks, stairs and dock area adjacent to the Leased Premises for
more than 48 hours after such snow or ice appears; or (iii) Lessee defaults in
the performance or observance of any other covenant or condition in this
Indenture and such default remains unremedied for twenty (20) days after written
notice thereof has been given to Lessee by Lessor; or (iv) any warranty or
representation made by Lessee herein proves to be false or misleading; or (v)
Lessee makes an assignment for the benefit of creditors, is generally not paying
its debts as such debts become due, a custodian was appointed or took possession
of its assets other than a trustee, receiver or agent appointed or authorized to
take charge of less than substantially all of the property of Lessee for the
purpose of enforcing a lien against such property, commences any proceeding
relating to Lessee or any substantial part of its property arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction whether now or hereafter in effect, or there is commenced against
Lessee any such proceeding which remains undismissed for a period of sixty (60)
days, or any order approving the petition in any such proceeding is entered, or
Lessee by any act indicates its consent to, or acquiescence in, any such
proceeding or the appointment of any receiver or trustee for Lessee or any
substantial part of its property, or suffers any such receivership or
trusteeship to continue undischarged for a period of sixty (60) days, or any
party holding a security interest in any of Lessee's fixtures or personal
property of any nature whatsoever that are located on the Leased Premises
institutes or gives notice of foreclosure against any such property, then, in
any of such events, Lessor may immediately or at any time thereafter and without
demand or notice enter upon the Leased Premises or any part thereof in the name
of the whole and repossess the same as of Lessor's former estate and expel
Lessee and those claiming through or under Lessee and remove their effects
forcibly if necessary, without being deemed guilty of any manner of trespass and
without prejudice to any remedies which might otherwise be used for arrears of
rent or preceding breach of covenant, and upon such entry this Lease shall
terminate, and

                                       18
<PAGE>   19

Lessee covenants that, in case of such termination or in case of termination
under the provisions of statute by reason of the default of Lessee, Lessee shall
remain and continue liable to Lessor in an amount equal to the total rent
reserved for the balance of the term plus all additional rent reserved for the
balance of the term hereof less the net amounts (after deducting the expenses of
repair, renovation or demolition) which Lessor realizes, or with due diligence
should have realized from the reletting of the Leased Premises, plus all costs
associated with the correction of the default or the termination of the Lease,
including Lessor's reasonable attorney's fees. As used in this Section, the term
"additional rent" means the value of all considerations other than rent agreed
to be paid or performed by Lessee hereunder, including, without limiting the
generality of the foregoing, taxes, assessments, maintenance charges and
insurance premiums. Lessor shall have the right from time to time to relet the
Leased Premises upon such terms as they may deem fit, and if a sufficient sum
shall not be thus realized to yield the net rent required under this Lease,
Lessee agrees to satisfy and pay all deficiencies as they may become due during
each month of the remaining term of this Lease. Nothing herein contained shall
be deemed to require Lessor to await the date whereon this Lease, or the term
hereof, would have expired had there been no default by Lessee, or no such
termination or cancellation. Lessee expressly waives service of any notice of
intention to reenter and waives any and all right to recover or regain
possession of the Leased Premises, or to reinstate or redeem this Lease as may
be permitted or provided for by or under any statute or law now or hereafter in
force and effect. The rights and remedies given to Lessor in this Lease are
distinct, separate and cumulative remedies, and no one of them, whether or not
exercised by Lessor, shall be deemed to be in exclusion of any of the others
herein or by law or equity provided. Nothing contained in this Section shall
limit or prejudice the right of Lessor to prove and obtain, in proceedings
involving the bankruptcy or insolvency of, or a composition with creditors by,
Lessee the maximum allowed by any statute or rule of law at the time in effect.

                                   SECTION 24

                               ACCESS TO PREMISES

         Lessor or its representatives shall have free access to the Leased
Premises at reasonable intervals during normal business hours for the purpose of
inspection, or for the purpose of showing the Premises to prospective purchasers
or tenants, or for the purpose of making repairs which Lessee is obligated to
make hereunder but has failed or refused to make. The preceding sentence does
not impose upon Lessor any obligation to make repairs. During the One Hundred
Twenty (120) days next preceding the expiration of this Lease, Lessor may keep
affixed to any

                                       19
<PAGE>   20

suitable part of the outside of the building on the Leased Premises a notice
that the Leased Premises are for sale or rent.

                                   SECTION 25

                                     NOTICES

         Any written notice, request or demand required or permitted by this
Indenture shall, until either party shall notify the other in writing of a
different address, be properly given if hand delivered or sent by certified or
registered first class mail, postage prepaid, and addressed as follows:

         If to Lessor:  FIVE N ASSOCIATES
                        40 Temple Street
                        Nashua, NH 03060

         If to Lessee:  SKILLSOFT CORPORATION
                        20 Industrial Park Drive
                        Nashua, NH  03062

                                   SECTION 26

                           SIGNS; EXTERIOR APPEARANCE

         Lessee may advertise its presence in the Leased Premises, provided,
however, that the signage shall conform to the ordinances of the City of Nashua
and shall be placed on the sign fronting the Everett Turnpike.
Lessor shall have the prior right to approve the signage to be placed by Lessee.

                                   SECTION 27

                                 OPTION TO RENEW

         Provided Lessee be not at the time in default in the payment of the
rent or in the performance of any of its obligations hereunder, the Lessee, upon
not less than one hundred twenty (120) days notice in writing to Lessor, may
renew this Lease for one (1) additional term of three (3) years. Such renewal
shall be upon all of the terms and conditions of this Lease except that there
shall be no further option of renewal following the last renewal term and the
rent for the renewal term shall be as set forth in Section 28 hereof.

                                       20
<PAGE>   21

                                   SECTION 28

                              RENT FOR RENEWAL TERM

         28.1     If the first option to renew shall be exercised, the base
monthly rent during such renewal term shall be an amount determined by
multiplying the monthly rent of Two Thousand Nine Hundred Eighty-Seven Dollars
and Twenty-Nine Cents ($2,987.29) by a fraction, the numerator of which shall be
the Price Index on the first of the month closest to the expiration of the
original term hereof, and the denominator of which shall be the Price Index as
of the month prior to the beginning of the term hereof; PROVIDED, HOWEVER, that
if such fraction is one or less the base monthly rent shall be Two Thousand Nine
Hundred Eighty-Seven Dollars and Twenty-Nine Cents ($2,987.29).

         28.2     As used in this paragraph, the term "Price Index" means (i)
the "Consumers' Price Index - For all urban consumers, U.S. City Average, All
Items, (1982-84 = 100) (referred to as CPI-U)" published by the Bureau of Labor
Statistics of the United States Department of Labor, or (ii) if the publication
of such Consumers' Price Index shall be discontinued, the comparable index most
closely reflecting diminution of the real value of the base rent herein provided
for. In the event of a change in the base rent for the Price Index, the
numerator of the fraction referred to above, shall be appropriately adjusted to
reflect continued use of the 1982-84 base in the case of the Consumers' Price
Index or in the case of such comparable index, the continued use of the base
period in effect at the time of its adoption for use hereunder. At the request
of either party hereto, the other from time to time shall execute an appropriate
instrument supplemental to this Indenture evidencing the then current monthly
rent payable by the Lessee hereunder.

                                   SECTION 29

                              SHORT FORM RECORDING

         The parties covenant and agree that, if required by the applicable
statutes, there shall be recorded in the Hillsborough County Registry of Deeds a
notice of this Lease that complies in content and form with the New Hampshire
statutes, and that they will execute and deliver a Notice of Lease in such form
for such purpose. The parties further covenant and agree that, in the event of
termination, cancellation or assignment of this Lease prior to the expiration of
the term hereof, they will execute and deliver, in recordable form, an
instrument setting forth such termination, cancellation or assignment.

                                       21
<PAGE>   22

                                   SECTION 30

                                   SUCCESSION

         This Indenture shall be binding upon and inure to the benefit of the
heirs, executors, administrators, successors and permitted assigns of the
parties hereto.

                                   SECTION 31

                                     WAIVER

         Any consent, express or implied, by Lessor to any breach by Lessee of
any covenant or condition of this Lease shall not constitute a waiver by the
Lessor of any prior or succeeding breach by Lessee of the same or any other
covenant or condition of this Lease. Acceptance by Lessor of rent or other
payment with knowledge of a breach of or default under any term hereof by Lessee
shall not constitute a waiver of Lessor by such breach or default.

                                   SECTION 32

                                  GOVERNING LAW

         This Indenture shall be construed and interpreted in accordance with
the laws of the State of New Hampshire.

                                   SECTION 33

                                  FORCE MAJEURE

         Except as expressly provided herein, there shall be no abatement,
diminution or reduction of the rent or other charges payable by the Lessee
hereunder based upon, or claimed as a result of, any act of God, act of the
public enemy, governmental action, or other casualty, cause or happening beyond
the control of the parties hereto.

                                   SECTION 34

                                  COUNTERPARTS

         This Indenture may be executed in two (2) or more counterparts, each of
which shall be deemed an original and all collectively but one and the same
instrument.

                                       22
<PAGE>   23

                                   SECTION 35

                         MODIFICATION; ENTIRE AGREEMENT

         This Lease contains and embraces the entire agreement between the
parties hereto and neither it nor any part of it may be changed, altered,
amended, modified, limited or extended orally or by agreement between the
parties unless such agreement be expressed in writing and signed by Lessor and
Lessee or their respective successors in interest.

                                   SECTION 36

                                SECTION HEADINGS

         The headings at the beginning of each of the Sections hereof are solely
for purposes of convenience and identification and are not to be deemed or
construed to be part of this Lease.

                                   SECTION 37

                                  SEVERABILITY

         If any term, clause or provision of this Lease is judged to be invalid
and/or unenforceable, the validity and/or enforceability of any other term,
clause or provision in this Lease shall not be affected thereby.

                                   SECTION 38

                       DEFINITION AND LIABILITY OF LESSOR

         The term "Lessor" as used in this Lease means only the owner or
mortgagee in possession for the time being of the building in which the Leased
Premises are located or the owner of a leasehold interest in said building
and/or the land thereunder (or the Managing Agent of any such owner or
mortgagee) so that in the event of sale of said building or leasehold interest
or an assignment of this Lease or a demise of said building and/or land, Lessor
shall be and hereby is entirely freed and relieved of all obligations of Lessor
subsequently accruing.
         It is specifically understood and agreed that there shall be no
personal liability of Lessor (nor Lessor's agent, if any) in respect to any of
the covenants, conditions or provisions of this Lease. In the event of breach or
default by Lessor, of any of its obligations under this Lease, Lessee shall look
solely to the equity of the Lessor in 20 Industrial Park Drive, Nashua, New
Hampshire for the satisfaction of Lessee's remedies.

                                       23
<PAGE>   24

                                   SECTION 39

                                    BROKERAGE

         Each of the parties represents and warrants that there are no claims
for brokerage commissions or finder's fees with respect to this Lease or the
negotiation hereof except as set forth in this section. The parties further
agree to indemnify the other against, hold harmless from, all liabilities
arising from any such claim (including without limitation, the cost of attorney
fees in connection therewith) except; the broker for this Lease is Tamposi --
Nash Real Estate Group, Inc. whose fee shall be paid by the Landlord.

         IN WITNESS WHEREOF, the parties hereto have caused this Indenture of
Lease to be executed as of the day and year first above written.

                              FIVE N ASSOCIATES

/S/ Sandra J. Martinson       /S/ Q. Peter Nash
--------------------------    -------------------------------
Witness                       Q. Peter Nash, Managing Partner

                              XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

/S/ Thomas J. Mcdonald        /S/ Charles E. Moran
--------------------------    -------------------------------
Witness                       Lessee

                               PERSONAL GUARANTEE

         In consideration of the execution of this Lease by the Lessor and for
other valuable consideration, the undersigned hereby issues his/her personal
guarantee for the faithful performance of all terms and conditions of this Lease
and accepts full responsibility that all obligations of the Lessee, including
the prompt payment of all rental and other charges recited herein, shall be made
when due and that in the event of any default of Lessee, the undersigned shall
reimburse and indemnify the Lessor for all costs and expenses incurred to
correct any such default. The undersigned agrees that the Lessor may proceed
directly against him/her for such payments owed or for such activity to be
performed without proceeding in the first instance against the Lessee or any
other obligor or guarantor of the Lessee as recited herein. The above provision
will be effective for a period of 1 1/2 years (8/31/99).

/S/ Thomas J. Mcdonald        /S/ Charles E. Moran
--------------------------    -------------------------------
Witness                       Lessee

                                       24
<PAGE>   25

                          SECOND SUPPLEMENTAL AGREEMENT

           SECOND SUPPLEMENTAL AGREEMENT dated as of the 31st day of August,
1999, to the Lease dated February 18, 1998 and the First Supplemental Agreement
dated October 26, 1998, by and between FIVE N ASSOCIATES of 40 Temple Street,
Nashua, New Hampshire (Lessor) and SKILLSOFT CORPORATION, of 20 Industrial Park
Drive, Nashua, New Hampshire (Lessor).

           WHEREAS the Lessor and the Lessee desire to amend the Lease,
effective upon the execution of this agreement, as follows:

           Section 1 -- Leased Premises - The Leased premises shall also include
4,686 square feet of space on the second floor.

           Section 3.1 - The base annual rent shall be changed to One Hundred
Thousand One Hundred Forty Five Dollars ($100,145.00) payable in monthly
installments of Eight Thousand Three Hundred Forty-Five and 41/100 Dollars
($8,345.41) with the fist monthly installment of base rent commencing October 1,
1999.

           Section 3.3 - The Lessee's pro-rata share shall be changed to
52.263%. and the base annual rent shall be changed to One Thousand One Hundred
Forty Five ($100,145) payable in monthly installments of Eight Thousand Three
Hundred Forty Five and 41/100 Dollars ($8,345,41) with the first monthly
installment of base rent commencing on October 1, 1999.

           Section 11.2 - The parking space percentage shall be changed to
52.263%.

           Section 13.1 - The Lessee's pro rata share of real estate taxes shall
be changed to 52.263%.

           Section 40 - Right of First Refusal to Lease - The Lessee's right of
first refusal shall be changed to be the remaining 5,314 square feet of space on
the second floor of the building.

           Additional Provision - The Lessor, at its expense, shall perform its
fit-up work which shall include the construction of the demising wall, the
construction of a hallway and entry door to the common electrical room, the
replacement of all damaged ceiling tiles, shampooing the common area carpet,
cleaning of bathrooms, cleaning or relamping the light fixtures and the removal
of the soda vending machine. Lessor shall also patch and paint the leased
premises and the Lessee shall be responsible for 50% of the cost, which is
estimated to be $1,200.00.

           Except as hereinabove amended, all of the provisions of the above
mentioned Lease shall remain in full force and effect.

           IN WITNESS WHEREOF, the parties have caused this Second Supplemental
Agreement to be executed as of the day and year first above written.

                                             FIVE N ASSOCIATES

                                             /s/ Q. Peter Nash
--------------------------------------       ----------------------------------
Witness                                      Q. Peter Nash, Managing Partner

                                             SKILLSOFT CORPORATION

/s/ Sara Buttarini                           /s/ Charles E. Moran
---------------------------------------      -----------------------------------
Witness                                      Charles E. Moran, President & CEO

<PAGE>   26
                          THIRD SUPPLEMENTAL AGREEMENT

     THIRD SUPPLEMENTAL AGREEMENT dated as of the 14th day of September, 1999,
to the Lease dated February 18, 1998 and the First Supplemental Agreement dated
October 26, 1998 and the Second Supplemental Agreement dated August 31, 1999, by
and between FIVE N ASSOCIATES of 40 Temple Street, Nashua, New Hampshire
(Lessor) and SKILLSOFT CORPORATION, of 20 Industrial Park Drive, Nashua, New
Hampshire (Lessee).

     WHEREAS the Lessor and the Lessee desire to amend the Lease, effective
October 1, 1999, as follows:

     Section 1 - Leased Premises - The Leased premises shall also include an
additional 810 square feet of space on the second floor.

     Section 3.1 - The annual base rent shall be changed to One Hundred Six
Thousand Two Hundred Twenty ($106,220.00) payable in monthly installments of
Eight Thousand Eight Hundred Fifty One and 66/00 Dollars ($8,851.66) with the
first such monthly installment of base rent commencing October 1, 1999.

     Section 3.3 - The Lessee's pro-rata share shall be changed to 55.146% and
the Lessee's additional monthly rent shall be changed to Four Thousand Five
Hundred Nineteen and 66/00 Dollars ($4,519.66), with the first such monthly
installment of additional rent, commencing on October 1, 1999.

     Section 11.2 - The parking space percentage shall be changed to 55.146%.

     Section 13.1 - The Lessee's pro rata share of real estate taxes shall be
changed to 55.146%.

     Section 28.1 - The rental amount used to calculate the rent for the renewal
term shall be changed to Eight Thousand Eight Hundred Fifty One and 66/00
Dollars ($8,851.66).

     Section 40 - Right of First Refusal to Lease - The Lessee's right of first
refusal shall be changed to be the remaining 4,504 square feet of space on the
second floor of the building.

     Additional Provision - The Lessor, at it's expense, shall perform it's fit
up work which shall include the construction of the relocated demising wall, the
construction of the relocated hallway to back stairway, the replacement of all
damaged ceiling tiles and the cleaning or relamping the light fixtures.

     Except as hereinabove amended, all of the provisions of the above mentioned
Lease and Supplemental Agreements shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties have caused this Third Supplemental
Agreement to be executed as of the day and year first above written.

                                          FIVE N ASSOCIATES

/s/ Sandra J. Martinson                   /s/ Q. Peter Nash
-----------------------------------       --------------------------------------
Witness                                   Q. Peter Nash, Managing Partner

                                          SKILLSOFT CORPORATION

/s/ Sara Butturini                        /s/ Charles E. Moran
-----------------------------------       --------------------------------------
Witness                                   Charles E. Moran, President & CEO

<PAGE>   27

                          FOURTH SUPPLEMENTAL AGREEMENT

     FOURTH SUPPLEMENTAL AGREEMENT dated as of the 1st day of May, 2000, to the
Lease dated February 18, 1998, the First Supplemental Agreement dated October
26, 1998, the Second Supplemental Agreement dated August 31, 1999, and the Third
Supplemental Agreement dated September 14, 1999, by and between FIVE N
ASSOCIATES of 40 Temple Street, Nashua, New Hampshire (Lessor) and SKILLSOFT
CORPORATION, of 20 Industrial Park Drive, Nashua, New Hampshire (Lessee).

     WHEREAS the Lessor and the Lessee desire to amend the Lease, effective
April 15, 2000, as follows:

     Section 1 - Leased Premises - The Leased premises shall include an
additional 4,504 square feet of space which is the remaining space on the second
floor and an additional 2,100 square feet of space on the southwest corner of
the first floor.

     Section 3.1 - The annual base rent shall be changed to One Hundred Fifty
Five Thousand Seven Hundred Fifty Dollars ($155,750.50) payable in monthly
installments of Twelve Thousand Nine Hundred Seventy Nine and 16/00 Dollars
($12,979.16) with the first such monthly installment of base rent commencing May
1, 2000.

     Section 3.3 - The Lessee's pro-rata share shall be changed to 78.647% and
the Lessee's additional monthly rent shall be changed to Six Thousand Four
Hundred Forty Five and 83/00 Dollars ($6,445.83), with the first such monthly
installment of additional rent commencing on May 1, 2000.

     Section 11.2 - The parking space percentage shall be changed to 78.647%.

     Section 13.1 - The Lessee's pro rata share of real estate taxes shall be
changed to 78.647%.

     Section 28.1 - The rental amount used to calculate the rent for the renewal
term shall be changed to One Hundred Fifty Five Thousand Seven Hundred Fifty
Dollars ($155,750.00).

     Section 40 - Right of First Refusal to Lease - The Lessee's right of first
refusal to lease additional space shall be changed to be the adjacent space on
the first floor when it becomes available for lease (currently leased by Mentec,
Inc.).

     Except as hereinabove amended, all of the provisions of the above mentioned
Lease and all Supplemental Agreements shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties have caused this Fourth Supplemental
Agreement to be executed as of the day and year first above written.

                                          FIVE N ASSOCIATES

/s/ Sandra J. Martinson                   /s/ Q. Peter Nash
-----------------------------------       --------------------------------------
Witness                                   Q. Peter Nash, Managing Partner

                                          SKILLSOFT CORPORATION

/s/ Sara Butturini                        /s/ Charles E. Moran
-----------------------------------       --------------------------------------
Witness                                   Charles E. Moran, President & CEO

<PAGE>   28

                          FIFTH SUPPLEMENTAL AGREEMENT

     FIFTH SUPPLEMENTAL AGREEMENT dated as of the 29th day of September 2000, to
the Lease dated February 18, 1998, the First Supplemental Agreement dated
October 26, 1998, the Second Supplemental Agreement dated August 31, 1999, the
Third Supplemental Agreement dated September 14, 1999 and the Fourth
Supplemental Agreement dated May 1, 2000, by and between FIVE N ASSOCIATES of 40
Temple Street, Nashua, New Hampshire (Lessor) and SKILLSOFT CORPORATION, of 20
Industrial Park Drive, Nashua, New Hampshire (Lessee).

     WHEREAS the Lessor and the Lessee desire to amend the Lease, effective
September 1, 2000, as follows:

     Section 27 - Option to Renew - The Lessee shall have an additional three
year renewal term which is above and beyond the original three year renewal term
called for in this section.

     Except as hereinabove amended, all of the provisions of the above mentioned
Lease and all Supplemental Agreements shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties have caused this Fifth Supplemental
Agreement to be executed as of the day and year first above written.

                                          FIVE N ASSOCIATES

/s/ Barbara J. [Illegible]                /s/ Q. Peter Nash
-----------------------------------       --------------------------------------
Witness                                   Q. Peter Nash, Managing Partner

                                          SKILLSOFT CORPORATION

/s/ Pamela MacDonald                      /s/ Thomas J. McDonald
-----------------------------------       --------------------------------------
Witness                                   Charles E. Moran, President & CEO<PAGE>   1
                                                                   EXHIBIT 10.36

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

                       COLLABORATION AND LICENSE AGREEMENT

This Collaboration and License Agreement dated as of November 28, 2000 (the
"Effective Date") is between SmithKline Beecham Corporation ("SB"), a
Pennsylvania corporation, and ArQule, Inc. ("ArQule"), a Delaware corporation.

                                 R E C I T A L S

         WHEREAS, ArQule has expertise relating to the discovery and
optimization of compounds for use in the Field; and

         WHEREAS, SB has expertise with respect to certain biological targets
within the Field; and

         WHEREAS, SB desires to collaborate with ArQule to screen certain
compounds within ArQule's compound libraries and certain compounds produced by
SB against SB's biological targets in the Field to identify, optimize and
develop compounds that exhibit activity against such targets.

         NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, SB and ArQule hereby agree as follows:

1.       CERTAIN DEFINITIONS. The following meanings shall be ascribed to
capitalized terms used herein without definition:

         1.1. "Active Compound" means an ArQule Compound that exhibits
significant functional activity against a Target, as determined by SB in a
manner consistent with the manner SB uses to evaluate other similarly situated
compounds being developed by SB within the Field.

         1.2. "Affiliate" means any legal entity (such as a corporation,
partnership, or limited liability company) that control, is controlled by or is
under common control with a party to this Agreement. 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 such lesser percentage which is the
maximum allowed by a foreign corporation in a particular jurisdiction), (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities, or (iii)
the ability to direct the affairs of any such entity.

                                        1
<PAGE>   2
         1.3. "Analog Compound" means a chemical compound that [*****]. "ArQule
Analog Compound" shall mean an Analog Compound developed from an ArQule Compound
(as the parent compound) in the course of an optimization program by ArQule or
SB as contemplated by this Agreement [*****]. For the avoidance of doubt, a
compound is not an ArQule Analog Compound if that compound is acquired,
discovered, or developed by or on behalf of SB independent of this Agreement.
"SB Analog Compound " means an Analog Compound developed from an SB Compound (as
the parent compound) in the course of an optimization program by ArQule or SB as
contemplated by this Agreement [*****]. For the avoidance of doubt, a compound
is not an SB Analog Compound if that compound is acquired, discovered, or
developed by or on behalf of SB independent of this Agreement.

         1.4. "ArQule Compound" means a chemical compound owned or controlled by
ArQule provided by ArQule to SB pursuant to this Agreement as part of a
screening library, including without limitation the compounds provided in the
Compass Array Library and Mapping Array Libraries.

         1.5. "Available Compound" means an Active Compound which ArQule has
determined in good faith is not (i) licensed or otherwise committed to a third
party in the Field or (ii) committed to an internal ArQule program in the Field.
For purposes of (i) above, "committed" shall mean a third party with contractual
or other legal rights to claim such compound for development and
commercialization has notified ArQule in writing that such third party has
claimed such compound for development and commercialization. For purposes of
(ii) above, "committed" shall mean that the compound has been designated by
ArQule as committed to an internal development program at ArQule (initiated and
conducted without use of any information generated in the course of this
Agreement) in accordance with its ordinary procedures, as evidenced by the
status of such compound in its corporate database, and is under bona fide
evaluation or is the subject of an active and funded internal development
program at ArQule.

         1.6. "Compass Array(TM) Library" means a collection of ArQule Compounds
that is a diverse representative subset of the Mapping Array Libraries used for
initial screening of the Mapping Array Libraries. The description of, and the
specifications for, the Compass Array(TM) Library are set forth in Schedule A
attached hereto.

         1.7. "Confidential Information" means any non-public technical or
business information furnished by one party (the "Disclosing Party") to the
other party (the "Receiving Party") in connection with this Agreement or
generated pursuant to 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, computer models, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, collaboration and development activities, JSC reports,
royalty reports, product and marketing plans, clinical development plans,
customer and supplier information, compound locations within Compass Array
Libraries and the Markush structures of ArQule Compounds.

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

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

                                       2
<PAGE>   3
         1.8. "Field" means all applications in the life sciences.

         1.9. "Full-Time Equivalent" or "FTE" shall mean the effort equivalent
to one (1) qualified full-time employee of ArQule working on a specific project
or task for a period of one year.

         1.10. "Inactive ArQule Compound" means an ArQule Compound (i) which is
selected by SB from the same Mapping Array Library as one or more Active
Compounds with activity for the same Target, and (ii) which is not active
against the same Target as such Active Compounds, as determined by SB in a
manner consistent with the manner SB uses to evaluate other similarly situated
compounds being developed by SB within the Field.

         1.11. "IND" means an investigational new drug application filed with
the United States Food and Drug Administration (or its foreign equivalent) 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; provided however, that for
purposes of this definition, an IND shall not include an investigational new
drug application regarding the testing of several closely related compounds, or
formulations or other adaptations of the same compound, to aid in the selection
of a lead compound for further human clinical development.

         1.12. "IND Candidate Compound" means any Royalty-Bearing Product that
is designated by SB as an IND Candidate pursuant to Section 4.4.

         1.13. "Lead Optimization Array" means a set of ArQule Analog Compounds
or SB Analog Compounds synthesized by ArQule pursuant to Section 4.2. of this
Agreement.

         1.14. "Licensed Compound" means any Available Compound or Inactive
ArQule Compound that has been designated as a Licensed Compound as provided in
Subsection 4.1.4 below.

         1.15. "Licensed Compound Set" means a set of one or more Licensed
Compounds from the same Mapping Array Library that have biological activity for
the same Target, as well as any ArQule Analog Compounds of such Licensed
Compounds that are synthesized by a party in the course of optimizing those
Licensed Compounds.

         1.16. "Mapping Array(TM) Library" means a set of ArQule Compounds
consisting of diverse, structurally related small organic chemical compounds
arranged in a spatially addressable format, such as a microtiter screening
plate, which ArQule makes available to its collaborators for screening on a
non-exclusive basis. The description of, and the specifications for, the Mapping
Array(TM) Libraries are set forth in Exhibit A attached hereto.

         1.17. "Net Sales" means the gross amount billed or invoiced on sales by
SB, its Affiliates and sublicensees of Royalty-Bearing Products, less the
following: [*****]. In any transfers of Royalty-Bearing Products among SB,
an Affiliate and/or a sublicensee, Net Sales

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

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EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       3
<PAGE>   4
shall be calculated based on the final sale of the Royalty-Bearing Product to an
independent third party. In the event that SB, an Affiliate or a sublicensee
receives non-monetary consideration for any Royalty-Bearing Products, Net Sales
shall be calculated based on the average price charged by that party for such
Royalty-Bearing Products during the preceding Royalty Period or, in the absence
of such sales, the fair market value of the non-monetary consideration as
determined by the parties in good faith.

         1.18. "Patent Rights" means any United States and foreign patent
application and any divisional, continuation, or continuation-in-part of such
patent application (to the extent the claims are directed to subject matter
specifically described therein), as well as any patent issued thereon and any
reissue or reexamination 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 SB, or (iii) licensed to or otherwise controlled by 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. "SB
Patent Rights" means Patent Rights that are either (i) assigned solely to SB
(including Patent Rights in Analog Compounds pursuant to Section 6.1.), (ii)
assigned jointly to SB and a party other than ArQule, or (iii) licensed to or
otherwise controlled by SB, in each case to the extent that SB 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 assigned to
both ArQule and SB as joint owners. Joint Patent Rights will include (i) Patent
Rights claiming Joint Technology and (ii) Patent Rights claiming both ArQule
Technology and SB Technology in a single filing, but will not include Patent
Rights in Analog Compounds assigned by ArQule to SB pursuant to Section 6.1.

         1.19. "Program Status Compound" means any Royalty-Bearing Product that
is designated by SB as eligible to enter the Program Phase pursuant to Section
4.3.

         1.20. "Proprietary Materials" means any tangible materials, whether
biological, chemical, physical, or otherwise, that one party (the "Provider")
furnishes to the other party (the "Recipient") under this Agreement and
designates as proprietary or confidential including, without limitation all
ArQule Compounds and SB Compounds.

         1.21. "Royalty Period" means the partial calendar quarter commencing on
the date on which the first Royalty-Bearing Product is sold and every complete
or partial calendar quarter thereafter during which SB has the obligation to pay
a royalty pursuant to Section 7.6.

         1.22. "Royalty-Bearing Product" means a product containing as one of
its constituents, [*****].

         1.23. "SB Compound" means any chemical molecule owned or controlled by
SB that is provided by SB or its Affiliates to ArQule for lead optimization
under this Agreement.

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

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EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       4
<PAGE>   5
         1.24. "Screening Phase" means the period commencing on the Effective
Date and continuing for [*****] years thereafter during the term of this
Agreement, as extended by the parties through the Steering Committee or pursuant
to Section 4.2.6.

         1.25. "Target" means any biological target selected by SB in its
discretion including, without limitation (a) any genetic material, gene,
nucleotide, protein, or peptide, (b) any collections of genetic material, genes,
proteins or peptides, and (c) any cellular activity in the Field that, in any
case, SB selects for screening against ArQule Compounds. "Anti-Fungal Target"
means any Target within the Field that has utility in the treatment, prophylaxis
or diagnosis of fungal diseases. "Anti-Infective Target" means any Target within
the Field that has utility in the treatment, prophylaxis or diagnosis of disease
caused by infection with bacterial organisms. The term "Target" shall include
all Anti-Infective Targets and Anti-Fungal Targets.

         1.26. "Technology" means any proprietary development, information,
know-how, idea, design, concept, technique, process, invention, compound,
discovery, 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 SB, or (iii) licensed to or
otherwise controlled by 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. "SB Technology" means Technology that is
either (i) assigned solely to SB, (ii) assigned jointly to SB and a party other
than ArQule, or (iii) licensed to or otherwise controlled by SB, in each case to
the extent that SB has the ability to license or sublicense the rights required
under this Agreement without payment to a third party. "Joint Technology" means
Technology that is developed or discovered jointly by one or more employees or
consultants of SB and one or more employees or consultants of ArQule in
connection with this Agreement.

         1.27. "Valid Claim" means either (i) a claim of an issued patent that
has not been held unenforceable or invalid by an agency or a court of competent
jurisdiction in any unappealable or unappealed decision or (ii) a claim of a
pending patent application that has not been abandoned or finally rejected
without the possibility of appeal or refiling.

2.       NATURE AND OBJECTIVE OF COLLABORATION. The primary objective of the
collaboration is to discover and develop compounds provided by both ArQule and
SB that demonstrate potential as human therapeutic products for the treatment,
prophylaxis or diagnosis of infectious diseases caused by bacterial organisms.
In order to achieve this objective, the parties shall (i) perform compound
screening activities using ArQule Compounds to identify Active Compounds, (ii)
perform lead qualification activities on Active Compounds that are determined to
be Available Compounds to prioritize such compounds for lead optimization, (iii)
perform lead optimization activities on Licensed Compounds to develop one or
more Program Status Compounds that may result in Royalty-Bearing Products, and
(iv) perform lead optimization activities on SB Compounds to develop one or more
Program Status Compounds that may result in Royalty-Bearing Products, in each
case as further described below.

3.       MANAGEMENT OF COLLABORATION.

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

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EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       5
<PAGE>   6
         3.1. ESTABLISHMENT OF JOINT STEERING COMMITTEE. The parties hereby
establish a Joint Steering Committee (the "JSC") comprised of six (6) members,
with three (3) representatives appointed by each party, one of whom from each
party shall fulfill the role of alliance manager for the collaboration. The
members initially designated by SB are John Elliott, Gary Woodnutt, and Mitchell
Gross. The members initially designated by ArQule are Norton Peet, David
Hartsough, and Sheila DeWitt. The JSC shall be chaired by one of the SB
representatives. A party may change any of its representatives to the JSC at any
time upon written notice to the other party.

         3.2. DUTIES OF JOINT STEERING COMMITTEE. The JSC shall plan, monitor,
manage, and administer the collaboration under this Agreement. In general, the
JSC will act on behalf of the parties and, subject to Section 3.3, will be
responsible for approving specific research and development objectives and
milestones, determining when and if milestones are met, and recommending
resource allocation requirements. In particular, the activities of the JSC will
include reviewing progress made in the various phases of the collaboration and
recommending necessary changes to the collaboration. The JSC will be responsible
for research data, i.e. any laboratory notes, technical data or specifications,
test results, or other information or materials that arise as a result of the
collaboration. The JSC may also establish one or more Research Committees to
assist in project management.

         3.3. DECISIONS RESERVED TO SB. Notwithstanding anything to the contrary
in this Agreement, the parties agree that SB shall have the final decision on
the following matters:

         (i)      approval of all material research allocation (e.g., FTE
                  funding);

         (ii)     definition of criteria for selection and identification of
                  qualified lead compounds suitable for optimization;

         (iii)    the minimum eligibility requirements for a compound to be
                  considered an Active Compound, Inactive Compound, Program
                  Status Compound (subject to Section 4.3.), and IND Candidate
                  Compound (subject to Section 4.4.).

         3.4. MEETINGS OF JOINT STEERING COMMITTEE. Unless otherwise determined
by the JSC, the JSC shall meet at least once each calendar quarter alternately
at the location of each party, or at other times, locations, or manner (e.g.,
telephone conferences) determined by the JSC. Dates for the next meeting will be
decided within fifteen (15) days after the previous meeting. A representative of
the JSC jointly appointed by its members shall provide each member with five (5)
business days notice of the time and location of each quarterly meeting, unless
such notice is waived by all members. If a designated representative of a party
cannot attend a meeting of the JSC, such party may designate a different
representative for that meeting without notice to the other party, and the
substitute member will have full power to vote on behalf of the permanent
member. Except as otherwise provided in this Agreement, all actions and
decisions reserved for the JSC will require the unanimous consent of all of its
members. If the JSC fails to reach agreement upon any matter that is not subject
to a final decision by SB as set forth in Section 3.3, the dispute will be
resolved in accordance with the procedures set forth in Article 13 below. Within
ten (10) business days following each quarterly meeting of the JSC,

                                       6
<PAGE>   7
a representative of the JSC jointly appointed by its members shall prepare and
deliver, to both parties, a written report describing the program status and the
issues, decisions, conclusions, and other actions taken by the JSC. SB will
appoint an SB person as chairperson for the JSC.

         3.5. COOPERATION. Each party agrees to provide the JSC with information
and documentation as reasonably required for the JSC and each party to fulfill
its duties under this Agreement. In addition, each party agrees to make
available its employees and consultants as reasonably requested by the JSC. The
parties anticipate and intend that members of the JSC will communicate
informally with each other and with employees and consultants of the parties on
matters relating to the collaboration.

4.       CONDUCT OF COLLABORATION.

         4.1. SCREENING PHASE. All activities described in this Section 4.1
shall end when the Screening Phase ends. SB may extend the Screening Phase upon
six (6) months written notice to ArQule, provided that the parties reach
agreement on terms and conditions for such extension during the six-month notice
period. The Screening Phase may also extend automatically as provided in
Subsection 4.2.6.

                  4.1.1. COMPASS ARRAY LIBRARY. Within ten (10) business days of
the Effective Date, ArQule will supply SB with one (1) copy of the Compass Array
Library in accordance with the specifications set forth in Schedule A attached
hereto. During the Screening Phase, SB will screen the ArQule Compounds within
the Compass Array Library against Anti-Infective Targets using efforts
consistent with its normal scientific and business practices. In addition, SB
may also screen the Compass Array Library against Anti-Fungal Targets and other
Targets as set forth in Subsection 4.1.6 below. SB shall periodically submit to
ArQule a list containing the array plate number and well number of all Active
Compounds by facsimile transmission followed by a confirmatory letter. ArQule
will promptly determine whether the listed Active Compounds are Available
Compounds and notify SB of such determination. If any Active Compound is not an
Available Compound, ArQule shall not disclose the structure and SB shall have no
rights under this Agreement with respect to that Active Compound; provided
however, that ArQule shall promptly notify SB if such Active Compound later
becomes an Available Compound. If an Active Compound is an Available Compound,
ArQule shall reserve such Active Compound as an Available Compound to SB under
this Agreement and, promptly thereafter, ArQule shall disclose to SB the
structure of such Available Compound correlated to its well location. Upon
request of SB, ArQule shall disclose which Mapping Array Library corresponds to
any Active Compound whether or not such ArQule Compound is an Available
Compound, including the Markush structure of the Mapping Array Library, as
described in Schedule A.

                  4.1.2. MAPPING ARRAY LIBRARY. After SB screens the Compass
Array Library and thereafter at any point during additional screening activities
(as described below) on Available Compounds from the Compass Array Library, and
as determined by SB in consultation with the JSC, SB may screen one or more
Mapping Array Libraries corresponding to any Active Compound(s) identified from
the Compass Array Library to obtain initial structure-activity relationship
("SAR") data with respect to those Active Compounds and to

                                       7
<PAGE>   8
identify additional Active Compounds for development. If SB elects to access
these Mapping Array Libraries, SB shall provide ArQule with written notice
identifying the Mapping Array Libraries selected for such purposes. ArQule shall
provide SB with the relevant Mapping Array Libraries within ten (10) business
days of receipt of such notice. Initially, ArQule will not identify the
structures of the individual ArQule Compounds within any delivered Mapping Array
Library. ArQule will, however, provide SB with Markush structures of each
Mapping Array Library furnished to SB upon shipment. SB shall periodically
submit to ArQule a list containing the array plate number and well number of all
Active Compounds with the Mapping Array Library by facsimile transmission
followed by a confirmatory letter. ArQule will promptly determine whether the
listed Active Compounds are Available Compounds and notify SB of such
determination. If any Active Compound is not an Available Compound, ArQule shall
not disclose the structure and SB shall have no rights under this Agreement with
respect to that Active Compound; provided however, that ArQule shall promptly
notify SB if such Active Compound later becomes an Available Compound. If an
Active Compound is an Available Compound, ArQule shall reserve such Active
Compound as an Available Compound to SB under this Agreement and, promptly
thereafter, ArQule shall disclose to SB (i) the structure of such Available
Compound correlated to its well location, and (ii) upon request of SB, the
structures but not the locations of inactive ArQule Compounds in the same
Mapping Array Library. [*****]

                  4.1.3. RESYNTHESIS AND ADDITIONAL SCREENING.

                            (a) RESYNTHESIS. ArQule shall resynthesize and
deliver to SB an additional quantity of any Available Compound requested by SB
to enable SB to conduct screening activities. The Available Compounds may come
from the Compass Array Library or a Mapping Array Library. SB shall provide
ArQule with written notice of the Available Compounds that SB desires to have
resynthesized by ArQule, in accordance with the specifications set forth in
Schedule A. In each case the amount of, and delivery schedule for, resynthesized
Available Compounds will be determined by SB, subject to approval by the JSC.

                            (b) ADDITIONAL SCREENING. SB will promptly conduct
additional screening of the resynthesized Available Compounds and submit such
results as necessary to the JSC.

                  4.1.4. DESIGNATION OF LICENSED COMPOUNDS. At any time after SB
has screened the Compass Array Library and the Mapping Array Libraries
corresponding to Available Compounds identified in the Compass Array Library
(i.e., confirmation in secondary screens is unnecessary), SB may select any
reserved Available Compound or reserved Inactive ArQule Compound as a Licensed
Compound under this Agreement. In such event, SB shall provide ArQule with
written notice of its selection and ArQule will change the status of such ArQule
Compounds from "reserved" to "licensed". Upon the designation of an ArQule
Compound as a Licensed Compound, the licenses set forth in Subsection 5.2 shall
automatically become effective. All Licensed Compounds from a Mapping Array
Library that share activity for the same Target, [*****] shall form a Licensed
Compound Set for the purposes of this Agreement.

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                                       8
<PAGE>   9
                  4.1.5. OPTIMIZATION RIGHTS. SB shall have the right to conduct
lead optimization of any Licensed Compound Set, provided that SB shall submit
one Licensed Compound Set to ArQule for optimization as provided below. In the
event that SB conducts optimization of a Licensed Compound Set, then at the
request of SB, ArQule will provide SB with synthetic protocols to enable SB to
make those Licensed Compounds. In addition, SB may request that ArQule provide
additional resynthesized quantities of those Licensed Compounds and, subject to
the availability of chemists and reagents, ArQule will provide SB with such
resynthesized quantities at the rates set forth in Section 7.2 (but, for
clarity, only during the Screening Phase).

                  4.1.6. SCREENING RIGHTS FOR TARGETS OTHER THAN ANTI-INFECTIVE
TARGETS.

                            (a) ANTI-FUNGAL TARGETS. SB may screen the Compass
Array Library against Anti-Fungal Targets and then conduct the activities
described in this Section 4 with respect to Available Compounds identified in
such screens; provided that before the parties commence such activities, the
parties shall negotiate in good faith the commercially reasonable financial
terms pertaining to such compounds as described in Sections 7.5. and 7.6. below,
which terms shall be set forth in a separate agreement. In addition, if SB
desires to conduct an optimization project with ArQule on any resulting Licensed
Compounds, the parties shall negotiate in good faith the applicable commercially
reasonable FTE rate unless the project is a substitute project as described in
Subsection 4.2.6.

                            (b) OTHER TARGETS. In the event that (i) SB fails to
identify any Active Compounds from the Compass Array Library in its screens
against Anti-Infective Targets and, if applicable, Anti-Fungal Targets and
decides not to initiate any additional screening activities of ArQule Compounds
against Anti-Infective Targets or Anti-Fungal Targets, or (ii) SB identifies
fewer than [*****] Available Compounds from the Compass Array Library in its
screens against Anti-Infective Targets and, if applicable, Anti-Fungal Targets,
then SB may screen the unused quantities of any ArQule Compounds from the
Compass Array Library retained by SB against other Targets for the duration of
the Screening Phase; provided that, SB shall give ArQule written notice prior to
undertaking such additional screening activities, which notice shall identify
such other Targets; and, provided further that before the parties commence such
activities, the parties shall negotiate in good faith the commercially
reasonable financial terms pertaining to such compounds as described in Section
7.5. and 7.6. below, which terms shall be set forth in a separate agreement. In
addition, if SB desires to conduct an optimization project with ArQule on any
resulting Licensed Compounds, the parties shall negotiate in good faith the
applicable commercially reasonable FTE rate unless the project is a substitute
project as described in Subsection 4.2.6.

                  4.1.7. REVERSE ENGINEERING. SB shall not attempt to reverse
engineer, or attempt to determine the structure of, any ArQule Compound until
the structure of such compound has been disclosed to SB by ArQule pursuant to
this Section 4.

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         4.2. LEAD OPTIMIZATION PHASE.

                  4.2.1. COMMITTED LEAD OPTIMIZATION PROJECTS. ArQule agrees to
perform, and SB agrees to perform and fund, two lead optimization projects in
accordance with the terms and conditions of this Agreement. One of the committed
projects will come from a Licensed Compound Set with activity for an
Anti-Infective Target, which project will be selected as described in Subsection
4.2.2 (b) should SB desire to optimize an Available Compound. For the avoidance
of doubt, in the event SB does not elect to optimize an Available Compound, SB
shall have no obligation to fund or perform an optimization project for any
Licensed Compound Set for an Anti-Infective Target and, as a result, SB shall
only have an obligation to fund and perform the optimization project described
in the next sentence. The other committed project will come from a series of SB
Compounds that SB has determined to have activity for an Anti-Infective Target,
which project will be selected by SB and submitted to ArQule as described in
Subsection 4.2.2 (a). SB will define the general guidelines and goals of the
project and the JSC will develop a defined workplan for each project in
accordance with such guidelines and goals, including project deliverables, and
then the JSC will coordinate and monitor the projects. The project deliverables
are subject to approval by both parties through the JSC, but SB has the final
decision for all other aspects of the lead optimization projects. Each lead
optimization project under this Section will commence not later than the end of
the Screening Phase and shall continue for the initial periods set forth in
Section 4.2.4 and such extension as set forth in Section 4.2.5, but not more
than [*****] years, unless earlier terminated as described in Subsection
4.2.6.

                  4.2.2 SELECTION OF PROJECTS.

                            (a) SB COMPOUNDS. On or before the Effective Date,
SB shall disclose to ArQule the structures of the SB Compounds that SB will
submit to ArQule for lead optimization, together with all data, synthetic
protocols, and other information in the possession of SB which may assist ArQule
in the project. ArQule shall commence work on this project within thirty (30)
days after the JSC develops and approves a workplan.

                            (b) ARQULE COMPOUNDS. At any time during the
Screening Phase, SB will provide a list of Licensed Compound Sets with
Anti-Infective activity to the JSC for consideration as lead optimization
projects. The JSC will select one of these Licensed Compound Sets for
optimization by ArQule under this Agreement. ArQule shall commence work on this
project promptly after the JSC develops and approves a workplan.

                  4.2.3. RESPONSIBILITIES OF PARTIES. Subject to modification by
the JSC and in accordance with the applicable workplan, ArQule will generally
perform [*****] activities associated with lead optimization projects including,
without limitation, [*****] as described in Schedule A, and SB will generally
perform [*****] activities associated with lead optimization projects, including
without limitation, [*****]. SB shall also perform such other activities as it
deems necessary or appropriate in connection with the lead optimization project.
Either party may perform [*****] as directed from time to time by the JSC. The
specific responsibilities of

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each party shall be described in the applicable workplan. Each party will
promptly report all research results related to such lead optimization
activities to the JSC.

                  4.2.4. INITIAL RESOURCE COMMITMENTS. SB commits to fund the
two (2) projects described in Section 4.2.1 in the following manner. On the
Effective Date, ArQule will initially allocate at least [*****] for
[*****] to a project derived from the series of SB Compounds for an
Anti-Infective Target as described in Subsection 4.2.2(a). In addition, upon
selection by the JSC of a Licensed Compound Set for a lead optimization project,
ArQule will initially allocate at least [*****] for [*****] to the project
derived from the Licensed Compound Set for an Anti-Infective Target as described
in Subsection 4.2.2(b). SB agrees to fund the FTEs for these two projects at the
rates set forth in Section 7.4 for at least a [*****] period for each project,
subject to early termination as set forth in Subsection 4.2.6 below.

                  4.2.5. ONGOING RESOURCE COMMITMENTS. When a project begins,
the JSC will, subject to Section 3.3, agree to an estimated number of FTEs per
project to complete the approved workplan and timeline to add those FTEs. ArQule
agrees to provide a maximum of [*****] FTEs per project in the following manner.
The JSC will determine the actual number of FTEs for each project at any given
time, subject to SB approval. Actual changes to the FTE commitment beyond the
project minimum detailed in Subsection 4.2.4 will require sixty (60) days
written notice by SB to ArQule. If an FTE increase is required, ArQule will make
a reasonable effort to increase the FTEs at the rate of at least [*****] per
quarter. If an FTE decrease is required, SB will make a reasonable effort to
reduce FTEs at the rate of no more than [*****] per quarter. SB will fund the
FTEs applied to each project at the rates set forth in Section 7.4. SB may
extend a project beyond the [*****] minimum at its discretion, for additional
[*****]month periods not to exceed a total of [*****] additional years. SB will
give ArQule at least ninety (90) days written notice before the [*****]
anniversary date of project commencement if SB desires to extend, and will
estimate the additional time period in [*****]month increments. Thereafter, SB
will give ArQule at least ninety (90) days written notice before the end of the
extension period for any subsequent extensions. In the event SB elects not to
extend a project, SB shall have no further funding obligations with respect to
such project.

                  4.2.6. PROJECT TERMINATION. At any time after a period of
[*****] from the initiation of a lead optimization project, SB may terminate the
project for any reason upon ninety (90) days prior written notice to ArQule;
provided that such notice period shall be reduced to sixty (60) days if SB
reasonably determines that ArQule is not proceeding diligently to meet the
deliverables defined in the corresponding workplan. In the event of termination,
SB will have no further obligation to fund the FTEs involved in that project
except for accrued expenses and subject to the following. If SB terminates the
project based on a Licensed Compound Set during the first year of the project
and such termination is not due to a lack of diligence by ArQule to meet the
deliverables defined in the workplan, then (i) ArQule will have no obligation to
refund any payments for FTEs actually received from SB and SB shall have an
obligation to make any remaining quarterly payments for the FTEs committed by
ArQule during the first year of the project, but ArQule shall apply the unused
balance to other services and products under this

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Agreement (e.g., resynthesis fees, Mapping Array Library access fees, or another
project) and (ii) the parties will endeavor to identify another mutually
acceptable Licensed Compound Set to submit to ArQule as a lead optimization
project. If the parties identify a mutually acceptable substitute project within
ninety (90) days after SB terminates the original project, then SB shall have
the benefit of the FTE rates in this Agreement for the balance of such
[*****]year period (plus the delay of up to ninety days while the parties
decided on the substitute project). If the parties identify a substitute project
after this ninety-day period expires, the FTE rate in the Agreement will not
apply but SB may still apply any unused credits of FTE payments to the new
project. If SB terminates the project based on a Licensed Compound Set during
the first year of the project and such termination is due to a lack of diligence
by ArQule to meet the deliverables defined in the workplan, then SB shall have
no further obligation to fund that project.

         4.3. PROGRAM PHASE. SB may declare Program Status for Royalty-Bearing
Products using the criteria set forth in Schedule B or other criteria
subsequently agreed upon by the parties. SB may select a Program Status Compound
at any time. SB will make its selections of Program Status Compounds in its sole
discretion under the criteria in Schedule B or other criteria subsequently
agreed upon by the parties, however SB will not treat Licensed Compounds or
ArQule Analog Compounds differently from other compounds that SB considers for
Program Status. SB shall promptly furnish ArQule with written notice upon the
selection of a Royalty-Bearing Product as a Program Status Compound. Effective
upon receipt of this notice by ArQule, the Program Status Compound and all other
ArQule Compounds and Analog Compounds in the same Licensed Compound Set will no
longer be subject to reversion as described in Section 9.3. At the request of
SB, ArQule will transfer synthetic protocols for Program Status Compounds if
transfer did not previously occur.

         4.4. IND CANDIDATE. SB may designate a Royalty-Bearing Product as an
IND Candidate Compound using the criteria set forth in Schedule C or other
criteria subsequently agreed upon by the parties. SB may select an IND Candidate
Compound at any time. SB will make its selections of IND Candidate Compounds in
its sole discretion under the criteria in Schedule C or other criteria
subsequently agreed upon by the parties, however SB will not treat Licensed
Compounds or ArQule Analog Compounds differently from other compounds that SB
considers as IND Candidates. SB shall promptly furnish ArQule with written
notice upon the selection of a Royalty-Bearing Product as an IND Candidate
Compound.

5.       LICENSE GRANTS.

         5.1. SCREENING LICENSES.

                  5.1.1. PRIMARY TARGETS. Subject to the terms and conditions of
this Agreement, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in the ArQule Technology to screen ArQule Compounds
delivered under the collaboration against Anti-Infective Targets and Anti-Fungal
Targets in the Field, but only during the Screening Phase.

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                  5.1.2. OTHER TARGETS. Subject to the terms and conditions of
this Agreement, and specifically subject to the limitations set forth in
Subsection 4.1.6(b) above, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in ArQule Technology to screen ArQule Compounds
delivered under the collaboration against Targets in the Field other than
Anti-Infective Targets and Anti-Fungal Targets, but only during the Screening
Phase.

         5.2 DEVELOPMENT AND COMMERCIALIZATION LICENSE. Subject to the terms and
conditions of this Agreement, ArQule hereby grants to SB and its Affiliates the
following licenses:

         (i)      an exclusive, worldwide license (with the right to sublicense)
                  under the ArQule Patent Rights and other rights in ArQule
                  Technology to conduct development of Licensed Compounds in the
                  Field, including the right to develop Analog Compounds based
                  on Licensed Compounds.;

         (ii)     an exclusive, worldwide license (with the right to sublicense)
                  under the ArQule Patent Rights and other rights in ArQule
                  Technology to make, have made, use, have used, sell, and
                  import Licensed Compounds and certain identified Analog
                  Compounds, as described below, in the Field; and

         (iii)    a non-exclusive, worldwide license (with the right to
                  sublicense) under the ArQule Patent Rights and other rights in
                  ArQule Technology to use chemical synthesis methods within the
                  ArQule Patent Rights and ArQule Technology to make and have
                  made Royalty-Bearing Products.

SB and ArQule acknowledge and agree that the exclusive license granted under
clause (i) of this Section prohibits ArQule from granting any third party any
right or license to develop Analog Compounds based on Licensed Compounds in the
Field, but does not extend to the composition or use of Analog Compounds except
as follows. At any time during the term of this Agreement, SB may disclose to
ArQule the structure of one or more Analog Compounds that SB desires to include
within the license grant set forth in clause (ii) above. In such event, ArQule
will promptly determine in good faith whether the identified Analog Compound(s)
are not (a) licensed or otherwise committed to a third party in the Field or (b)
committed to an internal ArQule program in the Field,. For purposes of (a)
above, "committed" shall mean a third party with contractual or other legal
rights to claim such compound for development and commercialization has notified
ArQule in writing that such third party has claimed such compound for
development and commercialization. For purposes of (b) above, "committed" shall
mean that the compound has been designated by ArQule as committed to an internal
development program at ArQule in accordance with its ordinary procedures, as
evidenced by the status of such compound in its corporate database, and is under
bona fide evaluation or is the subject of an active and funded internal
development program at ArQule (without any use of information under this
Agreement). If the identified Analog Compound(s) are not licensed or
"committed", as defined above, in the Field, then ArQule shall include such
Analog Compound(s) within the license grant set forth in clause (ii) above;
otherwise, such Analog Compound(s) shall not be included in such license grant.
SB further acknowledges and agrees that the license grant in clause (iii) of
this Section is subject to the terms, conditions, and limitations of any
agreement under which ArQule has acquired rights in a chemical synthesis

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method from a third party and, in such event, ArQule may require SB to enter
into a separate sublicense agreement before such license grant shall take
effect. Notwithstanding the definitions of ArQule Patent Rights and ArQule
Technology, ArQule represents and warrants that SB will not incur any payment
obligation to a third party as a result of the practice of the license grant in
clause (iii) of this Section for third party licenses that ArQule has executed
as of the Effective Date and ArQule covenants that ArQule shall notify SB prior
to implementation of any ArQule Technology that would subject SB to a payment
obligation to a third party as a result of the practice of the license grant in
clause (iii) of this Section for third party licenses that ArQule executes after
the Effective Date. In the event that SB decides to sublicense its rights under
this Section to a third party, SB shall furnish ArQule with written notice of
the sublicense grant and shall ensure that all sublicense agreements conform to
this Agreement.

6.       INTELLECTUAL PROPERTY RIGHTS.

         6.1. RIGHTS IN COMPOUNDS. SB shall have the sole right to prepare,
file, prosecute, and maintain Patent Rights that claim the composition or use of
ArQule Analog Compounds or SB Analog Compounds developed by either party under
this Agreement. ArQule shall assign to SB all right, title, and interest in any
Patent Rights filed by SB that claim the composition or use of such ArQule
Analog Compounds or SB Analog Compounds. Therefore, such Patent Rights are
considered SB Patent Rights under this Agreement rather than Joint Patent
Rights.

         6.2. OWNERSHIP OF INTELLECTUAL PROPERTY. Other than as expressly
provided herein, neither party shall have any rights in Patent Rights and
Technology that is invented, developed or discovered by the other party prior to
the Effective Date or outside the research performed under this Agreement.
Ownership of Patent Rights and Technology arising from the research performed
under this Agreement shall be allocated in accordance with US patent law.

         6.3. MANAGEMENT OF PATENT RIGHTS. SB shall have sole responsibility
for, and control over, the management of SB Patent Rights and ArQule shall have
sole responsibility for, and control over, the management of ArQule Patent
Rights; provided, however, that ArQule shall consult with SB with respect to any
ArQule Patent Rights that claim an ArQule Compound that is part of a Licensed
Compound Set. Each party will bear its own expenses in connection with such
Patent Rights. In the case of Joint Technology, the JSC will decide whether to
seek Joint Patent Rights claiming that Technology. If the JSC decides to seek
any Joint Patent Rights under this Section 6.3, the parties shall jointly
prepare, file, prosecute, and maintain such Patent Rights, and all related
expenses shall be borne equally by the parties. In the event that one party
declines to pay or desires to cease further payment of patent-related expenses
for such Joint Patent Rights in any country and the other party desires to
maintain the Joint Patent Rights, the withdrawing party may assign to the
continuing party all rights in such Joint Patent Rights in such country and
thereafter have no further obligation to pay such expenses.

         6.4. COOPERATION. Each party agrees to cooperate fully with the other
in the preparation, filing, and prosecution of any Joint Patent Rights. ArQule
agrees to cooperate fully with SB in the preparation, filing, and prosecution of
any Patent Rights that ArQule has assigned to SB pursuant to Section 6.1. Such
cooperation includes, but is not limited to:

         (i)      executing all papers and instruments, or requiring its
                  employees or agents, to

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<PAGE>   15
                  execute such papers and instruments, so as to effectuate the
                  ownership of Patent Rights as established under this Agreement
                  and to enable the other party to apply for and to prosecute
                  patent applications in any country;

         (ii)     promptly informing the other party of any matters coming to
                  such party's attention that may affect the preparation,
                  filing, or prosecution of any such patent applications; and

         (iii)    undertaking no actions that are potentially deleterious to the
                  preparation, filing, or prosecution of such patent
                  applications.

         6.5.     INFRINGEMENT.

                  6.5.L. OFFENSIVE ACTIONS. With respect to infringement of any
SB Patent Right or ArQule Patent Right claiming the composition or use of a
Licensed Compound, Analog Compound, or Royalty-Bearing Product, SB shall have
the primary right, but not the obligation, to enforce such Patent Right under
its sole control and at its sole expense. In such event, SB shall be exclusively
entitled to all proceeds or recoveries resulting therefrom, but from such
proceeds or recoveries SB shall pay ArQule a royalty in accordance with Section
7.6. on sales lost to the infringer. In the event that SB declines to enforce
such Patent Right with respect to a Royalty-Bearing Product where the sales of
the alleged infringer are at least [*****] percent [*****] of the
worldwide market for said product, then ArQule shall have the secondary right to
enforce such Patent Right under its sole control and at its sole expense. In
such event, ArQule shall be exclusively entitled to all proceeds or recoveries
resulting therefrom.

         6.5.2. DEFENSIVE ACTIONS. SB will indemnify, defend, and hold harmless
ArQule, its Affiliates, and their respective officers, directors, employees, and
agents from any and all loss, damage, cost, and expense (including reasonable
attorneys fees) and amounts paid in settlement arising from any actual or
alleged infringement claim brought by a third party, in law or in equity, based
on activities undertaken by SB or by ArQule at the direction of SB pursuant to
this Agreement (except for claims based solely on the practice of an ArQule
Patent Right or the use of ArQule Technology) or based on the manufacture or
sale of a Royalty-Bearing Product. In the event that ArQule intends to claim
indemnification under this Subsection, ArQule shall promptly notify SB of the
infringement action and SB shall assume the defense of the action under its sole
control, including the right to effect a settlement. A failure by ArQule to
deliver notice to SB within a reasonable time shall relieve SB of its indemnity
obligation under this Subsection to the extent such failure prejudices the
ability of SB to defend such action. ArQule shall cooperate fully with SB and
its legal representatives in the investigation and defense of the action. In the
event of a settlement, SB shall obtain the consent of ArQule before agreeing to
any settlement that imposes restrictions which are inconsistent with the rights
and obligations of the parties under this Agreement.

         6.6. ARQULE REPRESENTATION AND WARRANTY. ArQule represents and warrants
to SB that, to the best of ArQule's knowledge and belief, the practice of the
combinatorial library

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design, synthesis, and analysis technology within the ArQule Technology
(commonly referred to and collectively defined herein as the "AMAP Chemistry
Operating System") as of the Effective Date does not infringe any Valid Claim of
any Patent Right of a third party in a manner that would have a material adverse
effect on SB as a result of this Agreement. In addition, ArQule covenants that,
during the term of this Agreement, ArQule will use its best efforts to ensure
that the practice of the AMAP Chemistry Operating System will not infringe any
Valid Claim of any Patent Right of a third party in a manner that would have a
material adverse effect on SB as a result of this Agreement. In the event that
the preceding representation and warranty is untrue, or if ArQule breaches the
preceding covenant, then upon written notice by SB to ArQule of such event:

         (i)      ArQule shall use its reasonable best efforts to modify the
                  ArQule Technology such that the practice of the ArQule
                  Technology no longer infringes the relevant Patent Right or to
                  secure a license to such Patent Right at no cost to SB.

         (ii)     ArQule will indemnify, defend, and hold harmless SB, its
                  Affiliates, and their respective officers, directors,
                  employees, and agents from any and all loss, damage, cost, and
                  expense (including reasonable attorneys fees) and amounts paid
                  in settlement arising from any claim brought by a third party,
                  in law or in equity, based on such material breach. In the
                  event that SB intends to claim indemnification under this
                  Section, SB shall promptly notify ArQule of the infringement
                  action and ArQule shall assume the defense of the action under
                  its sole control, including the right to effect a settlement.
                  A failure by SB to deliver notice to ArQule within a
                  reasonable time shall relieve ArQule of its indemnity
                  obligation under this Section to the extent such failure
                  prejudices the ability of ArQule to defend such action. SB
                  shall cooperate fully with ArQule and its legal
                  representatives in the investigation and defense of the
                  action. In the event of a settlement, ArQule shall obtain the
                  consent of SB before agreeing to any settlement that imposes
                  restrictions which are inconsistent with the rights and
                  obligations of the parties under this Agreement.

SB agrees that the maximum liability of ArQule under this Section, including
without limitation legal expenses, damages, and settlement payments resulting
from the indemnity granted in clause (ii) above, shall be limited to ten million
dollars ($10,000,000).

7.       PAYMENTS.

         7.1. COMPASS ARRAY ACCESS FEE. In partial consideration of SB obtaining
access to the Compass Array Library as set forth in Subsection 4.1.1 of this
Agreement, SB shall pay to ArQule an access fee in the amount of [*****],
payable within forty-five (45) days of the Effective Date, upon invoice from
ArQule. If SB, at its sole discretion, obtains a second copy of the Compass
Array Library, SB shall pay to ArQule a fee in the amount of [*****] payable
within forty-five (45) days after SB receives the second copy, upon invoice from
ArQule.

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         7.2. COMPOUND RESYNTHESIS FEES. In partial consideration of the
production and delivery by ArQule of resynthesized Available Compounds pursuant
to Subsection 4.1.3(a) and 4.1.5. or any applicable workplan, SB agrees to pay
ArQule [*****] per [*****] mg and [*****] for up to [*****] mg of
resynthesized Available Compound, payable within forty-five (45) days of
delivery; provided, that, the aggregate funding for the resynthesis of all
Available Compounds for each fiscal quarter shall not, unless SB expressly
authorizes an increase, exceed [*****] per fiscal quarter or [*****] per fiscal
year.

         7.3. MAPPING ARRAY DELIVERY FEE. In partial of consideration of the
delivery by ArQule to SB of Mapping Array Libraries in accordance with
Subsection 4.1.2 hereof, SB shall pay ArQule [*****] per Mapping Array Library,
payable within forty-five (45) days of delivery, upon invoice from ArQule.

         7.4. OPTIMIZATION PROGRAM FUNDING. In partial consideration of the
performance by ArQule of the lead optimization projects described in Section 4.2
hereof, SB shall pay ArQule for the FTEs assigned to such projects at the
"Applicable FTE Rate" (as defined below) payable in advance in equal quarterly
installments, with the first such payment to be made within forty-five (45) days
of notification to the JSC of project initiation, and with each installment
thereafter payable within five (5) business days of the first day of each fiscal
quarter thereafter, upon invoice from ArQule. The "Applicable FTE Rate" will be
determined as follows:

         (i)      For the lead optimization project on an SB Compound (as
                  described in Subsection 4.2.2(a)), the Applicable FTE Rate
                  from project initiation through [*****] shall be [*****] per
                  FTE for the first [*****] FTEs and [*****] for the next
                  [*****] FTEs, and the Applicable FTE rate from [*****] onwards
                  shall be [*****] per FTE for up to [*****] FTEs. SB and ArQule
                  will negotiate a separate Applicable FTE Rate if the number of
                  FTEs employed by ArQule for a project exceeds [*****] at any
                  time.

         (ii)     For the lead optimization project on a Licensed Compound Set
                  (as described in Subsection 4.2.2(b)), the Applicable FTE Rate
                  from project initiation through [*****] shall be [*****] per
                  FTE for the first [*****] FTEs and [*****] for the next
                  [*****] FTEs, and the Applicable FTE rate thereafter shall be
                  [*****] per FTE for up to [*****] FTEs. SB and ArQule will
                  negotiate a separate Applicable FTE Rate if the number of FTEs
                  employed by ArQule for a project exceeds [*****] at any time

         The parties hereby acknowledge and agree that the FTE rate for any
additional optimization programs will be negotiated in good faith by the parties
and set forth in a separate agreement to be executed by the parties.

         7.5.     MILESTONE PAYMENTS.

                  7.5.1. [*****] MILESTONE PAYMENTS.

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                            (a) PAYMENTS. In partial consideration of the
performance by ArQule of the activities described in Section 4.2., SB shall pay
ArQule the following amount within forty-five (45) days after a compound
resulting from such a project (whether synthesized by ArQule or SB) in which
ArQule participated achieves [*****]. The amount to be paid upon achievement of
each [*****] will be calculated in accordance with the formula set forth below:

                           [*****]

The above milestone payments shall be non-refundable and shall not be credited
against royalties payable to ArQule under this Agreement.

                            (b) EXCEPTION. No payment for achievement of the
[*****] Milestone will be made under this Subsection with respect to a
particular optimization project if SB terminates that project due to lack of
diligent efforts by ArQule pursuant to Subsection 4.2.6. hereof, regardless of
whether such compound meets the criteria for an [*****]. In addition, the
parties agree that the [*****] Milestone shall only be paid on the initial
Royalty-Bearing Product to achieve such milestone within the same activity
profile previously defined by SB and agreed by the JSC.

                  7.5.2.   OTHER DEVELOPMENT MILESTONE PAYMENTS.

                            (a) PAYMENTS. In partial consideration of the
delivery of the Compass Array Library and Mapping Array Libraries and the
performance by ArQule of the optimization activities described in Section 4.2.
of this Agreement, SB shall pay ArQule the following development milestone
payments within forty-five (45) days after each occurrence of each event for
each Royalty-Bearing Product, upon invoice from ArQule:

"Type I RBP" means a Royalty-Bearing Product [*****]

"Type II RBP" means  a Royalty-Bearing Product[*****]

"Type III RBP" means a Royalty-Bearing Product[*****]

"Type IV RBP" means a Royalty-Bearing Product[*****]

"Major Market Country" means any of the United States, United Kingdom, France,
Germany, Italy, Spain or Japan.

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

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

                                       18
<PAGE>   19
                        Milestone Payments (in thousands)
<TABLE>
<CAPTION>

  Milestone                                Type of Royalty-Bearing Product
                         Type I RBP          Type II RBP       Type III RBP      Type IV RBP
                       Oral        IV     Oral      IV       Oral      IV       Oral      IV
<S>                   <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
TOTAL                  $1,200     $650    $2,000   $1,300    $3,500   $2,100    $7,000   $4,200
</TABLE>

*For the purposes of this Section, the phrase "successful completion of Phase II
clinical trial (or equivalent)" means [*****]

                            (b) EXCEPTIONS. The above milestone payments shall
be non-refundable and shall not be credited against royalties payable to ArQule
under this Agreement. However, the parties agree that development milestones
shall only be paid on the initial Royalty-Bearing Product to achieve such
milestone within the same activity profile previously defined by SB and agreed
by the JSC; provided, that, if a second Royalty-Bearing Product within the same
activity profile reaches a given milestone which would have resulted in a
greater milestone payment, SB shall pay such difference.

                  7.5.3. OTHER MILESTONES. The parties shall negotiate in good
faith the commercially reasonable financial terms pertaining to payments for
achievement of development milestones relating to Royalty-Bearing Products based
on compounds resulting from the screening described in Section 4.1.6 or for uses
of a Royalty-Bearing Product within the Field for purposes other than as a human
therapeutic or prophylactic for [*****], which terms shall be set forth in a
separate agreement.

         7.6.     PRODUCT ROYALTIES.

                  7.6.1. EARNED ROYALTIES WITHIN THE FIELD. In partial
consideration of the performance by ArQule of the activities set forth in
Article 4, SB shall pay to ArQule the following royalties on the incremental Net
Sales of Royalty-Bearing Products within the Field in accordance with the
procedures set forth in Article 8 hereof.

"Type I RBP" means a Royalty-Bearing Product [*****]

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

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

                                       19
<PAGE>   20
"Type II RBP" means a Royalty-Bearing Product [*****]

"Type III RBP" means a Royalty-Bearing Product[*****]

"Type IV RBP" means a Royalty-Bearing Product[*****]

"Major Market Country" means any of the United States, United Kingdom, France,
Germany, Italy, Spain or Japan.

                                    Royalties
<TABLE>
<CAPTION>

Incremental                                                      Type of Royalty-Bearing Product
 Net Sales
    in
 Calendar
   Year
                    Type I RBP                 Type II RBP                 Type III RBP                Type IV RBP
                Oral           IV           Oral           IV           Oral           IV           Oral          IV
<S>            <C>          <C>           <C>           <C>           <C>           <C>           <C>           <C>
Less than      [*****]      [*****]       [*****]       [*****]       [*****]       [*****]       [*****]       [*****]
$300m
$300m or       [*****]      [*****]       [*****]       [*****]       [*****]       [*****]       [*****]       [*****]
more
</TABLE>

                  7.6.2 ROYALTY TERM. The foregoing royalty obligations shall
commence with the first commercial sale of a Royalty-Bearing Product in any
country and shall continue on a country-by-country basis for a period of ten
(10) years after the first commercial sale (i.e. the date of first sale of a
Royalty-Bearing Product in the ordinary course of business in any country by SB
or an Affiliate or sublicensee of SB) of the Royalty-Bearing Product in such
country. Upon expiration of the ten-year royalty payment obligations in a
country, SB shall thereafter have, in perpetuity, a fully paid up license under
Section 5.2 of this Agreement.

                  7.6.3. OTHER ROYALTIES. The parties shall negotiate in good
faith the financial terms pertaining to royalty payments for sales of
Royalty-Bearing Products based on compounds resulting from the screening
described in Subsection 4.1.6 or for uses of a Royalty-Bearing Product within
the Field for purposes other than as a human therapeutic or prophylactic for
[*****], which terms shall be set forth in a separate agreement.

                  7.6.4 THIRD PARTY ROYALTIES. SB shall be responsible for
procuring such licenses as it deems, in its sole discretion, appropriate for the
manufacture, use, marketing, sale or distribution of Royalty-Bearing Products by
SB and its Affiliates and sublicensees, and for the payment of any amounts due
third parties under such licenses; provided SB may offset, against the royalties
owed to ArQule with respect to a Royalty-Bearing Product in a country, [*****]
of royalties that SB pays to a third party in order to license in the relevant
country a Valid Claim

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

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EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       20
<PAGE>   21
covering the composition of a Licensed Compound contained in that
Royalty-Bearing Product or the use of a synthetic protocol provided by ArQule to
SB under this Agreement to manufacture that Royalty-Bearing Product, up to (i)
in the case of an issued patent, a maximum of [*****] or (ii) in the case of a
patent application, a maximum of [*****], of the royalty owed to ArQule in any
quarter with respect to the applicable Royalty-Bearing Product in the applicable
country. Any such amounts which are not credited in a quarter may be carried
forward until expended.

8.       REPORTS, RECORDS, AND PAYMENT PROCEDURES.

         8.1. ROYALTY REPORTS AND PAYMENTS. Within sixty (60) days after the
conclusion of each Royalty Period, SB shall deliver to ArQule a report
containing the following information:

         (i)      the gross sales of Royalty-Bearing Products during the
                  applicable Royalty Period in each country of sale in
                  sufficient detail to permit confirmation of the accuracy of
                  the royalty payment;

         (ii)     adjustments and calculation of Net Sales for the applicable
                  Royalty Period in each country of sale; and

         (iii)    total Net Sales in U.S. dollars, together with the exchange
                  rates used for conversion.

If no payment is due to ArQule for any reporting period, the report shall so
state. All such reports shall be considered Confidential Information under this
Agreement. Concurrent with this report, SB shall remit to ArQule any payment due
for the applicable Royalty Period.

         8.2. METHOD AND CURRENCY OF PAYMENT. All amounts payable by SB to
ArQule under this Agreement shall be by check or wire transfer for immediately
available funds. All payments due to ArQule under this Agreement shall be
payable in United States dollars. Conversion of foreign currency to U.S. dollars
shall be made using the actual average exchange rates for such currency as used
by SB in producing its quarterly and annual accounts, as confirmed by SB's
auditors. Subject to Section 8.5, such payments shall be without deduction of
exchange, collection, or other charges. If by law, regulation, or fiscal policy
of a particular country, conversion into United States dollars or transfer of
funds of a convertible currency to the United States is restricted or forbidden,
SB shall give ArQule prompt written notice of such restriction, which notice
shall satisfy the payment deadlines in this Agreement. SB shall pay any amounts
due to ArQule through whatever lawful methods ArQule reasonably designates;
provided, however, that if ArQule fails to designate such payment method within
thirty (30) days after being notified of the restriction, SB may deposit such
payment in local currency to the credit of ArQule in a recognized banking
institution selected by SB and identified by written notice to ArQule, and such
deposit shall fulfill all obligations of SB to ArQule with respect to such
payment.

         8.3. LATE PAYMENTS. Any payment by SB that is not paid on or before the
date such payment is due under this Agreement shall bear interest, to the extent
permitted by law, at two

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

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

                                       21
<PAGE>   22
percentage points above the "Prime Rate" of interest as reported in the Wall
Street Journal on the date payment is due, with interest calculated based on the
number of days that payment is delinquent.

         8.4. RECORDS. SB shall maintain, and shall require its Affiliates and
other authorized sellers of Royalty-Bearing Products to maintain, complete and
accurate records of Royalty-Bearing Products made, used, or sold under this
Agreement, and any amounts payable to ArQule in relation to such Royalty-Bearing
Products, which records shall contain sufficient information to permit ArQule to
confirm the accuracy of any reports delivered to ArQule in accordance with
Section 8.1. SB shall retain such records relating to a given Royalty Period for
at least five (5) years after the conclusion thereof. ArQule shall have the
right, at its own expense, to cause an independent certified public accountant
reasonably acceptable to SB to inspect such records during normal business hours
for the sole purpose of verifying any reports and payments delivered under this
Agreement. The accountant shall conduct the audit at a date and time reasonably
acceptable to SB but not later than fifteen (15) business days after ArQule
notifies SB of the audit. Such accountant shall not disclose to ArQule any
information other than information relating to accuracy of reports and payments
delivered under this Agreement and shall provide SB with a copy of any report
given to ArQule. The parties shall reconcile any underpayment or overpayment
within sixty (60) days after the accountant delivers the results of the audit.
In the event that any audit performed under this Section reveals an underpayment
in excess of five percent (5%) in any Royalty Period, SB shall bear the full
cost of such audit. ArQule shall not exercise its audit right under this Section
more than once in any twelve-month period.

         8.5. WITHHOLDING AND SIMILAR TAXES. Any tax required to be withheld by
SB or any Affiliate or sublicensee of SB under the laws of any foreign country
for the account of ArQule under this Section 8 shall be promptly paid by SB or
said Affiliate or sublicensee for and on behalf of ArQule to the appropriate
governmental authority, and SB or said Affiliate or sublicensee shall furnish
ArQule with proof of payment of such tax together with official or other
appropriate evidence issued by the appropriate governmental authority sufficient
to enable ArQule to support a claim for income tax credit in respect of any sum
so withheld.

9.       DILIGENCE.

         9.1. DILIGENCE. SB shall use reasonable efforts to develop,
manufacture, market, and sell a Royalty-Bearing Product based on each Licensed
Compound Set in accordance with its scientific, medical, business and legal
judgment.

         9.2. STATUS REPORTS. SB will furnish ArQule with a brief [*****]
statement, within thirty (30) days after [*****] of each calendar year, that
describes the status of each Licensed Compound Set which remains under
development by SB as a Royalty-Bearing Product. After SB completes development
of a Royalty-Bearing Product, SB will promptly notify ArQule of the first
commercial sale of that Royalty-Bearing Product in each country. In addition, SB
agrees to

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

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

                                       22
<PAGE>   23
inform ArQule at least [*****] regarding the status of any SB Analog Compounds
that SB develops based on SB Analog Compounds developed by the parties under
this Agreement.

         9.3. RETURN OF ARQULE COMPOUNDS. For a period of [*****] after an
ArQule Compound is designated as a Licensed Compound under this Agreement, or
such longer period as ArQule is conducting a lead optimization project with
respect to such Licensed Compound, SB shall be deemed to comply with the
diligence requirements of Section 9.1. Thereafter, in the event that SB ceases
to use reasonable efforts to develop at least one Licensed Compound or Analog
Compound within a Licensed Compound Set as a Royalty-Bearing Product in
accordance with Section 9.1, including without limitation the cessation of
efforts to optimize such Licensed Compound Set prior to reaching Program Status
(other than for lack of diligence by ArQule), then (i) rights in any ArQule
Compounds within such Licensed Compound Set shall revert to ArQule, (ii) all
licenses granted to SB under this Agreement with respect to such ArQule
Compounds shall terminate, and (iii) SB shall assign to ArQule the ownership of
such ArQule Compounds and all SB Patent Rights and Joint Patent Rights in the
composition of such ArQule Compounds. Notwithstanding the foregoing, once SB
designates a Licensed Compound within a Licensed Compound Set as a Program
Status Compound, then the entire Licensed Compound Set will no longer be subject
to this Section 9.3.

10.      CONFIDENTIAL INFORMATION.

         10.1. DESIGNATION OF CONFIDENTIAL INFORMATION. Confidential Information
that is disclosed in writing or by electronic transmission which can be
converted into writing 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 thirty (30) days 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.

         10.2.    OBLIGATIONS.  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 its, and its
                  Affiliates, directors, officers, employees, consultants, and
                  advisors who are obligated to maintain the confidential nature
                  of such Confidential Information and who need to know such
                  Confidential Information for the purposes set forth in this
                  Agreement;

         (ii)     use all Confidential Information solely for the purposes set
                  forth in, or as permitted by, this Agreement; and

         (iii)    allow its directors, officers, employees, consultants, and
                  advisors 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.

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

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

                                       23
<PAGE>   24
         10.3. EXCEPTIONS. The obligations of the Receiving Party under Section
10.2. 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 the Confidential Information;

         (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 to the Disclosing Party with
                  respect to such Confidential Information; or

         (v)      is required to be disclosed 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.

         10.4. RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this
Agreement, at the request of the Disclosing Party, the Receiving Party shall
destroy or 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 Department solely for the purpose of monitoring its
obligations under this Agreement.

         10.5. SURVIVAL OF OBLIGATIONS. The obligations set forth in this
Section shall remain in effect for a period of [*****] years after
termination of this Agreement, except that the obligations of the Receiving
Party to destroy or return Confidential Information to the Disclosing Party
shall survive until fulfilled.

11.      PROPRIETARY MATERIALS.

         11.1. OWNERSHIP. SB acknowledges and agrees that the ArQule Compounds
and any other Proprietary Materials provided to SB and its Affiliates under this
Agreement are and shall remain the property of ArQule. ArQule acknowledges and
agrees that any SB Compounds and

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

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EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       24
<PAGE>   25
any other Proprietary Materials provided to ArQule under this Agreement are and
shall remain the property of SB. The foregoing notwithstanding, the parties
agree that ownership of any intellectual property rights in ArQule Analog
Compounds and SB Analog Compounds shall be determined in accordance with Section
6.

         11.2. RESTRICTIONS ON USE AND TRANSFER. SB shall use the ArQule
Compounds only for the purposes contemplated by this Agreement, and, except as
permitted under Section 5.2 above, shall not transfer the ArQule Compounds to
any third party without the prior written consent of ArQule. Except as expressly
permitted herein, SB shall not attempt to identify the ArQule Compounds in the
Mapping Array Libraries or Compass Array Libraries. ArQule shall use the SB
Compounds and SB Analog Compounds only for the purposes contemplated by this
Agreement, and shall not transfer the SB Compounds or any SB Analog Compounds to
any third party without the prior written consent of SB. In the case of
Proprietary Materials other than Compounds, the Recipient agrees to use such
Proprietary Materials only for the purposes indicated by the Provider, and shall
not transfer the Proprietary Materials to any third party without the prior
written consent of the Provider. The Recipient further agrees to inform its
employees and consultants about the proprietary nature of the Proprietary
Materials and to take reasonable precautions, at least as stringent as those
observed by the Recipient to protect its own Proprietary Materials, to ensure
that such employees and consultants observe the obligations of the Recipient
under this Article 11.

         11.3. DISPOSITION OF UNUSED MATERIALS. At the request of the Provider,
the Recipient will return or destroy any unused Proprietary Materials furnished
by the Provider; provided, however, that subject to Section 4.1.6(b), the
disposition of unused ArQule Compounds shall be made in accordance with Section
12.4.

         11.4. COMPLIANCE WITH LAW. The Recipient agrees to comply with all
federal, state, and local laws and regulations applicable to the use, storage,
disposal, and transfer of Proprietary Materials furnished by the provider,
including without limitation the Toxic Substances Control Act (15 USC 2601 et
seq.) and implementing regulations (in particular, 40 CFR 720.36 [Steering 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. The Recipient assumes sole responsibility for any
violation of such laws or regulations by the Recipient or any of its Affiliates.

         11.5. LIMITATION OF LIABILITY. Any Proprietary Materials delivered
pursuant to this Agreement are understood to be experimental in nature and may
have hazardous properties. The Recipient should assume that the materials are
dangerous and should use appropriate precautions. THE PROVIDER MAKES NO
REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE PROPRIETARY MATERIALS FURNISHED TO THE RECIPIENT.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. EXCEPT AS SET FORTH IN SECTION 7.6.4, THE PROVIDER DISCLAIMS
ANY WARRANTY, EXPRESS OR IMPLIED, THAT THE USE OF ANY PROPRIETARY MATERIALS WILL
NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY,
AND THE PROVIDER SHALL HAVE NO LIABILITY RELATING THERETO.

                                       25
<PAGE>   26
12.      TERM AND TERMINATION.

         12.1. TERM. This Agreement shall commence on the Effective Date and
shall remain in effect for a period of five (5) years, subject to extension by
agreement of the parties or pursuant to Subsection 4.2.5 or unless earlier
terminated as provided in this Article 12.

         12.2. MATERIAL BREACH. In the event that either party commits a
material breach of any of its obligations under this Agreement and such party
fails (i) to remedy that breach within sixty (60) days after receiving written
notice thereof from the other party or (ii) to commence dispute resolution
pursuant to Article 13, within sixty (60) days after receiving written notice of
that breach from the other party, the other party may immediately terminate this
Agreement upon written notice to the breaching party.

         12.3. 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.

         12.4. TERMINATION OF ACTIVITIES. In the event that all activities under
Article 4 have been completed or terminated prior to the five-year expiration of
the Agreement set forth in Section 12.1 above, including without limitation in
the event of early termination of all activities pursuant to Subsection 4.2.6.,
this Agreement shall automatically terminate.

         12.5. EFFECT OF TERMINATION. Termination of this Agreement shall not
relieve the parties of any obligation accruing prior to such termination. The
following provisions shall survive the expiration or termination of this
Agreement: Articles 6, 8, 9, 10, 11, 13, 14; Sections 5.2., 7.5., 7.6., 12.5.,
15.8., and 15.10.,. Notwithstanding the foregoing, if ArQule terminates this
Agreement pursuant to Section 12.2., then (i) SB shall have no further right to
screen or optimize ArQule Compounds pursuant to Article 4, or to develop and
commercialize Program Status Compounds and (ii) SB shall immediately return all
unused ArQule Compounds in a manner directed by ArQule.

13.      DISPUTE RESOLUTION.

         13.1. PROCEDURES MANDATORY. 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 13, 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
13 may be modified by written agreement of the parties. If either party fails to
observe the procedures of this Article 13, as modified by their written
agreement, the other party may bring an action for specific performance in any
court of competent jurisdiction.

                                       26
<PAGE>   27
         13.2.    DISPUTE RESOLUTION PROCEDURES.

                  13.2.1 NEGOTIATION. In the event of any dispute arising out of
or relating to this Agreement, the affected party shall notify the other party,
and the JSC shall attempt in good faith to resolve the matter, subject to the
approval of the senior management of both parties, within ten (10) days after
the date such notice is received by the other party (the "Notice Date"). Any
disputes not resolved by good faith discussions by the JSC shall be referred to
the Chief Executive Officer of ArQule and the Chairman of Research and
Development of SB, who shall meet at a mutually acceptable time and location
within thirty (30) days after the Notice Date and attempt to negotiate a
settlement.

                  13.2.2. MEDIATION. If the matter remains unresolved within
sixty (60) days after the Notice Date, or if the senior executives fail to meet
within thirty (30) days 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 ninety (90) days 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) 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 one hundred and twenty (120) days after the Notice Date.

                  13.2.3.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 Article 13.

         13.3. PRESERVATION OF RIGHTS PENDING RESOLUTION.

                  13.3.1. PERFORMANCE TO CONTINUE. Each party shall continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out 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.

                  13.3.2. PROVISIONAL REMEDIES. Although the procedures
specified in this Section 13 are the sole and exclusive procedures for the
resolution of disputes arising out of 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.

                  13.3.4. 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

                                       27
<PAGE>   28
procedures set forth in Subsections 13.2.1. and 13.2.2. are pending. The parties
shall take any actions necessary to effectuate this result.

14.      INDEMNIFICATION AND INSURANCE.

         14.1. INDEMNIFICATION. SB agrees to defend, indemnify and hold ArQule,
its Affiliates and their respective directors, officers, employees, and agents
(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 ArQule, its Affiliates, or their respective directors,
officers, employees, or agents as a result of any of the following: (i) actual
or asserted violations by SB or its Affiliates, sublicensees, or third party
manufacturers of any applicable law or regulation that relates to the
manufacture, distribution, or sale of any Royalty-Bearing Product, including
without limitation, any alleged or actual claim that such product was
adulterated, misbranded, or mislabeled; (ii) claims for bodily injury, death, or
property damage attributable to the manufacture, distribution, sale, or use by
SB or its Affiliates, sublicensees, or third party manufacturers of any
Royalty-Bearing Product; or (iii) a recall ordered by a governmental agency, or
required by a confirmed failure, of any Royalty-Bearing Product, that is
manufactured, distributed, or sold by SB, its Affiliates, sublicensees, or third
party manufacturers.

         14.2. PROCEDURE. The Indemnitees agree to provide SB with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. SB agrees, at its own expense,
to provide attorneys reasonably acceptable to ArQule to defend against any such
claim. The Indemnitees shall cooperate fully with SB in such defense and will
permit SB 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 SB, if representation of such
Indemnitee by the counsel retained by SB would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. SB agrees to keep ArQule informed of
the progress in the defense and disposition of such claim and to consult with
ArQule with regard to any proposed settlement.

         14.3. INSURANCE. SB shall maintain appropriate product liability
insurance or self-insurance with respect to development, manufacture, and sales
of Royalty-Bearing Product in such amount as SB customarily maintains with
respect to sales of its other products. SB shall each maintain such insurance
for so long as it continues to manufacture or sell such products, and thereafter
for so long as SB maintains insurance for itself covering such manufacture or
sales.

15.      MISCELLANEOUS.

         15.1. PUBLICITY. Neither party shall reveal the terms of this Agreement
or use the name of the other party in connection with any promotional statements
to the public about the work performed under this Agreement or the relationship
between the parties, whether in a press release, advertisement, promotional
sales literature, or other promotional oral or written statements, without the
prior written approval of the other party, which consent shall not be

                                       28
<PAGE>   29
unreasonably withheld or delayed, except for restatements of previously-approved
statements and disclosures required by applicable law or regulation.

         15.2. 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 otherwise authorized in writing.

         15.3. REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants to the other party (i) that it has the legal right, power, and
authority to enter into this Agreement, to extend the rights and licenses
granted to the other party in this Agreement, and to fully perform its
obligations under this Agreement, and (ii) that the performance of such
obligations will not conflict with its charter documents or any agreements,
contracts, or other arrangements to which it is a party. In the event that a
party becomes aware that any of its representations and warranties under this
Section 15.3 become untrue during the term of this Agreement, such party shall
immediately furnish the other party with written notice which describes the
facts in reasonable detail.

         15.4. 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.

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

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

         15.7. ASSIGNMENT. Neither party may assign this Agreement without the
prior written consent of the other party, except that a party may assign this
Agreement to an Affiliate or 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.

         15.8. 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:

                                       29
<PAGE>   30
         If to SB:

                           SmithKline Beecham Pharmaceuticals
                           709 Swedeland Road
                           P.O. Box 1539
                           King of Prussia, PA 19406-0939
                           Attn: Alliance Management
                           Tel:     610-270-4800
                           Fax:     610-270-5964

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

                           SmithKline Beecham Corporation
                           One Franklin Plaza
                           P.O. Box 7929
                           Philadelphia, PA  19101
                           Attn:    US General Counsel
                           Tel:     215-7514000
                           Fax:     215-751-3935

         If to ArQule:
                           ArQule, Inc.
                           19 Presidential Way
                           Woburn, MA  01801-5140
                           Attn:  President
                           Tel: (781) 994-0300
                           Fax: (781) 994-0676

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

                           ArQule, Inc.
                           19 Presidential Way
                           Woburn, MA  01801-5140
                           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 15.8.

         15.9. 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.

                                       30
<PAGE>   31
         15.10. 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.

         15.11 HART-SCOTT-RODINO ACT. If required by law, the parties shall, at
their own expense, prepare and make appropriate filings under Title II of the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules
and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as
soon as reasonably practicable. The parties shall co-operate in the antitrust
clearance process and agree to furnish promptly to the FTC and the Antitrust
Division of the Department of Justice any additional information reasonably
requested by them in connection with such filings.

         15.12. 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.

         15.13. 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.

                                       31
<PAGE>   32
         IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as a sealed instrument effective as of the date first above
written.

SMITHKLINE BEECHAM CORPORATION

By:      /s/ Authorized Officer
   -----------------------------------------
Name:
Title:

ARQULE, INC.

By:      /s/ Stephen A. Hill, M.D.
   -----------------------------------------
Stephen A. Hill, M.D.
President and Chief Executive Officer

                                       32
<PAGE>   33
                                   Schedule A

                                    [*****]

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

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

                                       33
<PAGE>   34
                                   Schedule B

                                    [*****]

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

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

                                       34
<PAGE>   35
                                   Schedule C

                                    [*****]

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

                                       35

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