EXHIBIT 10.17



                            COLLABORATION AGREEMENT


        THIS COLLABORATION AGREEMENT (this "AGREEMENT") is made effective as of
the 11th day of August 2001 (the "EFFECTIVE DATE") by and between Hyseq, Inc., a
corporation organized under the laws of Delaware, having offices at 670 Almanor
Avenue, Sunnyvale, California 94085 USA ("HYSEQ"), and Kirin Brewery Company,
Ltd., a corporation organized under the laws of Japan, having offices at 10-1,
Shinkawa 2-chome, Chuo-ku, Tokyo 104-8288, Japan, ("Kirin"). Hyseq and Kirin are
sometimes referred to herein individually as a "PARTY" and collectively as the
"PARTIES."

                                    RECITALS

        1. Hyseq owns or has rights under certain patents, patent applications,
technology, know-how and other intellectual property relating to gene and
protein discovery and expression, and may develop or acquire additional such
rights.

        2. Kirin owns or has rights under certain patents, patent applications,
technology, know-how and other intellectual property relating to gene and
protein discovery and expression, and may develop or acquire additional such
rights.

        3. The Parties wish to collaborate in the research and development of
new protein, antibody and macromolecular therapeutics directed to human
diseases, including, but not limited to, hematopoietic and inflammatory
diseases, in accordance with the terms and conditions set forth herein.

        4. The Parties may also collaborate in the marketing and sale of certain
products resulting from such research and development efforts in accordance with
the terms and conditions set forth herein.

        In consideration of the premises and of the mutual covenants and
obligations set forth herein, the Parties hereby agree as set out below.

                                    ARTICLE 1

                                   DEFINITIONS

        The following capitalized terms shall have the following meanings:

        1.1 "ADDITIONAL TECHNOLOGY" shall have the meaning set forth in Section
3.5.1.

        1.2 "AFFILIATE" means any individual, corporation, association or other
business entity which directly or indirectly controls, is controlled by or is
under common control with the Party in question. As used in this definition of
"Affiliate" only, the term "control" means the direct or indirect ownership of
more than fifty percent (50%) of the stock having the right to vote for
directors thereof or the ability to otherwise control the management of the
corporation or other business entity whether through the ownership of voting
securities, by contract, resolution, regulation or otherwise; provided that, if
local law requires a minimum percentage of local


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ownership, control will be established by direct or indirect beneficial
ownership of one hundred percent (100%) of the maximum ownership percentage that
may, under such local law, be owned by foreign interests.

        1.3 "APPLICABLE LAWS" means all laws, statutes, ordinances, codes, rules
and regulations which have been enacted by a governmental authority and are in
force as of the Effective Date or come into force during the term of this
Agreement, in each case to the extent that the same are applicable to the
performance by the Parties of their respective obligations under this Agreement.

        1.4 "APPROVAL APPLICATION" means any application necessary or
appropriate to obtain a Regulatory Approval, together with all required
documents, data and information concerning the New Product which is the subject
of such application.

        1.5 "AUDITED PARTY" shall have the meaning set forth in Section 3.4.3.

        1.6 "AUDITING PARTY" shall have the meaning set forth in Section 3.4.3.

        1.7 "BANKRUPTCY CODE" shall have the meaning set forth in Section 11.10.

        1.8 "BENCH SCIENTIST" means, as to a Party, an employee of such Party
having both an advanced scientific degree and the qualifications, skill and
experience adequate for the tasks assigned to such employee by such Party in
performance of the R&D Plan.

        1.9 "CHANGE OF CONTROL," as to a Party, means a change in Control of
such Party by merger or reorganization, sale or other transfer of business and
assets, sale or other transfer of capital stock, or similar transaction, whether
in a single transaction or series of related transactions, as a result of which
any Person (or any group of related Persons) that did not directly or indirectly
Control such Party prior to the transaction (or series of transactions)
thereafter directly or indirectly Controls such Party.

        1.10 "CONTROL" (including "Controlled," "Controls" and other forms)
shall mean (except with respect to the definition of Affiliate), as to a Person:
(a) ownership or control, directly or indirectly, of more than fifty percent
(50%) of the voting securities of the Person or, in the case of a noncorporate
Person, equivalent interests or (b) the right or power to designate more than
fifty percent (50%) of the governing authority (e.g., board of directors) of the
Person (whether through management contract, voting rights agreement or similar
means).

        1.11 "DEVELOPMENT CANDIDATE" means a specific molecule, such as a
protein, antibody, or other macromolecule, selected and approved by the JRDC for
R&D Work under the R&D Plan in accordance with the terms and conditions of this
Agreement.

        1.12 "DEVELOPMENT FUNDING" shall have the meaning set forth in Section
3.2.

        1.13 "DEVELOPMENT WORK" shall have the meaning set forth in Section
2.1.1.

        1.14 "DISCLOSING PARTY" shall have the meaning set forth in Section 7.1.

        1.15 "DISPUTE" shall have the meaning set forth in Section 10.2.


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        1.16 "EFFECTIVE DATE" shall have the meaning set forth in the first
paragraph of this Agreement.

        1.17 "ENFORCING PARTY" shall have the meaning set forth in Section
5.5.4.

        1.18 "FIRST PARTY" shall have the meaning set forth in Section 5.1.6.

        1.19 "FTE" means the full time equivalent effort, for one calendar year,
of one individual participating directly and substantially in R&D Work on behalf
of a Party, or, in the case of less than a full-time dedicated scientific
person, a full-time, equivalent scientific person year, based upon a total of
fifty-two (52) weeks (i.e., two thousand eighty (2,080) hours) per year of such
R&D Work on behalf of a Party. The Parties shall agree upon standard cost
accounting procedures to determine FTE contributions properly allocable to the
R&D Work.

        1.20 "FTE RATE" means [***] per FTE, which rate shall apply to a Bench
Scientist and remain fixed and in effect for the duration of the term of this
Agreement, unless otherwise agreed upon by the Parties.

        1.21 "HYSEQ CLAIMS" shall have the meaning set forth in Section 9.2.

        1.22 "HYSEQ IMPROVEMENTS" means any improvements to or modifications of
the Hyseq Technology, excluding Joint Inventions, by any Party or its
Affiliates, either jointly or solely.

        1.23 "HYSEQ INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 9.2.

        1.24 "HYSEQ TECHNOLOGY" means: all Patent Rights, all copyrights, trade
secrets and all other intellectual property rights and interests of every nature
(specifically including, but not limited to, unpatented inventions, ideas, data,
know-how, methods, processes, biological material, reagents, software and trade
secrets of any kind, and any other rights or interests in any Inventions) that
are: (i) owned by Hyseq or any its Affiliates (to the greatest extent that Hyseq
or its Affiliates has the right and authority to grant licenses as of the
Effective Date) or, if not so owned, as to which Hyseq or any of its Affiliates
otherwise has the right to grant licenses or sublicenses as of the Effective
Date (subject to any limitations imposed by a Third Party license); (ii) [***]
to perform the R&D Work or to make, have made, use, sell, offer for sale and/or
import Development Candidates or New Products; and (iii) as directed by the
JRDC.

        1.25 "HYSEQ TERRITORY" means the countries and multinational
jurisdictions listed in Exhibit A.

        1.26 "INDEMNIFIED PARTY" shall have the meaning set forth in Section
9.3.

        1.27 "INDEMNIFYING PARTY" shall have the meaning set forth in Section
9.3.

        1.28 "INFRINGEMENT" shall have the meaning set forth in Section 5.5.1.

        1.29 "INVENTIONS" means any and all creations, materials and
information, in any tangible or intangible form whatsoever and whether or not
patentable, relevant to or resulting from the research, discovery, development,
manufacture or commercialization of protein or antibody


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therapeutics or diagnostics, including, without limitation, ideas, discoveries,
inventions, practices, methods, techniques, specifications, formulations,
formulas, knowledge, trade secrets, know-how, skill, experience, test data
(including pharmacological, biological, chemical, biochemical, toxicological and
clinical test data), analytical and quality control data, stability data,
results of studies, databases, technical drawings, software, works of authorship
and other related subject matter.

        1.30 "JOINT INVENTION" means any Invention (a) made in the course of
performance of the R&D Work or commercialization of a New Product, (b) by one or
more employees, agents or contractors of Hyseq or its Affiliates and/or Kirin or
its Affiliates, and (c) which comprises, or which is required to make, use,
sell, offer for sale or import, a Development Candidate or a New Product.

        1.31 "JOINT PATENTS" means, subject to Section 5.1.6, all Patent Rights
that claim, cover or are directed to Joint Inventions and Other Joint
Inventions.

        1.32 "JRDC" shall have the meaning set forth in Section 2.1.2.

        1.33 "KIRIN CLAIMS" shall have the meaning set forth in Section 9.1.

        1.34 "KIRIN IMPROVEMENTS" means any improvements to or modifications of
the Kirin Technology, excluding Joint Inventions, by any Party or its
Affiliates, either jointly or solely.

        1.35 "KIRIN INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 9.1.

        1.36 "KIRIN TECHNOLOGY" means: all Patent Rights, copyrights, trade
secrets and all other intellectual property rights and interests of every nature
(specifically including, but not limited to, unpatented inventions, ideas, data,
know-how, methods, processes, biological material, reagents, software and trade
secrets of any kind, and any other rights or interests in any Inventions) that
are: (i) owned by Kirin or any its Affiliates (to the greatest extent that Kirin
or its Affiliates has the right and authority to grant licenses as of the
Effective Date) or, if not so owned, as to which Kirin or any of its Affiliates
otherwise has the right to grant licenses or sublicenses as of the Effective
Date (subject to any limitations imposed by a Third Party license); (ii) [***]
to perform the R&D Work or to make, have made, use, sell, offer for sale and/or
import New Products and (iii) as directed by the JRDC.

        1.37 "KIRIN TERRITORY" means the countries and multinational
jurisdictions listed in Exhibit B.

        1.38 "NET SALES" means the gross amount billed or invoiced by a Party or
its Affiliates or any of their Sublicensees for the sale or other disposition of
a New Product, less the following deductions: [***]. "Net Sales" does not
include amounts for any New Product furnished to a Third Party for which [***].
Furthermore, "Net Sales" excludes amounts from sales or other dispositions of
New Products between a Party and any of its Affiliates or between a Party (or
any of its Affiliates) and its Sublicensees, solely to the extent that such
entity purchasing the New Product resells such New Products to a Third Party.


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        1.39 "NEW PRODUCT" means any protein, antibody, or macromolecular
therapeutic or diagnostic product directly resulting from the Development Work
hereunder, including, without limitation, any Development Work performed with
respect to a Development Candidate.

        1.40 "OTHER JOINT INVENTION" means any Invention made in the course of
performance of the R&D Work or commercialization of New Products by the
employees, agents or contractors of Hyseq or its Affiliates and/or Kirin or its
Affiliates but excluding Joint Inventions, Hyseq Improvements, and Kirin
Improvements.

        1.41 "OTHER TERRITORY" means all countries of the world excluding those
countries in the Hyseq Territory or the Kirin Territory.

        1.42 "PATENT COSTS" means all preparation, filing, prosecution and
maintenance out-of-pocket fees and expenses (including attorneys' fees),
actually and reasonably incurred in connection with the establishment and
maintenance of Patent Rights.

        1.43 "PATENT RIGHTS" means (a) all issued patents and inventor's
certificates, and all patent applications throughout the world, including any
renewal, division, continuation, continued prosecution application or
continuation-in-part of any of such patents, certificates and applications, and
any and all patents issuing in respect thereof; (b) any and all reissues,
extensions, substitutions, confirmations, registrations, revalidations,
revisions, renewals, reexaminations, foreign counterparts of and additions to
any of the foregoing; and (c) all intellectual property rights and other
proprietary rights in, to and under the foregoing.

        1.44 "PERSON" means any individual or legal entity.

        1.45 "PRIOR ART INVENTION" shall have the meaning assigned to it in
Section 5.1.6.

        1.46 "PROJECT YEAR" means a twelve (12) month period in which one or
both Parties shall perform specific R&D Work approved by the JRDC under the R&D
Plan. Each Project Year shall commence as of its applicable Project Year
Commencement Date. For purposes of clarification, more than one Project Year may
be in progress at any time, and no two Project Years shall necessarily have the
same Project Year Commencement Date.

        1.47 "PROJECT YEAR COMMENCEMENT DATE," as to a Project Year, means the
date specified by the JRDC in the R&D Plan for such Project Year.

        1.48 "R&D PLAN" shall have the meaning set forth in Section 2.1.1.

        1.49 "R&D WORK" shall have the meaning set forth in Section 2.1.1.

        1.50 "RECEIVING PARTY" shall have the meaning set forth in Section 7.1.

        1.51 "REGULATORY APPROVAL" means, with respect to a nation or, where
applicable, a multinational jurisdiction, any approvals, licenses, registrations
or authorizations necessary for the manufacture, marketing and sale of a New
Product in such nation or jurisdiction.

        1.52 "RESEARCH FUNDING" shall have the meaning set forth in Section
3.1.1.


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        1.53 "RESEARCH WORK" shall have the meaning set forth in Section 2.1.1.

        1.54 "RESPONSIBLE EXECUTIVE" shall have the meaning set forth in Section
10.2.

        1.55 "RIGHT" shall have the meaning set forth in Section 11.7.

        1.56 "SECOND PARTY" shall have the meaning set forth in Section 5.1.6.

        1.57 "SUBLICENSEE" means an authorized or permitted licensee or
sublicensee of a Party or any of its Affiliates.

        1.58 "THIRD PARTY" means any Person other than Hyseq or Kirin or their
respective Affiliates.

                                    ARTICLE 2

                            RESEARCH AND DEVELOPMENT

        2.1 JOINT RESEARCH AND DEVELOPMENT COMMITTEE.

               2.1.1 In accordance with the terms and conditions set forth
below, the Parties shall conduct the research and development of Development
Candidates ("R&D WORK") pursuant to a mutually agreed plan approved (and as
amended from time to time) in accordance with this Article 2, including, at a
minimum and without limitation, the subject matter set forth in Exhibit C (the
"R&D PLAN"). The R&D Work shall consist of the two phases: (a) the discovery or
optimization of potential Development Candidates (the "RESEARCH WORK"), and (b)
the development of select Development Candidates into New Products (the
"DEVELOPMENT WORK").

               2.1.2 Within ten (10) days after the Effective Date, each Party
shall appoint three (3) individuals to serve as its representatives on a joint
research and development committee (the "JRDC"). The JRDC shall formulate and
approve the initial R&D Plan and, from time to time, any modifications or
amendments thereto. The initial R&D Plan shall include, at a minimum and without
limitation, the subject matter set forth in Exhibit C. The R&D Plan shall
specify the R&D Work to be performed by the Parties and the Project Year
Commencement Date therefor. Each Party shall have the right to change any or all
of its representatives on the JRDC upon written notice to the other Party,
provided that each Party shall appoint and maintain for the duration of the term
of this Agreement at least one senior management representative on the JRDC.

               2.1.3 The JRDC shall have authority over the design, management
and conduct of the R&D Work and, if applicable, the commercialization of New
Products. The JRDC may appoint individuals to serve as representatives on
subcommittees to assist the JRDC with respect to any particular subject matter
of the R&D Plan and, if applicable, the commercialization of New Products,
including, for example, product manufacturing, quality control and assurance,
preclinical studies design, implementation and evaluation, clinical protocols
design, implementation and evaluation, and regulatory affairs. Without limiting
the generality of the foregoing, the JRDC shall have the sole authority to:


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               (a)    Develop and implement the R&D Plan, including, without
                      limitation, go/no-go criteria, timelines and
                      responsibilities with respect to the discovery,
                      optimization and development of Development Candidates,
                      which responsibilities may include [***];

               (b)    Develop and implement the budget for the Research Funding
                      and Development Funding;

               (c)    Monitor and make recommendations regarding compliance of
                      the Parties with the R&D Plan and the conduct of the R&D
                      Work;

               (d)    Develop and implement amendments and modifications to the
                      R&D Plan;

               (e)    Set priorities with respect to allocation of resources
                      under the R&D Plan;

               (f)    Review any and all proposed publications relating to the
                      R&D Plan or activities with respect to a Development
                      Candidate and the results therefrom, and any and all
                      proposed filings of patent applications in connection
                      therewith;

               (g)    List on Exhibit D all Patent Rights identified by each
                      Party that claim a Development Candidate or New Product,
                      provided that any and all Patent Rights that claim a Joint
                      Invention shall be deemed to be listed on Exhibit D;

               (h)    Direct prosecution of Joint Patents as provided in Section
                      5.4;

               (i)    Determine and direct the licensing and/or disposition of
                      any Joint Patents that claim Other Joint Inventions;

               (j)    Select Development Candidates for Development Work and
                      determine how such Development Work should occur;

               (k)    Monitor and review pre-clinical and clinical trials of
                      Development Candidates and Approval Applications for New
                      Products;

               (l)    Determine on an annual basis whether to continue or
                      discontinue performance of the R&D Plan or any R&D Work
                      thereunder;

               (l)    Coordinate each Party's activities with respect to the
                      commercialization of New Products, if applicable, and
                      establish each Party's rights and obligations with respect
                      to the launch, promotion, marketing and sale of New
                      Products in the Other Territory; and

               (m)    Decide which Party or Parties shall manufacture each New
                      Product, subject to a separate manufacturing agreement to
                      be negotiated in good faith by each Party.


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               2.1.4 During the term of this Agreement, and thereafter as set
forth in Section 8.4.2, if applicable, the JRDC shall meet, in person or by
telephone conference call, on an "as needed" basis (as determined by the JRDC)
to review progress of the R&D Plan. The JRDC shall hold regular meetings, in
person or by telephone conference call, as necessary, to discuss the progress of
the R&D Work and any all Inventions resulting therefrom; provided that the JRDC
shall meet at least one (1) time each quarter and shall hold at least two (2)
in-person meetings per year, with at least one (1) in-person meeting being held
at the offices of each Party each year. All decisions made or actions taken by
the JRDC shall be made in writing, signed by a JRDC representative of each
Party, and require the [***] of the Parties, with each Party entitled to [***]
vote. Any decision of or action by the JRDC without the [***] of the Parties
shall be null and void. A quorum of the JRDC shall consist of two members,
provided that at least one member appointed by each Party is present. The JRDC
shall keep meeting minutes and prepare a quarterly report for internal senior
management review by the Parties. The host Party at each in-person meeting shall
prepare the minutes for that meeting and the Parties will alternate preparing
minutes for each meeting held via telephone or video conference. All
disagreements arising out of the R&D Plan, R&D Work or prosecution of Patent
Rights during the term of this Agreement shall be referred to the JRDC. If the
JRDC is unable to resolve such disagreement within thirty (30) days, the matter
shall be resolved in accordance with the procedures set forth in Article 10.

        2.2 RESPONSIBILITIES OF THE PARTIES.

               2.2.1 Each Party shall be solely responsible for all R&D Work
assigned to such Party under the R&D Plan. If the R&D Plan fails to allocate
responsibility for any R&D Work to a particular party, the JRDC shall promptly
designate the responsible Party for such R&D Work. Each Party shall use [***]
efforts to perform the R&D Work for which it is responsible. Without limiting
the generality of the foregoing, each Party shall use [***] efforts to: (a)
commit sufficient internal resources to perform the R&D Work, (b) make available
to the other Party sufficient quantities of materials, as required under the R&D
Plan, for such Party to perform the R&D Work, (c) commit sufficient resources to
deliver and disclose technology (including trade secrets and know-how) required
to be so delivered and disclosed to the other Party in accordance with the R&D
Plan, (d) report all Inventions to the JRDC pursuant to Section 2.2.3, (e) carry
out its responsibilities with respect to prosecution of Joint Patents as
directed by the JRDC, and (f) cooperate, consult and share information with
respect to the establishment and progress of pre-clinical and clinical trials
and filings for Regulatory Approval.

               2.2.2 Each Party shall be solely responsible for the promotion,
marketing and sales of New Products (including all Regulatory Approval relating
thereto), and all costs associated with the foregoing, in the Hyseq Territory or
Kirin Territory, as applicable, and, as directed by the JRDC, the Other
Territory. Each Party shall use [***] efforts to promote, market and sell New
Products in the Hyseq Territory and Kirin Territory, as applicable, and, as
directed by the JRDC, the Other Territory.

               2.2.3 Each Party shall prepare and maintain detailed records of,
and regularly disclose to the JRDC and the other Party, any and all Inventions
and other related information created by or for such Party in connection with
the R&D Work. Such disclosure shall be made as provided for in the R&D Plan, but
in no event less than once per calendar quarter. Without limiting the generality
of the foregoing, each Party shall regularly provide the JRDC with information


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sufficient to enable the JRDC to perform its obligations pursuant to Section
2.1, including, without limitation, reasonably detailed descriptions of the R&D
Work performed, the scheduling of ongoing or future R&D Work, resources
anticipated to accomplish the R&D Work, and any additional reasonable reporting
information required by the JRDC.

        2.3 RIGHT TO NEGOTIATE NEW AGREEMENT. At any time after any Development
Candidate approved by the JRDC for Development Work hereunder [***], either
Party may request the other Party to discuss alternative approaches and
contractual arrangements, to be memorialized in a separate agreement with
respect to the development, manufacturing and commercialization of New Products.
The other Party shall make appropriate representatives reasonably available to
confer with such Party regarding the terms and conditions of such separate
agreement for a period of [***], provided that nothing in this Agreement shall
be construed to require or obligate such other Party to enter into any such
separate agreement.

                                    ARTICLE 3

                               FUNDING; ROYALTIES

        3.1 RESEARCH FUNDING.

               3.1.1 The JRDC shall formulate and approve a budget to cover the
FTE contributions of Hyseq, and [***] costs and expenses actually incurred by
Hyseq, subject to [***], that are [***], in performance of the Research Work
during each Project Year (such approved budget referred to herein as the
"RESEARCH FUNDING"). Such [***] costs and expenses include, for example and
without limitation, approved outside services, contract manufacturing, contract
studies or consulting services, but exclude [***] costs and expenses incurred in
performance of the Research Work. Kirin shall be solely responsible for payment
of the Research Funding in accordance with Section 3.1.2. Within [***] after the
close of each quarter of any Project Year, Hyseq shall submit to Kirin a
detailed and accurate invoice, based on Hyseq's actual FTE contributions and the
FTE Rate, and any approved [***] expenses incurred, for Research Work conducted
by Hyseq during such quarter. Each such invoice shall identify each individual
performing Research Work by or on behalf of Hyseq together with a reasonably
detailed description of the Research Work performed by such individual, and the
time spent (on a monthly basis) by such individual performing such Research
Work. Kirin shall not be responsible for expenses incurred in any Project Year
by Hyseq with respect to Research Work that was not approved by the JRDC or to
the extent that such expenses exceed the budgeted amounts therefor.

               3.1.2 For each Project Year, Kirin shall pay the budgeted
Research Funding payments for Research Work conducted by Hyseq during each
quarter of the Project Year (based upon budgeted Research Funding for such
quarter of the Project Year as approved by the JRDC) within [***] after receipt
of Hyseq's invoice therefor, as submitted pursuant to Section 3.1.1; provided,
however, that, upon receipt of such invoice by Kirin, the Parties shall review
the amount of expenses submitted by Hyseq in such quarter and, in the event that
Hyseq's actual expenses are less than the budgeted Research Funding payment for
such quarter, Kirin shall only be required to pay the amount of actual expenses
incurred by Hyseq. Kirin shall not be obligated to make any payment to Hyseq
hereunder before the initial Project Year Commencement Date.


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               3.1.3 As provided under Sections 3.1.1 and 3.1.2, the Research
Work for which Kirin shall pay, and the associated Research Funding therefor,
for each Project Year shall be approved by the JRDC not later than ninety (90)
days prior to the start of each such Project Year. In the event that the
Research Funding for any Project Year has not been agreed upon in advance of the
start of such Project Year, the Responsible Executives of the Parties shall
meet, in person or by conference telephone call, to resolve the matter. Pending
such resolution, however, Kirin, at its sole discretion, may elect to fund the
FTE contributions of Hyseq for any upcoming Project Year, on a quarterly basis,
in amounts sufficient to continue any Research Work (or portions thereof) from
the corresponding just-ended Project Year, and Hyseq shall continue to perform
such ongoing Research Work (or portions thereof).

               3.1.4 Except as expressly provided in this Section 3.1, Hyseq
shall bear all costs and expenses incurred by Hyseq in performance of Research
Work under the R&D Plan.

               3.1.5 Upon Kirin's request, the JRDC shall provide to Kirin, on
or before October 1 of any calendar year, an estimated budget for all Research
Work to be performed by Hyseq during the subsequent calendar year.

        3.2 DEVELOPMENT FUNDING. The JRDC shall agree upon a budget to cover
both Parties' FTE contributions in performance of the Development Work during
each Project Year (such approved budget referred to herein as the "DEVELOPMENT
FUNDING"). The Parties shall share responsibility equally (i.e., on a 50/50
basis) for payment of the Development Funding, based on each Party's actual FTE
contributions to the Development Work and the FTE Rate. Within [***] after the
close of each quarter of a Project Year, each Party shall submit detailed and
accurate reports of its actual FTE contributions at the FTE Rate to the other
Party, and the Party reporting lower costs for such quarter shall reimburse the
other Party for one-half the difference between each Party's individual costs
within [***] after both parties submit their reports, provided that neither
Party shall be responsible for expenses incurred in a Project Year by the other
Party with respect to Development Work that was not approved by the JRDC or to
the extent that such expenses exceed such Party's allocated portion of the
budgeted amounts therefor. Unless otherwise provided by the JRDC in writing, any
other costs for the R&D Plan (e.g., third-party licenses and costs relating to
third-party contractors) shall be borne solely by the Party which incurred such
costs.

        3.3 NET SALES ROYALTY.

               3.3.1 Hyseq shall pay Kirin a royalty equal to [***] of Net Sales
billed or invoiced by Hyseq or its Affiliates or Sublicensees in the Hyseq
Territory.

               3.3.2 Kirin shall pay Hyseq a royalty equal to [***] of Net Sales
billed or invoiced by Kirin or its Affiliates or Sublicensees in the Kirin
Territory.

        3.4 ROYALTY PAYMENT TERMS.

               3.4.1 All royalty payments due and payable pursuant to Section
3.3 shall be made within [***] after the close of the calendar quarter in which
the applicable Net Sales were billed or invoiced. Each payment shall be
accompanied by a written statement setting forth in reasonable detail the Net
Sales in each country for each New Product, the rates of exchange (if
applicable), and the royalty calculation.


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               3.4.2 All royalty payments due and payable pursuant to Section
3.3 shall be made in United States Dollars. Each payment shall be made by wire
transfer to such financial institutions and account numbers as the other Party
may designate in writing. In the event that a Party (or its Affiliates or
Sublicensees) sells New Products in foreign currencies other than United States
Dollars, the royalties owed shall be calculated by such Party (or its Affiliates
or Sublicensees) in the foreign currency (and otherwise in accordance with such
Party's or its Affiliates' or Sublicensees' standard accounting procedures) by
converting the total amount of each foreign-currency royalty owed for the
applicable reporting period to United States Dollars at the exchange rate in the
United States (calculated by reference to the "United States Dollar noon buying
rates," or its equivalent, as published in the Wall Street Journal) in effect on
the last business day of the applicable reporting period.

               3.4.3 Each Party shall keep and maintain accurate books and
records to verify the number of units of New Products sold or otherwise disposed
of during a reporting period by such Party, its Affiliates and its Sublicensees,
and such other information as may be reasonably required to confirm the amounts
payable hereunder with respect to such reporting period. Each Party shall
preserve such books and records for a period of [***] after the end of the
period covered by such books and records, which obligation shall survive for
[***] after expiration or termination of this Agreement. Each Party (the
"AUDITING PARTY") shall have the right, on [***] advance written notice and not
more than [***] in any twelve (12) month period, to have an independent
accounting firm reasonably acceptable to the other Party (the "AUDITED PARTY")
examine such books, records and accounts of the Audited Party during the Audited
Party's normal business hours solely to verify the accuracy of the royalty
reports and the amount of payments made by the Audited Party hereunder during
the preceding [***] quarterly reporting periods. The accounting firm shall not
be paid on a contingency or other basis related to the outcome of the audit, and
shall execute a confidentiality agreement with the Audited Party in a form
mutually acceptable to the Parties that prohibits the accounting firm from
disclosing or using information obtained in connection with the audit other than
the disclosure to the Auditing Party of the amount of any underpayment or
overpayment. Any such audit shall be conducted during the Audited Party's
regular business hours, in such a manner so as not to interfere with the Audited
Party's normal business activities, and shall be at the Auditing Party's
expense, provided that if such audit reveals an underpayment of more than [***]
during any reporting period, the Audited Party shall pay the costs of the audit.

               3.4.4 Any deduction, withholding or similar taxes that a Party is
required by statute to withhold with respect to any royalty payment payable
hereunder shall be deducted from such payment; provided that the deducting Party
shall provide the other Party with a copy of the certificate or other
documentation demonstrating the payment to applicable tax authorities of the
deducted, withheld or taxed amount. Late payments shall be subject to interest
at a rate equal to [***] per annum or the maximum rate allowed by law, whichever
is less.

        3.5 ADDITIONAL TECHNOLOGY.

               3.5.1 During the term of this Agreement, if either Party becomes
aware of technology or related intellectual property rights relating to a New
Product that is held or otherwise controlled by a Third Party, and such Party
believes such technology and/or intellectual property rights are required to
make, use, sell, offer for sale or import such New Product ("ADDITIONAL
TECHNOLOGY") in any country within the Hyseq Territory, Kirin Territory or Other
Territory, as


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applicable, such Party may present a description of such technology, along with
an analysis of the purported need for such technology, to the JRDC. Such Party
shall [***]. Upon the written approval of the JRDC, which approval shall not be
unreasonably withheld, such Party shall have the right to [***], provided that
in no event will [***].

               3.5.2 Notwithstanding anything to the contrary in this Section
3.5, this section shall not limit or otherwise restrict either Party in
procuring technology or intellectual property rights.

                                    ARTICLE 4

                               GRANTS OF LICENSES

        4.1 GRANT OF LICENSES BY HYSEQ TO KIRIN.

               4.1.1 Subject to the terms and conditions of this Agreement,
Hyseq hereby grants to Kirin and its Affiliates a non-exclusive right and
license, without a right to grant sublicenses, under the Hyseq Technology and
Hyseq Improvements, as follows: (a) worldwide, solely to conduct Kirin's
obligations to perform the R&D Work in accordance with the R&D Plan; (b) in the
Kirin Territory to make, use, sell, offer for sale and import New Products in
the Kirin Territory; and (c) in the Other Territory to make, use, sell, offer
for sale and import New Products in the Other Territory solely as directed by
the JRDC pursuant to Article 2.

               4.1.2 Subject to the terms and conditions of this Agreement and
upon designation of a Development Candidate by the JRDC, Hyseq grants to Kirin
and its Affiliates, on a Development Candidate-by-Development Candidate basis, a
worldwide co-exclusive right and license (i.e., exclusive except for Hyseq's
retention of all such rights for itself and its Affiliates and its
Sublicensees), under all Patent Rights of Hyseq that claim each Development
Candidate and are listed on Exhibit D, including without limitation, the Prior
Art Inventions, to make, use and import (and to have such rights exercised on
its or their behalf) Development Candidates for the limited purpose of
conducting the R&D Work in accordance with the R&D Plan, as directed by the JRDC
pursuant to Article 2. Kirin and its Affiliates shall have the right to grant
sublicenses under the foregoing license only upon the prior written consent of
Hyseq, which shall not be unreasonably withheld or delayed.

               4.1.3 Subject to the terms and conditions of this Agreement ,
Hyseq grants to Kirin and its Affiliates, on a New Product-by-New Product basis,
an exclusive right and license, under all Patent Rights of Hyseq that claim each
New Product and are listed on Exhibit D, to make, use, sell, offer for sale and
import New Products in the Kirin Territory and, solely as directed by the JRDC
pursuant to Article 2, in the Other Territory. Kirin and its Affiliates shall
have the right to grant sublicenses under the foregoing license only upon the
prior written consent of Hyseq, which shall not be unreasonably withheld or
delayed.

        4.2 GRANT OF LICENSES BY KIRIN TO HYSEQ.

               4.2.1 Subject to the terms and conditions of this Agreement,
Kirin hereby grants to Hyseq and its Affiliates a non-exclusive right and
license, without a right to grant sublicenses, under the Kirin Technology and
Kirin Improvements, as follows: (a) worldwide, solely to conduct


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Hyseq's obligations to perform the R&D Work in accordance with the R&D Plan; (b)
in the Hyseq Territory to make, use, sell, offer for sale and import New
Products in the Hyseq Territory; and (c) in the Other Territory to make, use,
sell, offer for sale and import New Products in the Other Territory solely as
directed by the JRDC pursuant to Article 2.

               4.2.2 Subject to the terms and conditions of this Agreement and
upon designation of a Development Candidate by the JRDC, Kirin grants to Hyseq
and its Affiliates, on a Development Candidate-by-Development Candidate basis, a
worldwide co-exclusive right and license (i.e., exclusive except for Kirin's
retention of all such rights for itself and its Affiliates and its
Sublicensees), under all Patent Rights of Kirin that claim each Development
Candidate and are listed on Exhibit D, including without limitation, the Prior
Art Inventions, to make, use and import (and to have such rights exercised on
its or their behalf) Development Candidates for the limited purpose of
conducting the R&D Work in accordance with the R&D Plan, as directed by the JRDC
pursuant to Article 2. Hyseq and its Affiliates shall have the right to grant
sublicenses under the foregoing license only upon the prior written consent of
Kirin, which shall not be unreasonably withheld or delayed.

               4.2.3 Subject to the terms and conditions of this Agreement Kirin
grants to Hyseq and its Affiliates, on a New Product-by-New Product basis, an
exclusive right and license, under all Patent Rights of Kirin that claim each
New Product and are listed on Exhibit D, to make, use, sell, offer for sale and
import New Products in the Hyseq Territory and, solely as directed by the JRDC
pursuant to Article 2, in the Other Territory. Hyseq and its Affiliates shall
have the right to grant sublicenses under the foregoing license only upon the
prior written consent of Kirin, which shall not be unreasonably withheld or
delayed.

        4.3 NO OTHER RIGHTS. This Agreement confers no right, license or
interest by implication, estoppel or otherwise under any patents, patent
applications, know-how or other intellectual property rights of either Party
except as expressly set forth in this Article 4 and in Articles 5 and 8. Each
Party hereby expressly reserves all rights and interests with respect to
patents, patent applications, know-how or other intellectual property rights not
expressly granted to the other Party hereunder.

                                    ARTICLE 5

                          INTELLECTUAL PROPERTY MATTERS

        5.1 OWNERSHIP OF INTELLECTUAL PROPERTY.

               5.1.1 JOINT INVENTIONS; JOINT PATENTS; OTHER JOINT INVENTIONS.
Subject to the provisions of Section 5.1.6, the Parties shall jointly own all
Joint Inventions, Joint Patents and Other Joint Inventions. Unless otherwise
explicitly provided herein, neither Party shall have any right or obligation of
consent, accounting or payment of royalties or other consideration with respect
to such Party's commercialization or exploitation of any Joint Invention, Joint
Patent or Other Joint Inventions.

               5.1.2 ASSIGNMENT BY HYSEQ. In order to effect the joint ownership
provisions of Section 5.1.1, and subject to Section 5.1.6, Hyseq hereby assigns
and agrees to assign to Kirin a


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                                       13


one-half undivided interest (and thereby retains an equal one-half undivided
interest) in, to and under: (a) any Joint Invention or Other Joint Invention
made solely by the employees, agents or contractors of Hyseq and its Affiliates;
and (b) all Patent Rights claiming such Joint Invention or Other Joint
Inventions.

               5.1.3 ASSIGNMENT BY KIRIN. In order to effect the joint ownership
provisions of Section 5.1.1, and subject to Section 5.1.6, Kirin hereby assigns
and agrees to assign to Hyseq a one-half undivided interest (and thereby retains
an equal one-half undivided interest) in, to and under: (a) any Joint Invention
or Other Joint Invention made solely by the employees, agents or contractors of
Kirin and its Affiliates; and (b) all Patent Rights claiming such Joint
Invention or Other Joint Invention.

               5.1.4 HYSEQ TECHNOLOGY; HYSEQ IMPROVEMENT. As between the
Parties, subject only to the licenses set forth in Article 4 and Article 8, and
the provisions of Section 5.1.6, Hyseq shall (a) retain all right, title and
interest in and to the Hyseq Technology, and (b) solely own (i) any Hyseq
Improvements (whether or not such Hyseq Improvements are invented, developed or
made solely by or with the contribution of the employees, agents or contractors
of Kirin) and (ii) all Patent Rights claiming, covering or directed to any such
Hyseq Improvements. To the extent necessary to implement the foregoing, Kirin
hereby assigns and agrees to assign to Hyseq all of Kirin's right, title and
interest in, to and under the Hyseq Improvements.

               5.1.5 KIRIN TECHNOLOGY; KIRIN IMPROVEMENT. As between the
Parties, subject only to the licenses set forth in Article 4 and Article 8, and
the provisions of Section 5.1.6, Kirin shall (a) retain all right, title and
interest in and to the Kirin Technology, and (b) solely own (i) any Kirin
Improvements (whether or not such Kirin Improvements are invented, developed or
made solely by or with the contribution of the employees, agents or contractors
of Hyseq) and (ii) all Patent Rights claiming, covering or directed to any such
Kirin Improvements. To the extent necessary to implement the foregoing, Hyseq
hereby assigns and agrees to assign to Kirin all of Hyseq's right, title and
interest in, to and under the Kirin Improvements.

               5.1.6 PRIOR ART INVENTIONS. Notwithstanding anything in this
Section 5.1 to the contrary, if only one Party or its Affiliates (the "FIRST
PARTY") owns subject matter that qualifies as prior art (as specifically
identified in 35 U.S.C. Section 102(e), (f) or (g)) with respect to any
Invention conceived, developed or reduced to practice by the employees, agents
or contractors of the other Party or its Affiliates (the "SECOND PARTY") or by
the Second Party and First Party in the course of performance of the R&D Work or
commercialization of a New Product, then the First Party shall own all right,
title and interest in, to and under such Invention, and all Patent Rights and
other intellectual property rights therein and thereunder, solely in the United
States (thereafter, a "PRIOR ART INVENTION"); provided, however, that the rights
to such Invention outside of the United States shall be as otherwise set forth
in this Agreement and shall be unaffected by this Section 5.1.6, provided
further that the Prior Art Invention shall not include Kirin Improvements and
Hyseq Improvements. In accordance with the foregoing, if, in the course of
making required disclosures of any Invention pursuant to this Agreement, or
preparing a United States patent application claiming, covering or directed to
any Invention, one Party becomes aware of any subject matter owned by either of
the Parties that qualifies as prior art (pursuant to 35 U.S.C. Section 102(e),
(f) or (g)) with respect to such Invention, such Party shall provide a detailed
written notice thereof to the other Party, and, following the other Party's
receipt of such notice, the Parties shall cooperate to execute all


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instruments required to document the assignment of the Prior Art Invention
required by this Section 5.1.6. The Second Party hereby agrees to transfer and
assign to the First Party all of its right, title and interest in, to and under
any such Prior Art Invention, and all Patent Rights therein, thereto, and
thereunder, solely in the United States, provided, however that such Prior Art
Invention, and all Patent Rights therein, thereto, and thereunder, outside the
United States shall be jointly owned as otherwise set forth in this Agreement
and shall be unaffected by this Section 5.1.6. The prosecution and maintenance
of any Patent Rights in, to and under any Prior Art Inventions owned by the
First Party pursuant to this Section 5.1.6 shall be governed in accordance with
the provisions of Section 5.3.

               5.1.7 Each Party shall execute or cause to be executed any
assignments or other instruments and documents and provide such other reasonable
assistance and cooperation as may be reasonably necessary or appropriate to
implement the provisions of this Section 5.1 and the assignments hereunder,
including, without limitation, by executing agreements with each Party's
employees, agents and contractors sufficient to convey to such Party the rights
transferred in this Section 5.1.

        5.2 OWNERSHIP OF APPROVAL APPLICATIONS AND REGULATORY APPROVALS.

               5.2.1 Subject to the rights granted to or owned by Kirin
hereunder, including without limitation, the rights owned by Kirin set forth in
Section 5.2.3, Hyseq shall own all right, title and interest in all Approval
Applications necessary to obtain Regulatory Approvals for New Products, together
with any Regulatory Approvals obtained in connection therewith, filed with or
issued by a governmental authority for a country or territory within the Hyseq
Territory and, as directed by the JRDC pursuant to Section 2.1.3, the Other
Territory. Such Approval Applications, together with any Regulatory Approvals
obtained in connection therewith, shall be filed in Hyseq's name and owned by
Hyseq.

               5.2.2 Subject to the rights granted to or owned by Hyseq
hereunder, including without limitation, the rights owned by Hyseq set forth in
Section 5.2.3, Kirin shall own all right, title and interest in all Approval
Applications necessary to obtain Regulatory Approvals required for manufacture,
marketing and sale of New Products, together with any Regulatory Approval
obtained in connection therewith, filed with or issued by a governmental
authority for a country or territory within the Kirin Territory and, as directed
by the JRDC pursuant to Section 2.1.3, the Other Territory. Such Approval
Applications, together with any Regulatory Approvals obtained in connection
therewith, shall be filed in Kirin's name and owned by Kirin.

               5.2.3 Each Party shall provide to the other Party [***] any new
or pending Approval Application. Each Party shall [***], and shall [***]
regarding Approval Application strategy. Each Party shall keep the other Party
informed of the status of an Approval Application to the extent known by each
Party.

        5.3 PROSECUTION AND MAINTENANCE OF SOLELY OWNED PATENTS; ABANDONMENT.

               5.3.1 Each Party shall have the sole right to file, prosecute and
maintain such Party's solely owned Patent Rights claiming, covering or directed
to a Development Candidate or New Product and shall bear all Patent Costs
associated therewith. Such Party (the "PROSECUTING


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                                       15


PARTY") shall provide to the other Party [***]. The Prosecuting Party shall
[***] with respect to any patent within such Patent Rights, and shall [***]
regarding the patent prosecution strategy for such Patent Rights. The
Prosecuting Party agrees to keep the other Party informed of the course of
patent prosecution or other proceedings relating to such Patent Rights to the
extent known by Prosecuting Party.

               5.3.2 Notwithstanding Section 5.3.1, in the event a Prosecuting
Party (as defined in Section 5.3.1) elects, on a country-by-country basis, not
to file or not to continue to prosecute and thereby abandon an application for a
patent, or not to maintain and thereby abandon a patent that it has the first
right to file, prosecute or maintain under Section 5.3.1 and that claims, or
which is required to make, use, sell, offer for sale or import, a Development
Candidate or New Product in such country or jurisdiction, such Party shall
notify the other Party not less than [***] before any relevant deadline, and
thereafter such other Party shall have the right to pursue, in such country or
jurisdiction, at such other Party's expense and in such other Party's sole
discretion, prosecution of such patent application or maintenance of such issued
patent, provided that with respect to any patent application or patent licensed
to a Party by a Third Party, the other Party shall only have a right to pursue
prosecution or maintenance to the extent permitted in the applicable agreement
with such Third Party. The other Party shall [***] any Patent Costs associated
with the prosecution or maintenance of such patent application or patent [***].

        5.4 PROSECUTION AND MAINTENANCE OF JOINT PATENTS; ABANDONMENT. The JRDC
shall determine and implement a patent strategy with respect to all Joint
Inventions and Other Joint Inventions that may be patentable. With respect to
all Joint Inventions and Other Joint Inventions for which the JRDC determines
patent protection should be sought, the JRDC shall direct, and the Parties shall
cooperate in, the preparation, filing and prosecution of Joint Patents, and the
Parties shall discuss and agree on the content and form of relevant patent
applications and any other relevant matters before such applications are made.
Each Party shall consider in good faith any comments from the other regarding
steps to strengthen such Joint Patents.

               5.4.1 Unless otherwise directed by the JRDC, Hyseq shall be
considered the Lead Party (as further described in Section 5.4.4) for Joint
Patents within the Hyseq Territory.

               5.4.2 Unless otherwise directed by the JRDC, Kirin shall be
considered the Lead Party (as further described in Section 5.4.4) for Joint
Patents within the Kirin Territory.

               5.4.3 The JRDC shall assign either Hyseq or Kirin as the Lead
Party (as further described in Section 5.4.4) for Joint Patents within the Other
Territory (or any jurisdiction therein).

               5.4.4 Unless otherwise directed by the JRDC, the Lead Party shall
have the right to file, prosecute and maintain Joint Patents within the Hyseq
Territory, Kirin Territory and/or Other Territory, as applicable, and shall bear
all Patent Costs associated therewith. In the event that the Lead Party elects
not to prosecute or maintain a patent application or patent with respect to a
particular Joint Invention or particular country or jurisdiction, the Lead Party
shall provide [***] notice thereof and the other Party may elect to prosecute
and maintain such patent application or patent at its sole discretion and
expense, and all rights in such patent application or patent shall be assigned
to such other Party. Either Party may choose at any time not to continue to pay
any such Patent Costs with respect to a particular Joint Patent, and shall
thereafter [***] if the other Party


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pays all such Patent Costs. Such [***] shall take place in a timely manner to
enable the [***] Party to meet any external requirement concerning prosecution
matters and paying Patent Costs. In the event that a Party elects, at any time,
not to participate in the preparation, filing and prosecution of any patent
application covering a Joint Invention, such Party shall provide reasonable
assistance to the other Party, at the sole expense of such other Party, with
respect to any activities reasonably determined by such other Party as necessary
to obtain patent protection for such Joint Invention.

        5.5 ENFORCEMENT OF PATENT RIGHTS.

               5.5.1 If any Patent Right within the Joint Patents, or any Patent
Right within either Party's solely owned Patent Rights claiming, covering or
directed to a Development Candidate or New Product that is subject to Section
5.3, is [***] infringed by a Third Party through the manufacture, use, sale,
offer for sale or importation of any product (an "INFRINGEMENT"), the Party
first having knowledge of such infringement shall promptly notify the other
Party in writing. Such notice shall set forth the facts of the Infringement in
reasonable detail.

               5.5.2 Hyseq shall have the first right, but not an obligation, to
institute, prosecute and control, using counsel of Hyseq's choice, any action or
proceeding with respect to an Infringement of a patent within the Joint Patents,
or its solely owned Patent Rights claiming, covering or directed to a
Development Candidate or New Product, in the Hyseq Territory and such Other
Territory as directed by the JRDC. If Hyseq initiates any such action or
proceeding, Kirin agrees [***]. In the event that Hyseq fails to institute an
action or proceeding with respect to such Infringement within a period of [***]
after notice of such Infringement, and fails thereafter to prosecute such action
or proceeding, Kirin shall have the right, but not the obligation, to institute
and/or prosecute and control an action or proceeding in its name with respect to
such an Infringement by counsel of Kirin's choice. In the event that Kirin
institutes any such action or proceeding, Hyseq agrees [***].

               5.5.3 Kirin shall have the first right, but not an obligation, to
institute, prosecute and control, using counsel of Kirin's choice, any action or
proceeding with respect to an Infringement, of a patent within the Joint
Patents, or its solely owned Patent Rights claiming, covering or directed to a
Development Candidate or New Product, in the Kirin Territory and such Other
Territory as directed by the JRDC. If Kirin initiates any such action or
proceeding, Hyseq agrees [***]. In the event that Kirin fails to institute and
an action or proceeding with respect to such Infringement within a period of
[***] after notice of such Infringement, and fails thereafter to prosecute such
action or proceeding, Hyseq shall have the right, but not the obligation, to
institute and/or prosecute and control an action or proceeding in its name with
respect to such an Infringement by counsel of Hyseq's choice. In the event that
Hyseq institutes any such action or proceeding, Kirin agrees [***].

               5.5.4 Any recovery obtained by a Party enforcing one or more
patents, in accordance with this Section 5.5 (the "ENFORCING PARTY"), whether by
judgment, award, decree or settlement, shall be [***]. Any remainder of the
recovery shall be [***].

        5.6 INFRINGEMENT OF THIRD PARTY RIGHTS.


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               5.6.1 In the event that a Third Party alleges that intellectual
property rights owned, held or otherwise controlled by such Third Party are
being infringed or have been infringed by one or both Parties in connection with
the manufacture, use, sale, offer for sale or importation of a Development
Candidate or New Product in the Hyseq Territory, [***], any claim in any legal
action or proceeding arising from such allegation. The Parties shall consult
with each other concerning strategy, approaches and the consequences of
approaches that may be taken under this Section 5.6.1. Kirin shall [***].

               5.6.2 In the event that a Third Party alleges that intellectual
property rights owned, held or otherwise controlled by such Third Party are
being infringed or have been infringed by one or both Parties in connection with
the manufacture, use, sale, offer for sale or importation of a Development
Candidate or New Product in the Kirin Territory, [***]. The Parties shall
consult with each other concerning strategy, approaches and the consequences of
approaches that may be taken under this Section 5.6.2. Hyseq shall [***].

               5.6.3 In the event that a Third Party alleges that intellectual
property rights owned, held or otherwise controlled by such Third Party are
being infringed or have been infringed by one or both Parties in connection with
the manufacture, use, sale, offer for sale or importation of a Development
Candidate or New Product in the Other Territory, [***]. The Parties shall
consult with each other concerning strategy, approaches and the consequences of
approaches that may be taken under this Section 5.6.3. Unless otherwise agreed
upon by the Parties, the Parties shall [***] in connection with any such action
or proceeding. The Parties shall [***].

        5.7 SETTLEMENT WITH A THIRD PARTY. Except as expressly provided herein,
[***].

                                    ARTICLE 6

                         REPRESENTATIONS AND WARRANTIES

        6.1 REPRESENTATIONS AND WARRANTIES OF THE PARTIES CONCERNING CORPORATE
AUTHORIZATIONS. Each Party represents and warrants to the other Party that:

               (a)    Such Party is duly organized and validly existing and in
                      good standing under the laws of the jurisdiction of its
                      organization.

               (b)    Such Party has the full corporate power and is duly
                      authorized to enter into, execute and deliver this
                      Agreement, and to carry out and otherwise perform its
                      obligations hereunder.

               (c)    This Agreement has been duly authorized, executed and
                      delivered by such Party and constitutes a legal, valid and
                      binding obligation enforceable against it in accordance
                      with its terms subject, as to enforcement, to bankruptcy,
                      insolvency, reorganization and other laws of general
                      applicability relating to or affecting creditors' rights
                      and to the availability of particular remedies under
                      general equity principles.

               (d)    Such Party's execution, delivery and performance of this
                      Agreement and its compliance with the terms and conditions
                      hereof do not, and will not during


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.



                                       18


                      the term of this Agreement or any of its surviving
                      provisions conflict, with or result in a breach of any of
                      the terms and conditions of or constitute a default under
                      (i) any agreement where such conflict, breach or default
                      would impair in any material respect the ability of it to
                      perform its obligations or grant rights hereunder, (ii)
                      the provisions of its charter document or bylaws, or (iii)
                      any material law, rule, regulation or any order, writ,
                      injunction or decree of any court or governmental
                      authority entered against it or by which any of its
                      property is bound.

               (e)    As of the Effective Data, except for those actions, suits
                      and proceedings identified in each Party's publicly
                      available disclosures, including without limitation
                      disclosures required by the securities regulations
                      applicable to each Party, there are no actions, suits or
                      proceedings pending or threatened against it or its
                      Affiliates that may affect its ability to carry out its
                      obligations under this Agreement.

        6.2 RIGHT AND AUTHORITY TO GRANT LICENSES.

               6.2.1 As of the Effective Date, Hyseq represents and warrants to
Kirin that it has the right and authority to grant the rights and licenses
granted to Kirin and its Affiliates hereunder and is the sole and exclusive
owner of, or otherwise has the right to license, all intellectual property and
rights therein and thereto licensed to Kirin and its Affiliates hereunder.

               6.2.2 As of the Effective Date, Kirin represents and warrants to
Hyseq that it has the right and authority to grant the rights and licenses
granted to Hyseq and its Affiliates hereunder and is the sole and exclusive
owner of, or otherwise has the right to license, all intellectual property and
rights therein and thereto licensed to Hyseq and its Affiliates hereunder.

        6.3 [***] RESEARCH WORK. Unless otherwise agreed upon by the Parties in
writing, each Party hereby agrees that it shall not (and shall not permit any of
its Affiliates to), directly or indirectly, [***].

        6.4 NO [***] WARRANTY. Notwithstanding anything to the contrary herein,
nothing in this Agreement shall be deemed or construed as a representation or
warranty by either Party that any [***] of such Party is [***].

        6.5 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE
PARTIES MAKE NO, AND EXPRESSLY DISCLAIM ALL, REPRESENTATIONS OR WARRANTIES OF
ANY KIND WHATSOEVER, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR NON-INFRINGEMENT.

        6.6 LIMITATION OF LIABILITY. EXCEPT WITH RESPECT TO A BREACH OF EACH
PARTY'S OBLIGATIONS PURSUANT TO ARTICLE 7 AND WITH RESPECT TO LIABILITY ARISING
UNDER ARTICLE 9, NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
CONSEQUENTIAL, PUNITIVE OR INDIRECT DAMAGES AS A RESULT OF ITS BREACH OF THIS
AGREEMENT, NO MATTER THE CAUSE OR THEORY


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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.



                                       19


OF LIABILITY. THE FOREGOING LIMITATION SHALL APPLY EVEN IF THE OTHER PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING ANY FAILURE
OF ESSENTIAL PURPOSE OF ANY LIMITED WARRANTY PROVIDED HEREIN.

                                    ARTICLE 7

                                 CONFIDENTIALITY

        7.1 CONFIDENTIALITY; EXCEPTIONS. Except as otherwise provided in this
Agreement, the Parties agree that, for the term of this Agreement and [***]
thereafter, all non-public, proprietary, or "confidential"-marked invention
disclosures, Inventions, know-how, data, and technical, financial and other
information of any nature whatsoever, including, without limitation, all
discussions and information exchanged or disclosed, in writing or through
observation, by one Party (the "DISCLOSING PARTY") to the other Party (the
"RECEIVING PARTY") hereunder (collectively, "CONFIDENTIAL INFORMATION") shall be
received and maintained by the Receiving Party in strict confidence, shall not
be used by the Receiving Party for any purpose other than the purposes expressly
permitted by this Agreement or for the purpose of exercising the Receiving
Party's rights and obligations under this Agreement, and shall not be disclosed
to any Third Party (including, without limitation, in connection with any
publications, presentations or other disclosures). Notwithstanding the
foregoing, the Receiving Party may, subject to the provisions of this Agreement,
disclose the Disclosing Party's Confidential Information to those of its and its
Affiliates' or Sublicensees' directors, officers, employees, agents, consultants
and clinical investigators that have a need to know such Confidential
Information to achieve the purposes of this Agreement, provided that such
Receiving Party shall ensure that its and its Affiliates' or Sublicensees'
directors, officers, employees, agents, consultants or clinical investigators to
whom disclosure is to be made are bound by the obligations of confidentiality
and non-disclosure and non-use no less stringent than those set forth herein.
Each Party shall promptly notify the other Party in writing upon discovery of
any unauthorized use or disclosure of the Confidential Information, and shall
describe the facts and circumstances of such use or disclosure. Except to the
extent expressly provided for in this Agreement, Confidential Information
belongs to and shall remain the property of the Disclosing Party. The provisions
of this Article 7 shall not apply to any information which can be shown by
contemporaneous written documentation by the Receiving Party:

               7.1.1 To have been known to or in the possession of the Receiving
Party prior to the date of its actual receipt from the Disclosing Party;

               7.1.2 To be or to have become readily available to the public
other than through any act or omission of the Receiving Party in breach of this
Agreement or any other agreement between the Parties;

               7.1.3 To have been disclosed to the Receiving Party, other than
under an obligation of confidentiality, by a Third Party which had no obligation
not to disclose such information to others; or

               7.1.4 To have been subsequently independently developed by the
Receiving Party without use of the Confidential Information as demonstrated by
competent written records.


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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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                                       20


        7.2 AUTHORIZED DISCLOSURE. Notwithstanding anything to the contrary in
Section 7.1 of this Agreement, each Party shall have the right to disclose
Confidential Information hereunder solely to the extent such disclosure is
reasonably necessary in connection with submissions to any governmental
authority for the purposes of this Agreement or in filing or prosecuting patent
applications contemplated under this Agreement, [***] solely to the extent
required by law, complying with Applicable Laws, conducting R&D Work for the
purposes expressly permitted by this Agreement, or complying with applicable
securities laws and regulations; provided, however, that in the event of any
such anticipated disclosure of the Disclosing Party's Confidential Information
by the Receiving Party, the Receiving Party shall, except where impracticable,
give reasonable advance notice to the Disclosing Party of such disclosure
requirement (so that the Disclosing Party may seek a protective order and/or
other appropriate remedy or waive compliance with the confidentiality provisions
of this Article 7) and shall use its [***] efforts to secure confidential
treatment of such Confidential Information required to be disclosed.

        7.3 RETURN OF CONFIDENTIAL INFORMATION. The Receiving Party shall keep
Confidential Information belonging to the Disclosing Party in appropriately
secure locations. Upon the termination of this Agreement, any and all
Confidential Information possessed in tangible form by a Receiving Party, its
Affiliates or Sublicensees or its or any of their officers, directors,
employees, agents, consultants or clinical investigators and belonging to the
Disclosing Party, shall, upon written request, be immediately returned to the
Disclosing Party (or destroyed if so requested) and not retained by the
Receiving Party, its Affiliates or Sublicensees or any of their officers,
directors, employees, agents, consultants or clinical investigators, provided
that, in the event any rights or licenses survive the termination of this
Agreement pursuant to Article 8, each Party shall be entitled to retain any
Confidential Information of the other Party that is reasonably required to
exercise such rights and licenses for so long as such rights and licenses
survive. Notwithstanding the foregoing, each Party may retain one (1) copy of
any Confidential Information in an appropriately secure location for
record-keeping purposes.

                                    ARTICLE 8

                        TERM, TERMINATION AND ABANDONMENT

        8.1 TERM OF AGREEMENT. The term of this Agreement shall commence on the
Effective Date and continue for three (3) years after the Effective Date (the
"Term"), unless sooner terminated in accordance with this Article 8.
Notwithstanding the foregoing, if the JRDC fails to approve the initial R&D Plan
within one hundred eighty (180) days after the Effective Date, either Party may
terminate this Agreement at any time, effective upon delivery of notice thereof.

        8.2 TERMINATION FOR CAUSE.

               8.2.1 If either Party commits a material breach of this Agreement
at any time, which breach is not cured within [***] after written notice from
the non-breaching Party specifying the breach, the non-breaching Party shall
have the right to terminate this Agreement by written notice. The Parties
acknowledge and agree that failure to exercise any right or option, or to take
any action expressly within the discretion of a Party, shall not be deemed to be
a material breach by the Party with such right, option or discretion.


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
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                                       21


               8.2.2 Each Party shall have the right to terminate this Agreement
if there is a Change of Control of the other Party.

        8.3 TERMINATION FOR INSOLVENCY. Either Party may terminate this
Agreement upon written notice to the other Party on or after the occurrence of
any of the following events: (a) the appointment of a trustee, receiver or
custodian for all or substantially all of the property of the other Party, or
for any lesser portion of such property, if the result materially and adversely
affects the ability of the other Party to fulfill its obligations hereunder,
which appointment is not dismissed within sixty (60) days, (b) the determination
by a court or tribunal of competent jurisdiction that the other Party is
insolvent such that such other Party's liabilities exceed the fair market value
of its assets, (c) the filing of a petition for relief in bankruptcy by the
other Party on its own behalf, or the filing of any such petition against the
other Party if the proceeding is not dismissed or withdrawn within sixty (60)
days thereafter, (d) an assignment by the other Party for the benefit of
creditors, or (e) the dissolution or liquidation of, or cessation of business in
the ordinary course by, the other Party.

        8.4 EFFECT OF TERMINATION; SURVIVAL.

               8.4.1 Upon termination or expiration of this Agreement, all of
the Parties' rights and obligations hereunder shall terminate, except as
provided in this Article 8.

               8.4.2 Except as provided in Section 8.4.3, upon termination or
expiration of this Agreement, if one or more New Products exists, then, for so
long as such one or both Parties or its Affiliates (or their Sublicensees)
continues to market and sell such New Products the following Sections shall
survive in addition to those set forth in Section 8.5: (a) Sections 2.2.2, 3.3,
3.4, 3.5, 4.1.1(b), 4.2.1(b), 4.1.3, 4.2.3, 6.1 and 6.2 shall remain in effect
until the earlier of (i) the last to expire of the Patent Rights claiming,
covering or directed to such New Products or (ii) the termination for cause,
pursuant to Section 8.2, of such surviving rights and obligations by either
Party; and (b) Sections 2.1.2, 2.1.3 and 2.1.4 shall survive solely to the
extent and for so long as necessary for the JRDC (or any approved subcommittee
thereof) to oversee the Parties' development and commercialization activities
with respect to one or more New Products.

               8.4.3 In the event a Party terminates this Agreement pursuant to
Section 8.2 or Section 8.3, (a) all licenses and rights granted to the other
Party pursuant to Article 4 shall terminate, and (b) the terminating Party shall
have an exclusive option to acquire (i) a worldwide, non-exclusive right and
license, without a right to grant sublicenses, under Hyseq Technology and Hyseq
Improvements or Kirin Technology and Kirin Improvements, as applicable, to
conduct research and development of Development Candidates and to make, have
made, use, sell, offer for sale and import any products resulting therefrom, and
(ii) a worldwide, royalty-bearing, exclusive right and license under all Patent
Rights of the other Party claiming, covering or directed to Development
Candidates, with a right to grant sublicenses, to make, use and evaluate such
Development Candidates and to make, have made, use, sell, offer for sale and
import any products resulting from such Development Candidates. The Party
entitled to exercise the foregoing option may do so only by providing written
notification thereof to the other Party at any time within a [***] period
commencing on the date of the other Party's written notice of termination of
this Agreement. Upon the exercise of the foregoing option, the Parties shall
negotiate [***] to establish


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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.



                                       22


promptly a separate agreement formalizing the specific terms and conditions of
the foregoing license on [***] terms.

        8.5 SURVIVAL. Articles 1, 5, 7 (to the extent provided therein), 9, 10
and 11 and Sections 4.1.1(c) (to the extent limited by, if at all, Sections
8.4.3, 8.7.1, 8.7.2 and 8.7.3), 4.2.1(c) (to extent limited by, if at all,
Sections 8.4.3, 8.7.1, 8.7.2 and 8.7.3), 4.3, 5.1.6, 6.4, 6.5, 6.6, 8.4, 8.5 and
8.6 shall survive any termination or expiration of this Agreement.

        8.6 ACCRUED RIGHTS. Termination or expiration of this Agreement for any
reason shall be without prejudice to any rights which shall have accrued to the
benefit of either Party prior to such termination or expiration, including
damages arising from any breach under this Agreement. Such termination or
expiration shall not relieve either Party from obligations which are expressly
indicated to survive termination or expiration of this Agreement.

        8.7 ABANDONMENT OF R&D WORK OR NEW PRODUCTS.

               8.7.1 Either Party shall have the right, upon not less than [***]
prior written notice to the other Party, to elect to abandon all of the R&D Work
with respect to one or more Development Candidates. In the event a Party so
elects to abandon its obligations with respect to any Development Candidate, or
if a Party fails to perform its obligations under Sections 2.2.1 or 2.2.2 for a
period of [***], then (a) all licenses and rights granted to the abandoning
Party pursuant to Sections 4.1.1, 4.1.2 and 4.1.3 or Sections 4.2.1, 4.2.2 and
4.2.3, as applicable, with respect to such Development Candidate shall
terminate, and (b) the other Party shall have an exclusive option to acquire (i)
a worldwide, non-exclusive right and license, without a right to grant
sublicenses, under Hyseq Technology and Hyseq Improvements or Kirin Technology
and Kirin Improvements, as applicable, to conduct research and development of
such Development Candidate and to make, have made, use, sell, offer for sale and
import any products resulting therefrom, and (ii) a worldwide, royalty-bearing,
exclusive right and license under all Patent Rights of the abandoning Party
claiming, covering or directed to such Development Candidate, with a right to
grant sublicenses, to make, use and evaluate such Development Candidate and to
make, have made, use, sell, offer for sale and import any products resulting
from such Development Candidate. The Party entitled to exercise the foregoing
option may do so only by providing written notification thereof to the other
Party at any time within a [***] period commencing on the date of the other
Party's written notice of abandonment of such Development Candidate, after which
such option shall expire. Upon the exercise of the foregoing option, the Parties
shall negotiate [***] to establish promptly a separate agreement formalizing the
specific terms and conditions of the foregoing license on [***] terms.

               8.7.2 Either Party shall have the right, upon not less than [***]
prior written notice to the other Party, to elect to abandon substantially all
efforts to promote, market and sell one or more New Products in the Hyseq
Territory, Kirin Territory or Other Territory, as applicable (or within any
jurisdiction therein). In the event a Party so elects to abandon its obligations
with respect to any New Product, or if a Party fails to perform its obligations
under Section 2.2.2 for a period of [***], (a) all licenses and rights granted
to the abandoning Party pursuant to Sections 4.1.1, 4.1.2 and 4.1.3 or Section
4.2.1, 4.2.2 and 4.2.3, as applicable, with respect to such New Product shall
terminate, and (b) the other Party shall have an exclusive option to acquire (i)
a worldwide, non-exclusive right and license, without a right to grant
sublicenses, under Hyseq Technology and


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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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                                       23


Hyseq Improvements or Kirin Technology and Kirin Improvements, as applicable, to
make, have made, use, sell, offer for sale and import such New Product and (ii)
a worldwide, royalty-bearing, exclusive right and license under all Patent
Rights of the abandoning Party claiming, covering or directed to such New
Product, with a right to grant sublicenses, to make, have made, use, sell, offer
for sale and import such New Product. The Party entitled to exercise the
foregoing option may do so only by providing written notification thereof to the
other Party at any time within a [***] period commencing on the date of the
other Party's written notice of abandonment of such New Product, after which
such option shall expire. Upon the exercise of the foregoing option, the Parties
shall negotiate [***] to establish promptly a separate agreement formalizing the
specific terms and conditions of the foregoing license on [***] terms.

               8.7.3 In the event that the JRDC fails to approve all Development
Work with respect to a Development Candidate (which had previously been the
subject of Research Work, and became a Development Candidate pursuant to Section
2.1.3(j) and for which Development Work has not been conducted), and such
failure is the consequence of one (1) Party's failure to vote in favor of such
Development Work, then: (a) all licenses and rights granted to each Party
pursuant to Section 4.1, 4.2 or 4.3, as applicable, with respect to such
Development Candidate shall terminate, and (b) the other Party shall have an
exclusive option to acquire (i) a worldwide, non-exclusive right and license,
without a right to grant sublicenses, under Hyseq Technology, or Hyseq's
interests in Patent Rights and other intellectual property rights covering Hyseq
Improvements and/or Prior Art Inventions, or Kirin Technology, or Kirin's
interests in Patent Rights and other intellectual property covering Kirin
Improvements or Prior Art Inventions, to conduct research and development of
such Development Candidate and to make, have made, use, sell, offer for sale and
import any products resulting therefrom, and (ii) a worldwide, royalty-bearing,
exclusive right and license under all Patent Rights or other intellectual
property rights of Hyseq or Kirin, as applicable, covering Joint Inventions,
with a right to grant sublicenses, to make, use and evaluate such Development
Candidate and to make, have made, use, sell, offer for sale and import any
products resulting from such Development Candidate. To exercise the foregoing
option, the Party with such option shall provide written notification thereof to
the other Party at any time within a [***] period commencing on the date of the
other Party's most recent failure to approve such Development Candidate for
Development Work, after which time period such option shall expire. Upon the
exercise of the foregoing option, the Parties shall negotiate [***] to establish
promptly a separate agreement formalizing the specific terms and conditions of
the foregoing license on [***] terms.

                                    ARTICLE 9

                                 INDEMNIFICATION

        9.1 INDEMNIFICATION BY HYSEQ. Hyseq shall defend and indemnify Kirin and
its Affiliates, and its and their respective directors, officers, employees and
agents (collectively, the "KIRIN INDEMNIFIED PARTIES"), against all claims,
damages, liabilities, losses, costs and expenses arising out of any suit, action
or proceeding brought against any Kirin Indemnified Party by a Third Party
(collectively, "KIRIN CLAIMS") if and to the extent arising from (a) a breach by
Hyseq of any of its representations and warranties set forth in Sections 6.1 or
6.2, or (b) any gross negligence or willful acts or omissions of Hyseq or any of
its employees or agents in connection with the performance of any
responsibilities to be performed by Hyseq under this Agreement, including
without limitation the R&D Work, or (c) the manufacture, use or sale of a
Development Candidate or New Product by


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COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
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Hyseq or its Affiliates or Sublicensees, or (d) any tax, interest, penalty or
associated expense owed by Hyseq or its Affiliates or imposed on or related to
any amounts received by Hyseq or its Affiliates, except in each case to the
extent any such Kirin Claim is subject to indemnification by Kirin pursuant to
Section 9.2.

        9.2 INDEMNIFICATION BY KIRIN. Kirin shall defend and indemnify Hyseq and
its Affiliates, and its and their respective directors, officers, employees and
agents (collectively, the "HYSEQ INDEMNIFIED PARTIES"), against all claims,
damages, liabilities, losses, costs and expenses arising out of any suit, action
or proceeding brought against any Hyseq Indemnified Party by a Third Party
(collectively, "HYSEQ CLAIMS") if and to the extent arising from (a) a breach by
Kirin of any of its representations and warranties set forth in Sections 6.1 or
6.2, or (b) any gross negligence or willful acts or omissions of Kirin or its
employees or agents in connection with the performance of any responsibilities
to be performed by Kirin under this Agreement, including without limitation the
R&D Work, or (c) the manufacture, use or sale of a Development Candidate or New
Product by Kirin or its Affiliates or Sublicensees, or (d) any tax, interest,
penalty or associated expense owed by Kirin or its Affiliates or imposed on or
related to any amounts received by Kirin or its Affiliates, except in each case
to the extent any such Hyseq Claim is subject to indemnification by Hyseq
pursuant to Section 9.1.

        9.3 PROCEDURE. Any Kirin Indemnified Party or Hyseq Indemnified Party
(each, an "INDEMNIFIED PARTY") shall give prompt written notice to the other
Party (the "INDEMNIFYING PARTY") of any Kirin Claim or Hyseq Claim, as
applicable, with respect to which indemnification may be required under this
Article 9, provided that failure to give such notice shall not impair the
obligation of the Indemnifying Party to provide indemnification hereunder except
if and to the extent that failure materially impairs the ability of the
Indemnifying Party successfully to defend such claim. The Indemnifying Party
shall be entitled to assume the defense and control of any Kirin Claim or Hyseq
Claim, as applicable, at its own cost and expense, provided that the Indemnified
Party shall have the right to be represented by its own counsel at its own cost
in such matters. The Indemnified Party shall provide all reasonable assistance
to the Indemnifying Party, at the Indemnifying Party's expense, in connection
with the defense of any claim hereunder. In the event the Indemnifying Party
declines to assume control of any Kirin Claim or Hyseq Claim, as applicable, the
Indemnified Party may assume such control the defense and settlement of such
claim at the sole cost and expense of the Indemnifying Party. The Indemnifying
Party shall not settle or dispose of any Kirin Claim or Hyseq Claim, as
applicable, [***] the Indemnified Party without [***].

                                   ARTICLE 10

                        GOVERNING LAW; DISPUTE RESOLUTION

        10.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California, without reference to or application
of its conflicts of laws rules or principles.

        10.2 DISPUTE RESOLUTION. The Parties are unable to resolve informally
any dispute arising out of or relating to this Agreement ("Dispute"), either
Hyseq or Kirin, by written notice to


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                                       25


the other, may have such Dispute referred to their respective executive officers
designated for attempted resolution by good faith negotiations (each, a
"Responsible Executive").

               FOR KIRIN:          President of Pharmaceutical Division

               FOR HYSEQ:          Chairman

        Any such Dispute shall be submitted to the Responsible Executives no
later than thirty (30) days following such request by either Hyseq or Kirin. All
negotiations pursuant to this Section 10.2 shall be treated as confidential
compromise and settlement negotiations. Nothing said or disclosed, nor any
document produced, in the course of such negotiations which is not otherwise
independently discoverable shall be disclosed to any Third Party nor offered or
received as evidence or used for impeachment or for any other purpose in any
current or future arbitration or litigation.

        10.3 ARBITRATION. In the event the Parties are not able to resolve a
Dispute within sixty (60) days after submission of the dispute to the
Responsible Executives pursuant to Section 10.2, such Dispute shall be settled
by arbitration; provided, however, that claims for injunctions and other
equitable relief shall be submitted to a court of competent jurisdiction; and
provided further that actions relating to the infringement, validity or
enforceability of any intellectual property right, including without limitation
a Patent Right, of either Party shall be submitted to a court of competent
jurisdiction in the country or territory in which such intellectual property
right exists or issued. In the case of Hyseq as the claimant in such
arbitration, such arbitration shall be held in Tokyo, Japan in accordance with
the Commercial Arbitration Rules of the Japan Commercial Arbitration
Association. In the case of Kirin as the claimant in such arbitration, such
arbitration shall be held in San Francisco, U.S.A., in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Judgment
upon the award rendered by such arbitration may be entered in any court having
jurisdiction over the party against which such award was rendered. Such
arbitration shall be conducted in the English language. The arbitrators shall
include one nominee of Hyseq and one nominee of Kirin and a third person
selected by said nominees. The Parties agree that any arbitration panel shall
include members knowledgeable as to evaluation of biopharmaceutical technology.
The prevailing Party shall be entitled to reasonable attorneys' fees and costs
to be fixed by the arbitrators.

        10.4 EXCLUSIVE DISPUTE RESOLUTION PROCEDURES. The Parties agree that the
procedures set forth in this Article 10 shall be the exclusive means of
resolving any and all Disputes between the Parties.

                                   ARTICLE 11

                                  MISCELLANEOUS

        11.1 ASSIGNMENT.

               11.1.1 Neither Party may assign or otherwise transfer its rights
or obligations under this Agreement without the prior written consent of the
other Party, such consent not to be unreasonably withheld, except that a Party
may assign or otherwise transfer its rights or obligations in whole or in part
without such consent, upon thirty (30) days prior written notice to the other
Party, (a) to an Affiliate of such Party, provided that no such assignment shall
relieve any Party as


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                                       26


the primary obligor hereunder, or (b) to a Third Party in connection with the
merger, consolidation, or sale of substantially all of the assets of the
assigning Party, or reorganization affecting substantially all of the assets or
voting control of the assigning Party, with respect to the subject matter of
this Agreement.

               11.1.2 This Agreement shall 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 shall be void.

        11.2 FORCE MAJEURE. Neither Party shall lose any rights hereunder or be
liable to the other Party for damages or losses on account of failure of
performance by the defaulting Party to the extent the failure is occasioned by
government action, war, fire, explosion, flood, strike, lockout, embargo, act of
God, or any other similar cause beyond the control of the defaulting Party,
provided that the Party claiming force majeure shall promptly notify the other
Party in writing setting forth the nature of such force majeure, shall use its
best efforts to eliminate, remedy or overcome such force majeure and shall
resume performance of its obligations hereunder as soon as reasonably
practicable after such force majeure ceases. Except as provided in the previous
sentence, if any force majeure continues for more than one hundred eighty (180)
days, the other Party may terminate this Agreement in part, on a
country-by-country basis, or in whole, if all countries are affected, upon
written notice to the affected Party.

        11.3 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and
deliver such further instruments, and to do all such other acts, as may be
necessary in order to carry out the express provisions of this Agreement.

        11.4 GOVERNMENTAL APPROVALS; COMPLIANCE WITH LAW. Parties shall make all
filings with governmental authorities as shall be required by Applicable Laws in
connection with this Agreement and the activities contemplated hereunder or
thereunder. In fulfilling its obligations under this Agreement each Party agrees
to comply in all material respects with all Applicable Laws.

        11.5 PUBLIC ANNOUNCEMENT. No announcement, news release, public
statement, publication or presentation relating to the existence of this
Agreement, or the terms hereof, shall be made without the other Party's prior
written approval; provided, however, that, subject to the provisions of Section
7.2, each Party shall have the right to make such disclosures as are required by
applicable law, including without limitation the securities regulations
applicable to each Party. Each Party agrees that it shall not publish or present
the results of the R&D Work (including any and all Inventions resulting
therefrom) carried out pursuant to this Agreement without the opportunity for
prior review by the other Party. Each Party shall provide the other Party an
opportunity to review any proposed abstract, manuscript or presentation
(including information to be presented orally) at least [***] prior to its
intended submission for publication, and each Party agrees, upon written request
from the other Party, not to submit such abstract or manuscript to any
publication, or to deliver such presentation, until the other Party has had a
reasonable opportunity and amount of time to review such publication or
presentation for its Confidential Information and to either: (i) secure patent
protection for any material in such publication or presentation that it believes
is patentable; or (ii) redact from the proposed abstract or manuscript the
Confidential Information of such reviewing Party, which redacted material shall
not be disclosed to any Third Party.


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.



                                       27


        11.6 NOTICES. All notices required or permitted to be given under this
Agreement shall be deemed given if delivered personally or by facsimile
transmission receipt verified, mailed by registered or certified mail return
receipt requested, postage prepaid, or sent by express courier service, to the
Parties at the following addresses, or at such other address for a Party as
shall be specified by like notice, provided that notices of a change of address
shall be effective only upon receipt thereof.

               IF TO HYSEQ:           HYSEQ, INC.
                                      670 Almanor Avenue
                                      Sunnyvale, California  94085
                                      Attention: Legal Department
                                      Telephone: 408-524-8100
                                      Facsimile: 408-524-8145

               IF TO KIRIN:           KIRIN BREWERY COMPANY, LTD.
                                      26-1, Jingumae 6-chome
                                      Shibuya-ku
                                      Tokyo 150-8011, Japan
                                      Attention: Licensing Department
                                      Telephone: 81-3-5485-6206
                                      Facsimile: 81-3-5485-6765

        The date of receipt of any notice given under this Agreement shall be
deemed to be the date given if delivered personally or by facsimile transmission
receipt verified, seven (7) days after the date mailed if mailed by registered
or certified mail return receipt requested, postage prepaid, and two (2) days
after the date sent if sent by express courier service.

        11.7 WAIVER. No failure of either Party to exercise and no delay in
exercising any right, power or remedy in connection with this Agreement (each, a
"RIGHT") shall operate as a waiver thereof, nor shall any single or partial
exercise of any Right preclude any other or further exercise of such Right or
the exercise of any other Right. To be effective, the waiver of any Right must
be set forth in a writing signed by both Parties.

        11.8 DISCLAIMER OF AGENCY. The relationship between the Parties
established by this Agreement is that of independent contractors, and nothing
contained herein shall be construed to (a) give either Party the power to direct
or control the day-to-day activities of the other, (b) constitute the Parties as
the legal representative or agent of the other Party or as partners, joint
venturers, co-owners or otherwise as participants in a joint or common
undertaking, or (c) allow either Party to bind the other Party or to create or
assume any liability or obligation of any kind, express or implied, against or
in the name of or on behalf of the other Party for any purpose whatsoever,
except as expressly set forth in this Agreement.

        11.9 SEVERABILITY. If any term, covenant or condition of this Agreement
or the application thereof to any Party or circumstance shall, to any extent, be
held to be invalid or unenforceable by a court or administrative agency of
competent jurisdiction, then (a) the remainder of this Agreement, or the
application of such term, covenant or condition to any Party or circumstance
other than those as to which it is held invalid or unenforceable, shall not be
affected


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.



                                       28


thereby and each term, covenant or condition of such documents shall be valid
and be enforced to the fullest extent permitted by law, and (b) the Parties
hereto covenant and agree to renegotiate any such term, covenant or application
thereof in good faith in order to provide a reasonably acceptable alternative to
the term, covenant or condition of such documents or the application thereof
that is invalid or unenforceable, it being the intent of the Parties that the
basic purposes of this Agreement are to be effectuated.

        11.10 NATURE OF AGREEMENT. The rights and licenses granted under this
Agreement are, for purposes of Section 365(n) of the U.S. Bankruptcy Code (the
"BANKRUPTCY CODE"), licenses of "intellectual property" within the scope of
Section 101 of the Bankruptcy Code. The Parties agree that each Party, as a
licensee of such rights and licenses, shall retain and may fully exercise all of
its rights and elections under the Bankruptcy Code. The Parties further agree
that, in the event of the commencement of a bankruptcy or insolvency proceeding
by or against a Party, the other Party shall be entitled to a complete duplicate
of (and complete access to) any such intellectual property and embodiments
thereof. If not already in the other Party's possession, such other Party shall
have the right to immediate delivery of such intellectual property and
embodiments upon written request.

        11.11 ENTIRE AGREEMENT. Except for the rights and obligations that
survive the expiration of the certain Collaboration and License Agreement, dated
as of November 10, 1998, between the Parties, this Agreement and Exhibits hereto
set forth all covenants, promises, agreements, warranties, representations,
conditions and understandings between the Parties hereto and supersedes and
terminates all prior and contemporaneous agreements and understandings between
the Parties. There are no covenants, promises, agreements, warranties,
representations, conditions or understandings, either oral or written, between
the Parties other than as set forth herein or therein. No subsequent alteration,
amendment, change or addition to this Agreement and Exhibits hereto shall be
binding upon the Parties hereto unless reduced to writing and signed by the
respective authorized officers of the Parties.

        11.12 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

        IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed on the date below written.

   HYSEQ, INC.                              KIRIN BREWERY COMPANY, LTD.

   By /s/ Ted Love                          By /s/ Katsuhiko Asano
     --------------------------------         ------------------------------

   Typed Name         Ted Love              Typed Name  Katsuhiko Asano
              -----------------------                 ----------------------

   Title  Chief Executive Officer           Title President, Pharmaceuticals
        -----------------------------             Division
                                                 ---------------------------

        Date     8/14/01                         Date    8/28/02
            ------------------------------           ---------------------------


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.



                                       29


                                    EXHIBIT A

                                 HYSEQ TERRITORY

    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    United States


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.



                                       30


                                    EXHIBIT B

                                 KIRIN TERRITORY

    [***]
    Australia
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    Japan
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    New Zealand
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]
    [***]


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.



                                       31


                                    EXHIBIT C

                       SUBJECT MATTER FOR INITIAL R&D PLAN


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.



                                       32


Kirin/Hyseq

Workplan/Timeline/Budget


[***]


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.



                                       33


                                    EXHIBIT D

                                  PATENT RIGHTS

                THAT CLAIM A DEVELOPMENT CANDIDATE OR NEW PRODUCT



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.



                                       34