HYSEQ INC
EXHIBIT 10.16
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>6
<FILENAME>f79510ex10-16.txt
<DESCRIPTION>EXHIBIT 10.16
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.16



                      COLLABORATION AND LICENSE AGREEMENT


        THIS COLLABORATION AND LICENSE AGREEMENT (the "Agreement") is made as of
June 29, 2001 (the "Effective Date") by and between AURORA BIOSCIENCES
CORPORATION, a Delaware corporation ("Aurora"), and HYSEQ, INC., a Nevada
corporation ("Hyseq").

                                    RECITALS

        WHEREAS, Aurora and Hyseq wish to enter into a collaboration to (i)
screen proteins within Hyseq's [***] protein [***] collection using Aurora's
proprietary CellSensor(TM) panel (the "CellSensor Panel") to identify OSPs of
interest as potential therapeutics, (ii) generate information that enhances the
utility of Hyseq's cDNA collection and database, and (iii) develop assays for
and screen, potentially novel drug targets selected from Hyseq's cDNA collection
with small molecule compounds of interest; and

        WHEREAS, Aurora wishes to grant to Hyseq, and Hyseq wishes to obtain
from Aurora, a non-exclusive license under the Aurora Patents and Stanford
Patents (both defined below) on the terms and subject to the conditions set
forth herein.

        NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements contained herein, the parties hereby agree as
follows:

                                    AGREEMENT

                                    ARTICLE 1
                                   DEFINITIONS

        1.1 "ACTIVE CLONING POOL" means up to [***] cDNA sequences selected by
[***] from the Hyseq Gene Sequences which are being [***] at any given time
under the Target Program.

        1.2 "AFFILIATE" means an individual, trust, business trust, joint
venture, partnership, corporation, association or any other entity which owns,
is owned by or is under common ownership with, a party. For the purposes of this
definition only, the term "owns" (including, with correlative meanings, the
terms "owned by" and "under common ownership with") as used with respect to any
party, will mean the possession (directly or indirectly) of more than 50% of the
outstanding voting securities of a corporation or comparable equity interest in
any other type of entity.

        1.3 "AURORA ASSAY" means any assay that is developed and validated by
Aurora under the Collaboration and that incorporates [***] or more Hyseq
Targets.

        1.4 "AURORA COMPOUND LIBRARY" means the collection of compounds owned
by, or licensed to Aurora during the Term, and [***] thereof.

        1.5 "AURORA MUTANT GFP" means any mutant [***] fluorescent protein, or
any polynucleotide encoding any mutant [***] fluorescent protein, which is
covered by the Aurora


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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Patents or the Stanford Patents, and which is (i) supplied by Aurora, (ii)
supplied by a bona fide licensee of Aurora licensed under the Aurora Patents or
the Stanford Patents to sell Aurora Mutant GFP, or (iii) internally developed by
Hyseq.

        1.6 "AURORA PATENTS" means the patents and patent applications listed on
Exhibit A, which is attached hereto and incorporated herein by reference, and
any continuations, divisions, reissues, extensions or continuations-in-part with
respect thereto, and all United States patents issuing therefrom.

        1.7 "AURORA PRODUCT" means (i) any small molecule compound, or analog or
derivative thereof, which is identified, developed or discovered by Aurora as
active against a Hyseq Target using an Aurora Assay, and pursued and developed
for that Hyseq Target, or (ii) any small molecule compound, or analog or
derivative thereof, that is determined [***] under the Collaboration to affect
the activity of (1) an [***], or (2) an [***].

        1.8 "AURORA TECHNOLOGY" means any of the polynucleotides listed on
Exhibit C, which is attached hereto and incorporated herein by reference, and
Aurora's proprietary technical manual for use of the same.

        1.9 "BLA" means a Biologics License Application filed pursuant to the
requirements of the FDA, or the equivalent application in any other country or
jurisdiction.

        1.10 "COLLABORATION" means the activities of the parties carried out in
performance of, and the relationship between the parties established by, this
Agreement.

        1.11 "COLLABORATION PERIOD" means the period beginning on the Effective
Date and ending upon the later of: (i) two years thereafter, or (ii) [***]
following (1) receipt by Aurora of the final batch of OSPs for screening, (2)
Hyseq's selection of the final OSP for creation of a Data Package, or (3)
Aurora's receipt of the final Hyseq Target, or (iii) such other period
established by mutual written agreement of the parties.

        1.12 "COMMERCIALLY REASONABLE AND DILIGENT EFFORTS" means, unless the
parties agree otherwise in writing, [***].

        1.13 "CONFIDENTIAL INFORMATION" means any proprietary, confidential or
trade secret information of a party disclosed during the Term and identified as
Confidential, including, without limitation, the terms of this Agreement and
information relating to any use, process, method, compound, research project,
work in process, future development, scientific, engineering, manufacturing,
marketing, business plan, financial or personnel matter relating to the
disclosing party, its present or future products, sales, suppliers, customers,
employees, investors or business, whether in oral, written, graphic or
electronic form. The Hyseq Gene Sequences, the Hyseq Targets and Hyseq's
proprietary OSP collection will be considered Confidential Information of Hyseq
under this Agreement, regardless of whether identified as Confidential.
Notwithstanding the foregoing, Confidential Information will not include any
information which the receiving party can prove by contemporaneous evidence:


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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               (a) is now, or hereafter becomes, through no act or failure to
act on the part of the receiving party, generally known or available to Third
Parties;

               (b) is known by the receiving party at the time of receiving such
information, as evidenced by its records;

               (c) is hereafter furnished to the receiving party by a Third
Party, as a matter of right and without restriction on disclosure;

               (d) is independently developed by the receiving party, as
evidenced by its records, without knowledge of, and without the aid, application
or use of, the disclosing party's Confidential Information; or

               (e) is the subject of a written permission to disclose provided
by the disclosing party.

        1.14 "CONTROL" means possession of the ability of either party to grant
a license or sublicense to the other party as provided for herein without
violating the terms of any agreement or other arrangement with any Third Party.

        1.15 "DATA PACKAGE" means all data and results obtained by Aurora from
screening an OSP, including, without limitation, information described on
Exhibit D, which is attached hereto and incorporated herein by reference,
relating to [***].

        1.16 "EXCLUDED FIELD" means any activities outside the Field, including,
but not limited to: (i) providing services to Third Parties; (ii) the use of
[***]; (iii) transfer to a Third Party of any product, process, method,
composition of matter and/or biological material covered under the Aurora
Patents or the Stanford Patents or incorporating the Aurora Technology; (iv) any
non-pharmaceutical research; (v) [***] of chemicals (e.g. proteins or small
molecules); (vi) [***] of chemicals (e.g. proteins or small molecules); (vii)
diagnostics; (viii) use of [***]; (ix) use in or with [***] (including [***]
cells); or (x) detection of [***]. In addition, the Stanford Patents may not be
practiced in the field of [***].

        1.17 "EXCLUSIVITY PERIOD" means, for each Hyseq Target, the period
beginning on receipt by Aurora of such Hyseq Target, and ending [***]
thereafter, unless extended in accordance with Section 5.4 (a).

        1.18 "FDA" means the United States Food and Drug Administration.

        1.19 "FIELD" means internal use of Aurora Mutant GFP (i) to perform
[***], and (ii) to create [***] for basic research (e.g., [***]).

        1.20 "FIRST COMMERCIAL SALE" means the first sale for use or consumption
of a Product. Sale to a sublicensee will not constitute a First Commercial Sale
unless the sublicensee is the end user of such Product.

        1.21 "GFP MATERIALS" means Materials that contain Aurora Mutant GFP.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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        1.22 "HYSEQ GENE SEQUENCES" mean [***] gene sequences from Hyseq's cDNA
database, which are identified using criteria determined jointly by Aurora and
Hyseq scientists, and which are provided by Hyseq to Aurora under the
Collaboration. [***].

        1.23 "HYSEQ PATENTS" means all patents or patent applications, and any
continuations, continuations-in-part, divisions, reissues, substitutes, renewals
or extensions thereof, and all patents issuing therefrom, which claim any Hyseq
Targets, OSPs or OSP Receptors and which are under the Control of Hyseq during
the Term.

        1.24 "HYSEQ PRODUCT" means (i) any of the OSPs provided to Aurora by
Hyseq and screened under the Collaboration by Aurora and active in Aurora's
CellSensor Panel, as disclosed to Hyseq hereunder, or any mutation, fragment,
analog or derivative of such OSPs, (ii) any other product identified, discovered
or developed [***] under the OSP Program, such as [***], or (iii) any biological
product identified, discovered or developed [***] under the Target Program, such
as [***].

        1.25 "HYSEQ TARGET" means an [***] protein or cloned and sequence
verified full-length cDNA, which is selected by [***] from the Active Cloning
Pool and provided to Aurora by Hyseq.

        1.26 "IMPROVEMENTS" means [***].

        1.27 "JOINT INVENTIONS" has the meaning set forth in Article 7.

        1.28 "JOINT RESEARCH AND DEVELOPMENT COMMITTEE" or "JRDC" means the
committee established pursuant to Section 2.1.

        1.29 "LICENSE PERIOD" means the period beginning on the Effective Date
and ending [***] thereafter, unless extended by mutual written agreement.

        1.30 "MATERIALS" means any reagents, promoters, enhancers, vectors,
plasmids, genes, polynucleotides, cells, proteins and fragments thereof,
peptides, antigens, antibodies, antagonists, agonists, inhibitors and chemicals.

        1.31 "NDA" means a New Drug Application filed pursuant to the
requirements of the FDA, or the equivalent application in any other country or
jurisdiction.

        1.32 "NET SALES" means, with respect to any Product, the gross amount
invoiced by either party or any of its sublicensees on sales or other transfers
of such Product, less [***]. If either party distributes a Product to any of its
sublicensees for end use by such sublicensee, then such distribution will be
considered a sale at list price normally charged to an independent Third Party
and the other party will be entitled to collect a royalty on such sale in
accordance with Section 5.1(g) or Section 5.2(f), as applicable, so long as no
royalty is applied to future resales. Such amounts will be determined from the
books and records of the party distributing such Product and/or its
sublicensees, such books and records being maintained in accordance with GAAP.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

        1.33 "OSPS" means any gene sequence, including [***] to encode a protein
or peptide [***] to be expressed in either membrane-bound or secreted form that
is provided to Aurora by Hyseq for screening and evaluation under the
Collaboration.

        1.34 "OSP PROGRAM" has the meaning set forth in Section 3.2.

        1.35 "OSP RECEPTORS" mean a receptor of an OSP, identified under the
Collaboration.

        1.36 "PHASE I" means that portion of the clinical development program
which generally provides for the first introduction into humans of a Product
with the primary purpose of determining safety, metabolism, pharmacokinetic
properties and clinical pharmacology of the Product, as more specifically
defined by the rules and regulations of the FDA and corresponding rules and
regulations in other countries or jurisdictions.

        1.37 "PHASE III" means that portion of the clinical development program
which provides for the continued trials of a Product on sufficient numbers of
patients to establish the safety and efficacy of a Product for the desired
claims and indications, as more specifically defined by the rules and
regulations of the FDA and corresponding rules and regulations in other
countries or jurisdictions.

        1.38 "PRIMARY SCREENING" means use of an Aurora Assay to determine
potential therapeutic or pharmaceutical activity or efficacy of compounds in the
Aurora Compound Library.

        1.39 "PRODUCT" means an Aurora Product or a Hyseq Product, as
applicable.

        1.40 "RESEARCH PROGRAMS" means the OSP Program and the Target Program.

        1.41 "ROYALTY TERM" means, for the convenience of the parties, the
period of time commencing on the First Commercial Sale of a Product in any
country and ending upon the later of [***] the expiration of the last to expire
patent covering such Product in such country.

        1.42 "SECONDARY SCREENING" means the (i) [***] of compounds identified
as [***] in Primary Screening and/or (ii) the screening of compounds identified
as active in Primary Screening against a [***] Hyseq Target to determine [***].

        1.43 "STANFORD AGREEMENT" means that certain exclusive license agreement
between Aurora and The Board of Trustees of the Leland Stanford Junior
University ("Stanford") dated April 25, 1998.

        1.44 "STANFORD LICENSED PRODUCT" means any product or process, or part
thereof, in the Field, or whose manufacture, use or sale is covered by a valid
claim of an issued, unexpired Stanford Patent and will be presumed to be valid
unless and until it has been held to be invalid by a final judgment of a court
of competent jurisdiction from which no appeal can be or has been taken.

        1.45 "STANFORD PATENTS" means the U.S. patents and applications listed
on Exhibit B, attached hereto and incorporated herein by reference, and
continuations, divisions, reissues,


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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extensions or continuations-in-part with respect thereto, and all United States
patents issuing therefrom.

        1.46 "TARGET PROGRAM" has the meaning set forth in Section 3.3.

        1.47 "TERRITORY" means [***].

        1.48 "TERM" has the meaning set forth in Section 10.1.

        1.49 "THIRD PARTY" means any entity other than Aurora or Hyseq.

                                    ARTICLE 2
                    JOINT RESEARCH AND DEVELOPMENT COMMITTEE

        2.1 FORMATION. Within 30 days after the Effective Date, the parties will
establish a joint research and development committee (the "JRDC"). The JRDC will
consist of two senior scientists and one business representative designated by
Aurora and two senior scientists and one business representative designated by
Hyseq. Either party may appoint substitute or replacement members of the JRDC to
serve as their representatives upon notice to the other party. The JRDC will
have the responsibility and authority to (a) manage the Research Programs, (b)
assign tasks and responsibilities under the Research Programs consistent with
the terms of this Agreement to Aurora and Hyseq, respectively, and (c) review
and modify the Research Programs, as it deems appropriate to achieve the
parties' objectives under this Agreement.

        2.2 MEETINGS. The JRDC will meet at least once per quarter at locations
and times to be determined by the JRDC, with the intent of meeting at
alternating locations in San Diego, California and Sunnyvale, California or by
tele- or video-conference. Each party will bear all travel and related costs for
its representatives. On an alternating basis, a party will promptly prepare and
deliver to the members of the JRDC minutes of such meetings for review and
approval of the parties.

        2.3 DECISION-MAKING PROCESS. Each party will have [***] on the JRDC, and
decisions by the JRDC will be made [***]. [***] disagreement [***] will be
resolved within the JRDC based on the efficient achievement of the objectives of
this Agreement. Any disagreement, which cannot be resolved by the JRDC, will be
referred to the appropriate chief executive officers of Aurora and Hyseq for
resolution. It is the intent of the parties to resolve issues through the JRDC
whenever possible and to refer issues to the officers of Aurora and Hyseq only
when resolution through the JRDC cannot be achieved, however, this shall not in
any event limit or waive any other rights or remedies otherwise available to the
parties.

                                    ARTICLE 3
           SCOPE OF COLLABORATION; ACTIVITIES UNDER THE COLLABORATION

        3.1 OBJECTIVES; LIMITATIONS. During the Collaboration Period, Aurora
will have [***] for the activities described in Sections 3.2(a) and 3.3(a), and
Hyseq will have [***] for the activities described in Section 3.2(b) and 3.3(b).
Except as specifically provided herein, all activities of the parties outside of
the Collaboration are outside of the scope of this Agreement,


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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and nothing contained herein is intended to limit either party from using any
intellectual property Controlled by such party for other purposes.

        3.2 OSP PROGRAM. During the Collaboration Period, Aurora and Hyseq will
conduct research and development of Hyseq Products pursuant to a detailed
research and development program (the "OSP Program"), a copy of which is
attached hereto and incorporated herein by reference as Exhibit D. Any
inconsistency between the provisions in this Agreement and Exhibit D will be
resolved in favor of the main body of this Agreement.

               (a) AURORA CONTRIBUTIONS. Aurora will (i) use its CellSensor
Panel to screen a minimum of [***] OSPs during each year of the Collaboration
Period (but no more than a total of [***] OSPs during the Collaboration Period),
(ii) provide all such initial screening data to Hyseq within [***] after
delivery of such OSPs to Aurora, and (iii) provide to Hyseq a Data Package for
each OSP selected by Hyseq based on such initial screening data, within [***]
following receipt of written notice from Hyseq of its desire to receive a Data
Package for such OSP.

               (b) HYSEQ CONTRIBUTIONS. During the Collaboration Period, Hyseq
(i) will provide to Aurora between [***] and [***] full-length cDNAs from its
OSP collection of [***] gene sequences for screening using Aurora's CellSensor
Panel, delivered in an initial block of [***] OSPs and minimum blocks of [***]
OSPs thereafter, and (ii) upon review of the initial screening data, will select
a minimum of [***] OSPs during the Collaboration Period for which Hyseq desires
to receive Data Packages from Aurora and will provide Aurora written notice of
such selection. Hyseq will own the Data Packages and they will be Confidential
Information of Hyseq hereunder, regardless of whether they have been identified
as such.

        3.3 TARGET PROGRAM. During the Collaboration Period, Aurora and Hyseq
will conduct research and development of Aurora Products pursuant to a detailed
research and development program (the "Target Program"), a copy of which is
attached hereto and incorporated herein by reference as Exhibit E. Any
inconsistency between the provisions in this Agreement and Exhibit E will be
resolved in favor of the main body of this Agreement.

               (a) AURORA CONTRIBUTIONS. Aurora will (i) develop between [***]
and [***] Aurora Assays during each year of the Collaboration Period using up to
[***] Hyseq Targets chosen by Aurora, (ii) screen the Aurora Assays during the
Collaboration Period against [***] compounds from the Aurora Compound Library,
and (iii) provide to the JRDC, all data and results generated by Aurora during
the Collaboration Period (other than [***]) and, (iv) if reasonably requested by
Hyseq, the [***] of compounds identified by Aurora in Primary Screening and
confirmed in Secondary Screening [***], or as agreed to by the parties
hereunder. Aurora will provide to the JRDC any additional data or results which
identify or correct inaccuracies in or conflicts between previous data and
results provided by Aurora to the JRDC under this Section 3.3(a). Aurora will
own all data and results generated by Aurora under the Target Program and hereby
grants to Hyseq the non-exclusive, non-transferable right to use the same to
support the prosecution of patent applications on Hyseq Targets. Such data and
results will be considered Confidential Information of Aurora hereunder,
regardless of whether it has been identified as Confidential Information,
however Hyseq is entitled to use such Confidential Information in accordance
with the terms of this Agreement.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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 Aurora will notify Hyseq in writing [***] after which Hyseq will have the right
to use such information to support the prosecution of patent applications on
Hyseq Targets. Notwithstanding the foregoing, Aurora retains the right to file
patent applications covering the [***].

               (b) HYSEQ CONTRIBUTIONS. Hyseq (i) will provide Aurora access to
the Hyseq Gene Sequences from which Aurora, with Hyseq's support and assistance,
will during the Collaboration Period, select and prioritize members of the
Active Cloning Pool, from which Hyseq will clone Hyseq Targets for the Target
Program, (ii) will deliver to Aurora from the Active Cloning Pool full-length,
sequence-verified cDNAs for between [***] and [***] Hyseq Targets during each
year of the Collaboration Period, for a total of at least [***] and up to [***]
Hyseq Targets during the Collaboration Period; provided, however, that Hyseq
will be required to provide no more than [***] Hyseq Targets to Aurora in any
given month, and (iii) will regularly provide Aurora and the JRDC, access to
[***], as well as any other relevant and unrestricted biological data in Hyseq's
Control all of which is Confidential Information of Hyseq, regardless of whether
it is identified as such, during the Collaboration Period, unless otherwise
extended for up to two additional years pursuant to Section 5.4(b) for use in
Aurora's selection of Hyseq Targets and the development of Aurora Products. Any
Hyseq Target delivered to Aurora under Section 3.3(b)(ii) above will be removed
from the Active Cloning Pool and may be replaced at Aurora's election in the
Active Cloning Pool with another gene sequence from the Hyseq Gene Sequences
selected by Aurora.

        3.4 COMMERCIALLY REASONABLE AND DILIGENT EFFORTS. Each party will use
Commercially Reasonable and Diligent Efforts to perform its responsibilities
under the Research Programs.

        3.5 AVAILABILITY OF RESOURCES; COOPERATION. Each party will maintain
laboratories, offices and/or other facilities reasonably necessary to carry out
the activities to be performed by such party pursuant to the Research Programs.
Unless otherwise agreed to in writing by Hyseq, Aurora will perform all of its
obligations under the OSP Program and the Target Program at [***]. Upon
reasonable advance notice, each party agrees to make its employees, agents and
consultants reasonably available at their respective places of employment to
consult with the other party during the Collaboration Period on issues arising
during the Collaboration and in connection with any request from any regulatory
agency, including, without limitation, regulatory, scientific, technical and
clinical testing issues

        3.6 DISCLOSURE; REPORTS. During the Collaboration Period, each party
will share all research data and results with the other party relating to the
Research Programs promptly after such data and results become available. During
the Collaboration Period, the parties will exchange, at a minimum, [***] written
reports presenting a meaningful summary of the activities performed and the
results obtained by such party pursuant to the Research Programs. In addition,
on reasonable request by either party, the other party will [***] to inform such
party of the details of the work performed under this Agreement. Information
disclosed by either party to the other party pursuant hereto may include
Confidential Information of the disclosing party and, whether Confidential
Information or not, may be used only in accordance with the rights granted under
Article 4 and Article 5 of this Agreement.



CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    ARTICLE 4
                                GRANT OF LICENSES

        4.1 NON-EXCLUSIVE LICENSE UNDER THE AURORA PATENTS. Subject to the terms
and conditions of this Agreement, Aurora hereby grants to Hyseq a non-exclusive,
non-transferable license under the Aurora Patents to make, use and import Aurora
Mutant GFP and Improvements made by Aurora during the License Period in the
Territory for use in the Field during the License Period.

        4.2 NON-EXCLUSIVE LICENSE UNDER THE STANFORD PATENTS. Subject to the
terms and conditions of this Agreement, Aurora hereby grants to Hyseq a
non-exclusive, non-transferable license under the Stanford Patents to make, use
and import Aurora Mutant GFP and Improvements made by Aurora during the License
Period in the Territory for use in the Field during the License Period.

        4.3 NON-EXCLUSIVE LICENSE TO AURORA TECHNOLOGY. Subject to the terms and
conditions of this Agreement, Aurora hereby grants to Hyseq a non-exclusive,
non-transferable license to make, use and import the Aurora Technology and
Improvements made by Aurora during the License Period in the Territory for use
in the Field during the License Period.

        4.4 LIMITATIONS. Except as otherwise expressly provided in this
Agreement, nothing in this Agreement is intended to convey or transfer ownership
by either party to the other party of any rights, title or interest in any
Confidential Information, patent rights, copyrights, trade secrets or other
intellectual property rights owned or Controlled by such party. Except as
expressly provided for in this Agreement, nothing in this Agreement will be
construed as a license or sublicense by either party to the other party of any
patent rights, copyrights, trade secrets or other intellectual property rights
owned or Controlled by such party. Aurora retains all rights that are not
expressly licensed by Aurora to Hyseq hereunder, including without limitation,
right to any Improvements made by Aurora during the License Period. Hyseq
retains all rights that are not expressly licensed by Hyseq to Aurora hereunder,
including, without limitation, rights to any Improvement made by Hyseq during
the License Period, and any products resulting from Hyseq's activities with
Aurora Mutant GFP and Improvements. Notwithstanding anything contained herein to
the contrary, the license rights granted to Hyseq in Sections 4.1, 4.2 and 4.3
do not include (a) the right to grant sublicenses, (b) the right to conduct any
activities outside the Field or outside the Territory under the Aurora Patents
or the Stanford Patents or with the Aurora Technology, (c) the right to transfer
any Material containing Aurora Technology (or any portion thereof) to any Third
Party, other than to an Affiliate of Hyseq, or (d) the right to conduct
activities within the Excluded Fields under the Aurora Patents or the Stanford
Patents or with the Aurora Technology.

        4.5 IMPROVEMENTS. Hyseq hereby grants to Aurora a worldwide, fully paid,
perpetual, non-exclusive license, including the right to grant sublicenses, to
make, have made, use, offer for sale, sell and import any Improvements made by
Hyseq during the License Period. Each party will promptly notify the other party
of the reduction to practice of such Improvements. Each party, to the extent it
has Control, will provide to the other party any tangible Materials related to
Improvements made by such party during the License Period. For clarity, Aurora
is [***] Improvements to Hyseq that were [***].


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

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        4.6 SERVICE. Aurora will prepare, aliquot and deliver the Aurora
Technology to Hyseq within 30 days after the Effective Date in the quantities
described on Exhibit C, and will offer Hyseq technical support in the use of
Aurora Technology through its help line. In the event of [***].

        4.7 LICENSE FOR TARGETS. Hyseq owns the Hyseq Targets and subject to the
terms and conditions of this Agreement, Hyseq hereby grants to Aurora a
worldwide license, including the right to grant sublicenses as set forth below,
under the Hyseq Patents to use the Hyseq Targets to identify, discover, develop,
make, have made, use, offer for sale, sell and import Aurora Products. With
respect to each Hyseq Target, such license will be exclusive during the
Exclusivity Period and will become non-exclusive thereafter; provided, however,
unless extended pursuant to Section 5.4(a), if Aurora (a) fails to develop an
Aurora Assay within [***] after receipt of the cDNA for a Hyseq Target, the
exclusive license for such Hyseq Target will terminate, or (b) fails to complete
Primary Screening and Secondary Screening of a Hyseq Target within [***] after
receipt of the cDNA for such Hyseq Target, then the exclusive license for such
Hyseq Target becomes a non-exclusive license for the Term of this Agreement;
provided further that, Aurora will not have the right to grant sublicenses under
a non-exclusive license until [***]. In no event does Aurora have the right to
license the Hyseq Targets on a stand-alone basis, independently from Aurora
technology or an Aurora Product. Aurora [***], and will notify Hyseq of each
sublicensee granted a license within (30) days after execution of each
sublicense agreement hereunder.

        4.8 RIGHTS TO OSPS. Hyseq owns and will own all right, title and
interest in and to any and all OSPs, provided by Hyseq to Aurora under the OSP
Program, including all rights to any data generated by Aurora from screening
such OSPs under the OSP Program, including, without limitation, the Data
Packages.

        4.9 RIGHTS TO OSP RECEPTORS. Aurora will notify Hyseq in writing of its
desire to clone any OSP Receptor. Within [***] following receipt of such notice,
Hyseq will notify Aurora in writing of (i) the exercise of its option under
Section 5.3(c) to have Aurora clone such OSP Receptors, or (ii) that it is or
plans to clone such OSP Receptor on its own or with a Third Party. If Hyseq
provides written notice that it is exercising its option under Section 5.3(c)
within such [***] period, then Hyseq will own all right, title and interest in
and to any such OSP Receptor. If Hyseq notifies Aurora that it is or will clone
such OSP Receptor on its own, or with a Third Party, then Aurora will not
attempt to clone the OSP Receptor with an OSP provided by Hyseq. If Hyseq
notifies Aurora in writing that it does not wish to exercise its option or is
not or does not plan to clone such OSP Receptors and gives Aurora permission to
clone such OSP Receptor, or if Hyseq fails to notify Aurora in writing of the
exercise of the option or that it is or will clone such OSP Receptor within such
[***] period, then, Aurora will have the right to attempt to clone such OSP
Receptor and will own all right, title and interest in and to such OSP Receptors
cloned. Subject to the terms and conditions of this Agreement, Aurora hereby
grants to Hyseq a worldwide, non-exclusive, non-transferable license to use any
such cloned OSP Receptor to identify, discover, develop, and commercialize Hyseq
Products. Subject to the terms and conditions of this Agreement, Hyseq hereby
grants to Aurora a worldwide, non-exclusive, non-transferable license, during
the Term, under the Hyseq Patents to use the specific OSP


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

necessary to clone a corresponding OSP Receptor as indicated herein and to use
such OSP that forms the OSP/OSP Receptor pair with any cloned OSP Receptor owned
by Aurora hereunder pursuant to 4.9(b) to, during the Term, (i) develop such
cloned OSP Receptor into assays and (ii) screen such OSP Receptor to identify,
develop and commercialize Aurora Products.

                                    ARTICLE 5
                          PAYMENT OBLIGATIONS; OPTIONS

        5.1 PAYMENTS TO AURORA.

               (a) LICENSE FEE. In consideration for the licenses granted to
Hyseq under Section 4.1, 4.2 and 4.3, Hyseq will pay to Aurora a non-creditable,
non-refundable license fee of [***] payable as follows: [***] within 10 days
after the Effective Date and [***] upon [***] of the Effective Date.

               (b) TECHNOLOGY ACCESS FEE. In consideration for the service of
the preparation and delivery of the Aurora Technology to Hyseq under Section
4.6, Hyseq will pay to Aurora a non-creditable, non-refundable technology access
fee of [***] within [***] after delivery of the Aurora Technology to Hyseq.

               (c) SCREENING OF OSPS. In consideration for screening OSPs under
the Collaboration, Hyseq will pay to Aurora a non-creditable, non-refundable
payment of [***] for each OSP screened by Aurora under the Collaboration. Such
payments will be calculated and reported for each calendar quarter during the
Collaboration Period. All payments due under this Section 5.1(c) will be paid
within [***] after the end of each calendar quarter.

               (d) DATA PACKAGES. In consideration for providing Data Packages
to Hyseq under the Collaboration, Hyseq will pay to Aurora a non-creditable,
non-refundable payment of [***] within [***] after delivery of each Data Package
to Hyseq. Notwithstanding the foregoing, Hyseq will pay to Aurora a minimum of
[***] during the Collaboration Period under this Section 5.1(d).

               (e) PERFORMANCE MILESTONE. Hyseq will pay to Aurora (i) a
one-time, non-creditable, non-refundable milestone payment of [***] within [***]
after Aurora completes screening of the first [***] OSPs using [***] approaches
thus demonstrating the feasibility of such approach (ii) a one-time,
non-creditable, non-refundable milestone payment of [***] within [***] after
Aurora completes screening of [***] OSPs provided by Hyseq to Aurora under the
Collaboration.


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

               (f) CLINICAL MILESTONES. Hyseq will pay to Aurora the following
non-creditable, non-refundable milestone payments for the first, and only the
first, Hyseq Product within [***] following achievement of each of the following
milestone events:

<TABLE>
<CAPTION>
                 Milestone                                    Payment
                 ---------                                    -------
                 <S>                                          <C>
                 [***]                                         [***]
</TABLE>

               (g) ROYALTIES. Hyseq will pay to Aurora a royalty equal to [***]
of Net Sales of each Hyseq Product sold by Hyseq or its sublicensees. Royalties
for sales of a Hyseq Product in any given country will be paid for a period
equal to the Royalty Term for such Hyseq Product in such country.

        5.2 PAYMENTS TO HYSEQ.

               (a) DATABASE ACCESS FEE. In consideration for access to Hyseq's
cDNA database under Section 3.3(b), Aurora will pay to Hyseq a non-creditable,
non-refundable payment of [***] within [***] after the Effective Date.

               (b) LICENSE FEE. In consideration for the license granted to
Aurora under Section 4.7, Aurora will pay to Hyseq a non-creditable,
non-refundable license fee of [***] within [***] after the Effective Date.

               (c) HYSEQ TARGETS SELECTED FOR SCREENING. Aurora will pay to
Hyseq a non-creditable, non-refundable payment of [***] for each Hyseq Target
for which Aurora develops an Aurora Assay during the Collaboration Period. Such
payments will be calculated and reported for each calendar quarter during the
Collaboration Period. All payments due under this Section 5.2(c) will be paid
within [***] after the end of each calendar quarter. Notwithstanding the
foregoing, Aurora will pay to Hyseq a minimum of [***] during the Collaboration
Period under this Section 5.2(c).

               (d) PERFORMANCE MILESTONE. If, during the Collaboration Period,
Aurora identifies chemical entities for at least [***] of the Hyseq Targets
screened by Aurora under the Target Program which demonstrate at least a [***]
over related public domain targets (as defined in the Target Program), then
Aurora will pay to Hyseq a one-time, non-creditable, non-refundable milestone
payment of [***] within [***] after the final report for the Target Program has
been received by Hyseq from Aurora.

               (e) CLINICAL MILESTONES. For each Hyseq Target, Aurora will pay
to Hyseq the following non-creditable, non-refundable milestone payments for the
first, and only the first, Aurora Product to achieve such milestone. This
payment will be made within [***] following achievement of each of the following
milestone events:


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

<TABLE>
<CAPTION>
                Milestone                                     Payment
                ---------                                     -------
                <S>                                           <C>
                [***]                                          [***]
</TABLE>

               (f) ROYALTIES. Aurora will pay to Hyseq a royalty equal to [***]
of Net Sales for each Aurora Product sold by Aurora or its sublicensees.
Royalties for sales of an Aurora Product in any given country will be paid for a
period equal to the Royalty Term for such Aurora Product in such country.

        5.3 GRANT OF OPTIONS TO HYSEQ. Aurora hereby grants to Hyseq
non-transferable options exercisable by Hyseq during the Collaboration Period,
or as extended in Section 5.3(c):

               (a) to receive a non-exclusive, non-transferable, worldwide
license to any cell-based assay used by Aurora in the performance of the
Collaboration for internal use by Hyseq to optimize, develop and commercialize
Hyseq Products for [***] per cell line;

               (b) to purchase from Aurora single mg quantities of up to [***]
of Hyseq's OSPs, synthesized by a third party, for internal use (non-GMP) to
optimize, develop and commercialize Hyseq Products at [***];

               (c) for a period of [***] following the Collaboration Period, to
have Aurora clone OSP Receptors [***] for Hyseq for [***] per OSP Receptor,
payable as follows: an upfront, non-refundable, non-creditable payment of [***],
and [***] upon delivery; and/or

               (d) to have Aurora use its CellSensor Panel to screen up to [***]
additional OSPs (over and above the [***] OSPs set forth in Section 3.2(a))
during the Collaboration Period for [***] per OSP.

        5.4 GRANT OF OPTIONS TO AURORA. Hyseq hereby grants to Aurora
non-transferable options exercisable by Aurora during the Collaboration Period,
except as set forth in Section 5.4(b):

               (a) to extend the Exclusivity Period, the time to complete assay
development under Section 4.7, and the time to complete Primary Screening and
Secondary Screening under Section 4.7 on a Hyseq Target-by-Hyseq Target basis by
[***] for [***] per Hyseq Target;

               (b) for a period of [***] following the Collaboration Period, to
have Hyseq perform bioinformatics efforts utilizing Hyseq informatics tools and
database to support the Target Program [***] on Aurora's behalf on a [***] basis
in an amount equal to [***] per FTE per year prorated on a per hour worked
basis; and/or

               (c) to obtain additional Hyseq Targets (over and above the [***]
Hyseq Targets set forth in Section 3.3(b)) for assay development and screening
under the same terms and conditions as set forth in this Agreement, for [***]
per Hyseq Target.

        5.5 RIGHT OF FIRST NEGOTIATION. During the Exclusivity Period for any
Hyseq Target, Hyseq will provide written notice to Aurora of its intention to
license such Hyseq Target for


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

[***] applications. During the [***] period following such written notice from
Hyseq, Aurora will have the first right to negotiate an exclusive license to
such Hyseq Target for [***] applications that are [***] used in clinical
applications of Aurora Products related to such Hyseq Target upon [***] terms
[***].

                                    ARTICLE 6
                            PAYMENTS; RECORDS; AUDITS

        6.1 PAYMENT; REPORTS. Royalty payments will be calculated and reported
for each calendar quarter. All royalty payments due under this Agreement will be
paid within [***] after the end of each calendar quarter, unless otherwise
specifically provided herein. Each payment of royalties will be accompanied by a
report in sufficient detail to permit confirmation of the accuracy of the
royalty payment made, including, without limitation, Net Sales, the royalties
payable in United States dollars, the method used to calculate the royalty and
the exchange rates used.

        6.2 EXCHANGE RATE; MANNER AND PLACE OF PAYMENT. All payments hereunder
will be payable in United States dollars. With respect to each quarter, for
countries other than the United States, whenever conversion of payments from any
foreign currency will be required, such conversion will be made at the rate of
exchange reported in The Wall Street Journal on the last business day of the
applicable reporting period. Any payment due under this Agreement will be made
by wire transfer to a bank account designated by the party receiving such
payment, unless otherwise specified in writing by such party.

        6.3 LATE PAYMENTS. In the event that any payment, including royalty
payments, due hereunder is not made when due, the payment will accrue interest
from that date due at the rate of [***] per month; provided however, that in no
event will such rate exceed the maximum legal annual interest rate for the state
in which the party is located. The payment of such interest will not limit the
party receiving such payment from exercising any other rights it may have as a
consequence of the lateness of any payment.

        6.4 RECORDS AND AUDITS. During the Royalty Term and for a period of
[***] thereafter, each party will keep complete and accurate records in
sufficient detail to permit the other party to confirm the accuracy of all
royalty payments due to the other party hereunder. A party due royalty payments
will have the right to cause an independent, certified public accountant
reasonably acceptable to the other party to audit such records to confirm
royalty payments due under this Agreement. Such audits may be exercised during
normal business hours no more than [***] in any 12-month period upon at least
[***] prior written notice to the other party. The party exercising such audit
right will bear the full cost of such audit, unless such audit discloses an
underpayment by more than [***] of the amount due under this Agreement. In such
case, the other party will bear the full cost of such audit. In all events, the
other party will pay any underpayment with interest in accordance with Section
6.3.

        6.5 TAXES. All taxes levied on account of the royalties and other
payments accruing to each party under this Agreement shall be paid by the party
receiving such royalty or other payment for its own account, including taxes
levied thereon as income to the receiving party. If provision is made in law or
regulation for withholding, such tax shall be deducted from the


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

royalty or other payment made by the party making such payment to the proper
taxing authority and a receipt of payment of the tax secured and promptly
delivered to the party entitled to the royalty. Each party agrees to assist the
other party in claiming exemption from such deductions or withholdings under any
double taxation or similar agreement or treaty from time to time in force.

        6.6 PROHIBITED PAYMENTS. Notwithstanding any other provision of this
Agreement, if either party is prevented from paying any royalty due hereunder by
virtue of the statutes, laws, codes or governmental regulations of the country
from which the payment is to be made, then such royalty may be paid by
depositing funds in the currency in which accrued to the other party's account
in a bank acceptable to the other party in the country whose currency is
involved.

                                    ARTICLE 7
                             OWNERSHIP OF INVENTIONS

        Ownership of patentable subject matter conceived of or reduced to
practice in performance of the Collaboration will be determined in accordance
with the rules of inventorship under United States patent laws. Subject to
Article 4, Aurora will own all inventions conceived and reduced to practice
during performance of the Collaboration solely by its employees and agents, and
all patent applications and patents claiming such inventions. Subject to Article
4, Hyseq will own all inventions conceived and reduced to practice during
performance of the Collaboration solely by its employees and agents, and all
patent applications and patents claiming such inventions. The parties agree to
promptly exert all reasonable efforts, including the execution and delivery of
any and all papers, instruments or affidavits necessary to effectuate the
ownership rights stated in Article 4. Subject to Article 4, all inventions
conceived and reduced to practice during performance of the Collaboration
jointly by employees or agents of Aurora and employees or agents of Hyseq, and
all patent applications and patents claiming such inventions, will be owned
jointly by Aurora and Hyseq ("Joint Inventions"). The parties will determine via
the JRDC which party will be responsible for the filing, prosecution and
maintenance of jointly owned patent applications and patents. Each party (a)
will [***] regarding the filing, prosecution and maintenance of patent
applications claiming Joint Inventions, and (b) will keep the other party
advised of the status of such filing, prosecution and maintenance. Each party
agrees to cooperate fully in the preparation, filing and prosecution of patent
applications claiming Joint Inventions, including, without limitation, (i)
executing all papers and instruments, or requiring its employees or agents, to
execute such papers and instruments, so as to enable the other party to apply
for and to prosecute patent applications claiming Joint Inventions in any
country, and (ii) promptly informing the other party of any matters coming to
such party's attention that may affect the preparation, filing or prosecution of
an such patent applications.

                                    ARTICLE 8
                          CONFIDENTIALITY; PUBLICATIONS

        8.1 NONDISCLOSURE. During the Term and for a period of [***] thereafter,
each party will maintain all Confidential Information of the other party as
confidential and will not disclose any such Confidential Information or any
summary or part thereof, to any Third Party or use, or enable any Third Party to
use, any such Confidential Information for any purpose, except (a) as


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

expressly authorized by this Agreement, or (b) to the extent such use or
disclosure is reasonably necessary in filing or prosecuting patent applications,
[***], complying with applicable law, governmental regulation or court order,
submitting information to tax or other governmental authorities, making a
permitted sublicense or otherwise exercising its rights hereunder; provided,
however, that if a party is required to make any such disclosure of the other
party's Confidential Information, other than pursuant to a confidentiality
agreement, it will give reasonable advance written notice to the other party of
such disclosure, and will use [***] efforts to secure confidential treatment of
such information prior to its disclosure (whether through protective orders or
otherwise). Each party may disclose Confidential Information of the other party
to its sublicensees, employees, agents, consultants and other representatives to
the extent required to accomplish the purposes of this Agreement, so long as
such persons are under an obligation of confidentiality no less stringent than
as set forth herein. Each party will use at least the same standard of care as
it uses to protect its own Confidential Information and will remain liable in
the event any sublicensees, employees, agents, consultants and other
representatives make any unauthorized use or disclosure of the other party's
Confidential Information. Each party will promptly notify the other party upon
discovery of any unauthorized use or disclosure of the other party's
Confidential Information.

        8.2 PUBLICATIONS. Each party recognizes that the publication of papers
regarding results of the research and development activities performed under the
Collaboration, including oral presentations and abstracts, may be beneficial to
both parties provided such publications are subject to reasonable controls to
protect Confidential Information. In particular, it is the intent of the parties
to maintain the confidentiality of any Confidential Information included in any
foreign patent application until such foreign patent application has been
published. Accordingly, each party will have the right to review and approve any
paper proposed for publication by the other party, including oral presentations
and abstracts, which utilizes data generated from the Collaboration and/or
includes Confidential Information of the other party. Before any such paper is
submitted for publication, the party proposing publication will deliver a
complete copy to the other party at least [***] prior to submitting the paper to
a publisher. The receiving party will review any such paper and give its
comments to the publishing party within [***] of the delivery of such paper to
the receiving party. With respect to oral presentation materials and abstracts,
the parties will make reasonable efforts to expedite review of such materials
and abstracts, and will return such items as soon as practicable to the
publishing party with appropriate comments, if any, but in no event later than
[***] from the date of delivery to the receiving party. The publishing party
will comply with the other party's request to delete references to such other
party's Confidential Information in any such paper and agrees to withhold
publication of such paper for an additional [***] to permit the parties to
obtain patent protection, if either party deem it necessary, in accordance with
the terms of this Agreement.

                                    ARTICLE 9
                    REPRESENTATIONS, WARRANTIES AND COVENANTS

        9.1 CORPORATE POWER. Each party hereby represents and warrants that such
party is duly organized and validly existing under the laws of the state of its
incorporation and has full corporate power and authority to enter into this
Agreement and to carry out the provisions hereof.


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

        9.2 DUE AUTHORIZATION. Each party hereby represents and warrants that
such party is duly authorized to execute and deliver this Agreement and to
perform its obligations hereunder. Each party represents and warrants to the
other party that it has the necessary authority to grant the licenses to the
other party contained herein.

        9.3 BINDING OBLIGATION. Each party hereby represents and warrants that
this Agreement is a legal and valid obligation binding upon it and is
enforceable in accordance with its terms. The execution, delivery and
performance of this Agreement by such party does not conflict with any
agreement, instrument or understanding, oral or written, to which it is a party
or by which it may be bound, or, to its knowledge, violate any law or regulation
of any court, governmental body or administrative or other agency having
authority over it.

        9.4 COVENANT NOT TO [***]. Neither party will [***].

        9.5 AURORA TECHNOLOGY. Except as expressly licensed herein, [***].

        9.6 LIMITATION ON WARRANTIES. Except as expressly set forth in this
Agreement, nothing herein will be construed as a representation or warranty by
either party that use of any intellectual property transferred, licensed or
otherwise made available hereunder does not infringe any intellectual property
right of any Third Party. Neither party makes any warranties, express or
implied, concerning the success of the Research Programs or the commercial
utility of any Product. [***].

        9.7 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY
OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

        9.8 LIMITATION OF LIABILITY. NEITHER PARTY WILL BE ENTITLED TO RECOVER
FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES
IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER.

        9.9 MUTUAL INDEMNIFICATION. Each party hereby agrees to save, defend,
indemnify and hold harmless the other party and its officers, directors,
employees, consultants and agents from and against any and all losses, damages,
liabilities, expenses and costs, including reasonable legal expense and
attorneys' fees ("Losses"), to which the indemnified party may become subject as
a result of any claim, demand, action or other proceeding by any Third Party to
the extent such Losses arise directly or indirectly out of (a) [***] the
indemnifying party hereunder, or (b) [***] by such indemnified party or
sublicensees, except to the extent such Losses result from the gross negligence
or willful misconduct of the party claiming a right of indemnification under
this Section 9.9. In the event either party seeks indemnification under this
Section 9.9, it will inform the other party of a claim as soon as reasonably
practicable after it receives notice of the claim, will permit the other party
to assume direction and control of the defense of the claim (including the right
to settle the claim


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COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
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<PAGE>

solely for monetary consideration), and will cooperate as requested (at the
expense of the other party) in the defense of the claim.

                                   ARTICLE 10
                              TERM AND TERMINATION

        10.1 TERM. This Agreement will commence on the Effective Date and will
continue until (i) the expiration of the last to expire of the Aurora Patents,
the Stanford Patents or the Hyseq Patents, or (ii) the last royalty obligation
due hereunder is paid, whichever is later, unless terminated earlier as provided
herein (the "Term").

        10.2 TERMINATION FOR CAUSE. Either party may terminate this Agreement
prior to the expiration of the Term upon the occurrence of any of the following:

               (a) Upon or after the bankruptcy, insolvency, dissolution or
winding up of the other party (other than dissolution or winding up for the
purposes of reconstruction or amalgamation); or

               (b) Upon or after the breach of any material provision of this
Agreement by the other party if the breaching party has not cured such breach
within [***] after written notice thereof by the non-breaching party.

        10.3 TERMINATION OF OSP PROGRAM BY AURORA. If Aurora is unable to use
[***] approaches to screen OSPs under the OSP Program, then Aurora may terminate
the OSP Program upon: (i) providing a written summary to the JRDC by Aurora
which sets forth the efforts undertaken and all results obtained by Aurora in
attempting to develop and use the [***] approaches to screen OSPs, (ii)
providing [***] written notice to Hyseq, and (iii) paying to Hyseq [***]. Upon
payment of such amount to Hyseq, Aurora will have no further obligations to
Hyseq under Section 3.2(a) regarding the OSP Program, other than the obligations
of confidentiality set forth in this Agreement. All other rights and obligations
of the parties under this Agreement will survive the termination of the OSP
Program pursuant to this Section 10.3.

        10.4 EFFECT OF TERMINATION.

               (a) Upon termination of this Agreement by Aurora under Section
10.2, (i) the licenses granted by Aurora to Hyseq under Article 4 will
terminate, and (ii) the licenses granted by Hyseq to Aurora under Article 4 will
remain in full force and effect for so long as Aurora is not in breach of its
obligations to Hyseq under this Agreement. Upon termination of this Agreement by
Hyseq under Section 10.2, (i) the licenses granted by Hyseq to Aurora under
Article 4 will terminate, and (ii) the licenses granted by Aurora to Hyseq under
Article 4 will remain in full force and affect for so long as Hyseq is not in
breach of its obligations to Aurora under this Agreement.

               (b) Expiration or termination of this Agreement will not relieve
the parties of any obligation accruing prior to such expiration or termination.
Except as set forth below or elsewhere in this Agreement, the obligations and
rights of the parties under Sections 3.3(a) 4.4,


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HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
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<PAGE>

4.8, 6.4, 9.7, 9.8, 9.9, 10.3 and 10.4 and Articles 1, 7, 8 and 11 will survive
the expiration or termination of this Agreement.

               (c) Within 30 days following the expiration or termination of
this Agreement (except to the extent either party retains a license as
contemplated by Section 10.2(a) or 10.2(b) above), each party will return to the
other party, or destroy, upon the written request of the other party, any and
all Confidential Information and Materials of the other party in its possession,
provided, however, that each party may keep one copy of such Confidential
Information for the sole purpose of complying with its obligations hereunder.

                                   ARTICLE 11
                                  MISCELLANEOUS

        11.1 ASSIGNMENT. Except as expressly provided hereunder, neither this
Agreement nor any rights or obligations hereunder may be assigned or otherwise
transferred by either party without the prior written consent of the other party
(which consent will not be unreasonably withheld); provided, however, that
during the Collaboration Period Aurora may assign this Agreement and the rights
and obligations hereunder to Vertex Pharmaceuticals Incorporated ("Vertex")
without Hyseq's consent in connection with the merger of Aurora with Vertex as
required by operational law, contract or otherwise; provided further, that
following the expiration of the Collaboration Period, either party may assign
this Agreement and its rights and obligations hereunder without the other
party's consent (a) in connection with the transfer or sale of all or
substantially all of the business of such party to which this Agreement relates
to a Third Party, whether by merger, sale of stock, sale of assets or otherwise,
or (b) to an Affiliate, provided that any such assignment to an Affiliate will
not relieve the assigning party of its responsibilities for performance of its
obligations under this Agreement. The rights and obligations of the parties
under this Agreement will be binding upon and inure to the benefit of the
successors and permitted assigns of the parties. Any assignment not in
accordance with this Agreement is null and void.

        11.2 FORCE MAJEURE. Neither party will be held liable or responsible to
the other party nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement
(other than non-payment) if (a) such failure or delay is caused by or results
from causes beyond the reasonable control of the affected party, including, but
not limited to, fire, floods, el nino, la nina, embargoes, war, acts of war
(whether war be declared or not), insurrections, riots, civil commotions,
strikes, lockouts or other labor disturbances, acts of God or acts, omissions or
delays in acting by any governmental authority or the other party, and (b) the
affected party has exerted all reasonable efforts to avoid or remedy such force
majeure event; provided, however, that in no event will either party be required
to settle any labor dispute or disturbance.

        11.3 GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of California, as such
laws apply to agreements between California residents performed entirely within
the State of California, except that questions affecting the construction and
effect of any patent will be determined by the law of the country in which such
patent is issued.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

        11.4 NOTICES. All notices and other communications provided for
hereunder will be in writing and will be mailed by first-class, registered or
certified mail, postage paid, or delivered personally, by overnight delivery
service or by facsimile, computer mail or other electronic means, with
confirmation of receipt, addressed as follows:

        IF TO AURORA:              AURORA BIOSCIENCES CORPORATION
                                   11010 Torreyana Road
                                   San Diego, CA 92121
                                   Fax: (858) 404-6713
                                   Attn: President

        IF TO HYSEQ:               HYSEQ, INC.
                                   670 Almanor Ave.
                                   Sunnyvale, CA 94085
                                   Fax: (408) 524-8145
                                   Attn: Legal Department

        Either party may by like notice specify or change an address to which
notices and communications will thereafter be sent. Notices sent by facsimile,
computer mail or other electronic means will be effective upon confirmation of
receipt, notices sent by mail or overnight delivery service will be effective
upon receipt, and notices given personally will be effective when delivered.

        11.5 WAIVER. Except as specifically provided for herein, the waiver from
time to time by either party of any right or failure to exercise any remedy will
not operate or be construed as a continuing waiver of the same right or remedy
or of any other of such party's rights or remedies provided in this Agreement.

        11.6 SEVERABILITY. If any provision of this Agreement is or becomes
invalid, is ruled illegal by a court of competent jurisdiction or is deemed
unenforceable under the current applicable law from time to time in effect
during the Term, the remainder of this Agreement will not be affected or
impaired thereby and will continue to be construed to the maximum extent
permitted by law. In lieu of any provision which is invalid, illegal or
unenforceable, there will be substituted or added as part of this Agreement by
mutual written agreement of the parties or arbitration, a provision which is (a)
as similar as possible in economic and business objectives as intended by the
parties to such invalid, illegal or unenforceable provision, and (b) valid,
legal and enforceable.

        11.7 INDEPENDENT CONTRACTORS. It is expressly agreed that Aurora and
Hyseq will be independent contractors and that the relationship between the
parties will not constitute a partnership or agency of any kind. Neither Aurora
nor Hyseq will have the authority to make any statements, representations or
commitments of any kind, or to take any action, which will be binding on the
other party, without the prior written consent of the other party.

        11.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement (including the exhibits
attached hereto) sets forth all of the agreements and understandings between the
parties with respect to the subject matter hereof and supersedes and terminates
all prior agreements and


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

understandings between the parties. There are no agreements or understandings,
either oral or written, between the parties other than as set forth herein.
Notwithstanding the foregoing, any disclosure made by either party pursuant to
the Mutual Non-Disclosure Agreement between the parties dated December 15, 2000
will continue to be governed by the terms and conditions of such agreement. No
subsequent modification, amendment, change or addition to this Agreement will be
binding upon the parties, unless reduced to writing and signed by the respective
authorized officers of the parties.

        11.9 HEADINGS AND PLURALITY. The captions and plurality of defined terms
contained in this Agreement are not substantively a part of this Agreement, but
are merely guides or labels to assist in locating and reading the several
articles hereof.

        11.10 USE OF TRADEMARKS. Neither party will use the names, trademarks,
or any adaptation thereof of the other in any advertising, promotional or sales
activities without the prior written consent obtained, except that the parties
may state that they are licensed under one or more of the patents and/or
applications granted hereunder.

        11.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. Counterparts may be signed
and delivered by facsimile, each of which will be binding when sent.

        IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the Effective Date.


AURORA BIOSCIENCES CORPORATION                    HYSEQ, INC.



By: /s/ Michael J. Dunn                           By: /s/ Ted W. Love
   ----------------------------------------          --------------------------

Name: Michael J. Dunn                             Name: Ted W. Love
     --------------------------------------            ------------------------

Title: Vice President, Business Development       Title: President and CEO
      -------------------------------------             -----------------------


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    EXHIBIT A

                                 AURORA PATENTS


<TABLE>
<CAPTION>
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Title                         Patent Number      Serial Number   Filing Date
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<S>                           <C>                <C>             <C>
[***]                         [***]              [***]           [***]
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[***]                         [***]              [***]           [***]
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
</TABLE>

Hyseq Indemnification for Products or Services Arising from License Granted
Herein. With respect to rights licensed to Aurora by the Howard Hughes Medical
Institute ("HHMI") or by The Regents of the University of California ("UC"),
Hyseq hereby agrees to indemnify, defend and hold harmless HHMI or UC, as
appropriate, and their respective officers, directors, employees, sponsors and
agents from and against all damages or other amounts payable to a Third Party
(including product liability) resulting or arising from Hyseq's use of the
rights granted herein to the extent that such indemnification by Hyseq is
required by HHMI or UC pursuant to agreements between HHMI and Aurora or between
UC and Aurora.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    EXHIBIT B

                                STANFORD PATENTS


<TABLE>
<CAPTION>
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Title                            Patent Number   Serial Number     Filing Date
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<S>                              <C>             <C>               <C>
[***]                            [***]           [***]             [***]
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[***]                            [***]           [***]             [***]
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
</TABLE>

Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
PURSUANT TO THE STANFORD AGREEMENT, STANFORD MAKES NO REPRESENTATIONS AND
EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO
EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR THAT THE USE OF THE STANFORD LICENSED PRODUCTS OR SERVICES WILL NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK\ OR OTHER RIGHTS OR ANY OTHER EXPRESS
OR IMPLIED WARRANTIES. Pursuant to the Stanford Agreement, nothing is this
Agreement is or will be construed as:

        (a) A warranty or representation by Stanford as to [***];

        (b) A warranty or representation that anything made, used, sold or
otherwise disposed of under any license granted in this Agreement [***];

        (c) An obligation to [***], except to the extent and in the
circumstances described in Article 11 of the Stanford Agreement;

        (d) Granting by implication, estoppel or otherwise any licenses or
rights under patents or other rights of Stanford or other persons other than the
Stanford Patents, regardless of whether such patents or other rights are [***]
to any of the Stanford Patents; or

        (e) An obligation to furnish any technology or technological information
other than the technology as set forth herein.

Stanford Names and Marks. Pursuant to the Stanford Agreement, Aurora and Hyseq
agree that Hyseq will not identify Stanford in any promotional advertising or
other promotional materials to be disseminated to the public or any portion
thereof or to use the name of any Stanford faculty member, employee or student
or any trademark, service mark, trade name or symbol of Stanford or the Stanford
University Hospital, or that is associated with either of them, without
Stanford's prior written consent. Stanford gives consent to Hyseq to identify
Herzenberg and Nolan as authors of their respective papers and to identify the
Stanford Patents.


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

Indemnification. Pursuant to the Stanford Agreement, Hyseq will indemnify, hold
harmless and defend Stanford and Stanford University Hospital and their
respective trustees, officers, employees, students and agents ("Indemnitees")
against any and all claims for death, illness, personal injury, property damage
and improper business practice arising out of the manufacture, use, sale or
other disposition of the Stanford Patents or Stanford Licensed Product(s) by
Hyseq or its customers, except to the extent any such claims or losses are
caused by the intentional misconduct, gross negligence or breach of the
representations and warranties made under the Stanford Agreement by Indemnitee;
and provided further that in the event of any such claim, Indemnitee will give
prompt written notice to Hyseq and Hyseq will manage and control, at its sole
expense, the defense and settlement of such claim, provided, however, that Hyseq
will not settle any suit involving the rights of such Indemnitee without
obtaining its prior written consent, which consent will not be unreasonably
withheld, and provided further that such Indemnitee will fully cooperate with
Hyseq.

Limitation of Liability. Pursuant to the Stanford Agreement, Stanford will not
be liable for any indirect, special, consequential or other damages whatsoever,
whether grounded in tort (including negligence), strict liability, contract or
otherwise. Stanford will not have any responsibilities or liabilities whatsoever
with respect to Stanford Licensed Product(s).


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    EXHIBIT C

                                AURORA TECHNOLOGY


[***]


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    EXHIBIT D

                                   OSP PROGRAM



HYSEQ:

-    [***].

AURORA:

-    [***].

-    [***].



APPENDIX I- CELLSENSOR ASSAYS RELEVANT FOR OSP SCREENING


<TABLE>
<CAPTION>
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           CELL LINE             PATHWAY MEASURED         REFERENCE STIMULUS
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</TABLE>


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

<TABLE>
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</TABLE>

[***].


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

<PAGE>

                                    EXHIBIT E

                                 TARGET PROGRAM


HYSEQ:

-    [***].

[***].

[***].

AURORA:

-    [***].


APPENDIX II  -  ASSAY VALIDATION.

[***].

[***].

[***].

                             [***]
[***].

[***].


CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

</TEXT>
</DOCUMENT>
