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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarter Ended June 30, 2004

Commission File No. 000-21429

ArQule, Inc.

19 Presidential Way, Woburn, Massachusetts 01801

(Registrant’s Telephone Number, including Area Code)

      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

      Number of shares outstanding of the registrant’s Common Stock as of August 3, 2004:

ARQULE, INC.

QUARTER ENDED JUNE 30, 2004

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ARQULE, INC.

The accompanying notes are an integral part of these unaudited financial statements.

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ARQULE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these unaudited financial statements.

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ARQULE, INC.

The accompanying notes are an integral part of these unaudited financial statements.

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ARQULE, INC.

      We are a biotechnology company engaged in the research and development of small molecule cancer therapeutics based on a novel biological approach to cancer, our Activated Checkpoint Therapy^SM (ACT^SM) platform, and our expertise in small molecule chemistry and intelligent drug design. We also provide fee-based services to pharmaceutical companies and biotechnology companies, using our chemistry based technology and expertise to attract collaborators. We have an experienced and highly qualified scientific and management team that can apply our chemistry technology platform to produce compounds that have medicinal attributes.

      We are subject to risks common to companies in the biotechnology, pharmaceutical, medical services and diagnostics industries, including but not limited to, development by the Company or our competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with governmental regulation.

      We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. These consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2003 included in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004. The unaudited consolidated financial statements include, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position as of June 30, 2004, and the results of our operations for the three months and six months ended June 30, 2004 and June 30, 2003 and cash flows for the six months ended June 30, 2004 and June 30, 2003. The results of operations for such interim periods are not necessarily indicative of the results to be achieved for the full year.

      Comprehensive income/(loss) is comprised of net income/(loss) and other comprehensive income. Other comprehensive income includes certain changes in stockholders’ equity that are excluded from net income/(loss), including unrealized gains and losses on our available-for-sale securities and interest rate swaps and foreign currency translation amounts. Comprehensive income/(loss) for the three and six months end June 30, 2004 and June 30, 2003 were as follows (in thousands):

      In the first quarter of 2004, we implemented a restructuring to shift resources from our chemical technologies business to our internal cancer therapy research. The restructuring included the termination of 53

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      Year-to-date activity against the restructuring accrual (which is included in accrued liabilities in the Consolidated Balance Sheet) was as follows (in thousands):

      As of June 30, 2004, substantially all employee terminations are complete and all remaining termination benefits will be paid by September 30, 2004. Facility costs will be paid out through the remaining lease term of the California facility, which extends through 2010, unless we are able to offset such costs by subleasing the facility or settling our leasehold position by paying to the landlord a lump-sum payment on favorable terms.

      The computations of basic and diluted net income/(loss) per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include stock options. Options to purchase 4,502,515 shares of common stock were not included in the computations of diluted net loss per share for the three and six months ended June 30, 2004 because inclusion of such shares would have an anti-dilutive effect on net loss per share.

      We apply APB No. 25 and related interpretations in accounting for option grants under the Company’s stock option plans. Had compensation cost been determined based on the estimated fair value of options at the grant date consistent with the provisions of SFAS No. 123, our pro forma net income/(loss) and pro forma basic and diluted net income/(loss) per share would have been as follows for the three and six months ended June 30, 2004 and 2003 (in thousands, except per share data):