<PAGE>

                                                                    Exhibit 10.7

                              LICENSE AGREEMENT II
                              --------------------

         This Agreement ("Agreement"), dated December 23, 1996, between ARCH
Development Corporation, an Illinois not-for-profit corporation ("ARCH"), and R2
Technology, Inc., a California corporation ("Licensee").

                               Purpose and Intent
                               ------------------

         ARCH and License entered into a Co-Exclusive License Agreement dated
September 1, 1993 ("Co-Exclusive License") under which ARCH licensed to Licensee
certain patents and patent applications for use in a defined field. ARCH holds
rights to additional patents and patent applications useful in the same field
which Licensee desires to obtain rights to for commercialization. Therefore the
parties agree as follows.

                                    Agreement
                                    ---------

         1. Definitions. The following capitalized terms used in this Agreement
            -----------
shall mean.

            A. "Affiliate" means, as to any person or entity, any other person
or entity which directly or indirectly controls, is controlled by or is under
common control with such person or entity. Control shall mean the right to
control, or actual control of, management of such other entity, whether by
ownership of voting securities, by agreement, or otherwise.

            B. "Copyrights" means the copyrights for the Software.

            C. "Effective Date" means the date first above written.

            D. "Field" means computer aided diagnosis of diseases or disorders
in humans.

            E. "Gross Revenue" means all revenue received by the Licensee and
its Affiliates from the distribution of products which incorporate or utilize
Licensed Patents, Copyrights, Software or Technical Information. Gross Revenue
shall include all revenue received from licensing of Software pursuant to
Paragraph 2.C below. Gross Revenue shall not include revenue earned by the
Licensee and its Affiliates from the provision of services of any type,
including, by way of example, consulting services, customized application or
implementation support, installation, maintenance, technical support or warranty
service.

            F. "Inventors" means the persons listed as inventors on the Licensed
Patents.

            G. "Group IV Patents" mean the patents and patent applications
listed on Schedule A, including all divisions, continuations,
continuations-in-part, foreign counterparts and any valid patents which may
issue therefrom and any reissues, renewals, substitutions, or extensions of or
to any such patents or patent applications. Group IV Patents shall not include
any applications and any patents issuing from applications filed in countries
(i) that Licensee


Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ***. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.

                                       1

<PAGE>

elected not to file in pursuant to Paragraph 6.A. and (ii) where Licensee's
rights are terminated under Paragraph 6.D.

     H. "Licensed Patents" means the Group IV Patents.

     I. "Net Revenue" means Gross Revenue less the following amounts directly
related to such revenue: (a) customary trade, quantity or cash discounts and
rebates actually allowed and taken; (b) amounts repaid or credited to customers
on account of rejections or returns of products subject to royalty hereunder;
and (c) freight and other transportation costs, including insurance charges,
bond duties, tariffs, sales and excise taxes and other governmental charges
based directly on sales, turnover or delivery of such products and actually paid
or allowed by the Licensee and its Affiliates or any Sublicensee. Net Revenue
shall be determined in accordance with generally accepted accounting principles
consistently applied.

     J. "Product" means any product covered by at least one Valid Claim
contained in a Licensed Patent or a product made by a process, method or
technique covered by at least one Valid Claim in a Licensed Patent or methods of
using any product covered by at least one Valid Claim contained in a Licensed
Patent.

     K. "Royalties" means all amounts payable under Paragraph 3.A.(2) and 3.B.
of this Agreement.

     L. "Software" means the computer programs listed and described on Schedule
B attached hereto, maintenance releases and bug fixes.

     M. "Sublicensee" means any person, company or other entity granted a
sublicense by Licensee under Paragraphs 2.B. or 2.C. below, as the case may be,
including Affiliates of the Sublicensee.

     N. "Sublicense" means a license agreement entered into by Licensee with a
Sublicensee under Paragraphs 2.B. or 2.C. below, as the case may be.

     O. "System" means any saleable system or unit containing or consisting of a
Product.

     P. "Territory" means the entire world.

     Q. "Technical Information" means any and all technical information,
know-how, data, processes, methods, protocols and procedures relating to the
Licensed Patents in the possession of ARCH as of the date of this Agreement
which is considered confidential within the meaning of Paragraph 93.A. of this
Agreement.

     R. "University" means the University of Chicago.

     S. "Valid Claim" means an issued claim of any unexpired patent or claim of
any pending patent application which has not been held unenforceable,
unpatentable or invalid by a decision of a court or governmental body of
competent jurisdiction, in a ruling that is unappealable or unappealed within
the time allowed for appeal; which has not been rendered

                                       2

<PAGE>

unenforceable through disclaimer or otherwise; and which has not been lost
through an interference proceeding or failure to pay a maintenance fee.
Notwithstanding the foregoing, a claim of a pending patent application shall
cease to be a Valid Claim if no patent has issued on such claim on or prior to
the fifth (5th) anniversary of the date of filing of such application provided
that such claim shall once again become a Valid Claim on the issue date of a
patent that subsequently issues and includes such claim.

     2. GRANT OF LICENSE AND RESERVATION OF RESEARCH RIGHTS
        ---------------------------------------------------

        A. Grant. ARCH hereby grants to Licensee and its Affiliates:
           -----

           (1) An exclusive license under the Group IV Patents to make, have
made, use, import, offer to sell and sell Products within the Field and within
the Territory and an exclusive license to use the Technical Information to make,
have made, use, import, offer to sell and sell products within the Field and
within the Territory; and

           (2) An exclusive license under the Copyrights to use, copy, modify,
prepare derivative works and compilations, distribute, perform and display
publicly the Software in the Territory.

        B. Sublicense. ARCH hereby grants to Licensee and its Affiliates an
           ----------
exclusive right to grant to third parties sublicenses under the Group IV Patents
on terms consistent with the terms of this Agreement.

        All Sublicenses shall provide that the Sublicensee may not grant further
Sublicenses to third parties, except to Affiliates of the Sublicensee. For each
Sublicense granted by Licensee to make or have made Products, Licensee shall pay
to ARCH * * * of all compensation paid by a Sublicensee to Licensee, including
any payments made by a third party to Licensee on behalf of a Sublicensee. For
all other sublicenses, the license revenue, including any payments made by a
third party on behalf of a Sublicensee, shall be treated as Gross Revenue.
Payments shall be made (or assigned as relevant) to ARCH within thirty (30) days
of receipt by Licensee. For this purpose compensation includes all fees, running
royalties, minimum royalties, milestone payments and other cash payments of any
kind and any in kind payments or equity amounts taken in lieu of cash. It is the
intent and agreement of the parties that ARCH will be paid * * * of any kind of
compensation paid by a Sublicensee for rights granted to such Sublicensee under
this Agreement without regard to how the compensation is structured, denominated
or paid.

        C. Software Sublicense. Licensee shall have the exclusive right under
           -------------------
the Copyrights to grant sublicenses to third parties on terms consistent with
the terms of this Agreement. All revenues received by Licensee from Software
Sublicenses shall be treated as Gross Revenue.


_________________________

*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

                                       3

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                D. Sublicensee's Rights upon Termination of this Agreement.
                   -------------------------------------------------------

                Each Sublicense under Paragraph 2.B. shall state that if this
Agreement terminates for any reason, except expiration pursuant to Paragraph
11.A., the Sublicensee shall automatically terminate effective the same date
without the necessity of any notice from ARCH to the Sublicensee. In each case,
ARCH agrees to negotiate in good faith for a period of ninety (90) days
following the termination of this Agreement with each Sublicensee for a license
directly from ARCH granting the Sublicensee substantially the same rights as
those contained in the Sublicense with Licensee. If no agreement is reached
within the ninety (90) days, ARCH shall have no further obligation to the
Sublicensee.

                E. Data Access. ARCH agrees to deliver copies of Technical
                   -----------
Information within thirty (30) days after the execution of this Agreement.

                F. Reservation of Rights. ARCH reserves for itself and the
                   ---------------------
University the worldwide right to use the Technical Information and to practice
the inventions claimed in the Licensed Patents to make, have made, use, import,
offer to sell and sell Products within the Field for all educational and
research purposes it may choose in its own discretion and without any payment
therefore. In addition, the inventions claimed in the Licensed Patents were made
with the use of funds from the United States government. Therefore, there is
reserved from the rights granted hereunder the worldwide right of the United
States government to use the Technical Information and to practice or have
practiced the inventions claimed in the Licensed Patents to make, have made,
use, import, offer to sell and sell Products in any field or use for its own
purposes in such manner as it deems fit without any payment therefore.

                G. U.S. Laws. Any right granted in this Agreement greater than
                   ---------
that permitted under Public Law 96-517 or Public Law 98-620 shall be subject to
modification as may be required to conform to the provisions of those laws.

                H. Other Rights. ARCH has * * * executed concurrently herewith,
                   ------------
and the rights granted in * * * of this Agreement are subject to all of the
terms and conditions of those licenses and other rights.

                I. ARCH Covenant. Notwithstanding the reservations made in
                   -------------
Paragraphs 2.F. and 2.H. above, ARCH hereby agrees, during the term of this
Agreement, not to grant licenses under the Licensed Patents to other third
parties.

             3. Royalties and Other Payments
                ----------------------------

                A. License Payment and Running Royalties. For the license
                   -------------------------------------
granted in Paragraph 2.A. of this Agreement, Licensee shall pay ARCH (1) the sum
of * * * within thirty (30) days following the earlier of an initial public
offering of Licensee's stock or any financing arrangement providing funding to
Licensee of at least ten million U.S. Dollars (U.S. $10,000,000); (2) combined
with the royalty obligations of Licensee under the Agreement executed
concurrently herewith between ARCH and Licensee relating to Group I, Group II
and Group III Patents as defined therein, a running


_________________

* * * Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

                                       4

<PAGE>

royalty equal to one percent (1%) of Net Revenue received by Licensee and its
Affiliates until the expiration of the last to expire of the Group I, Group II,
Group III and Group IV Patents as defined in this Agreement and License
Agreement I; and (3) payment of the sums specified in Paragraphs 2.B. and 6.C.

          B.   Minimum Running Royalties. Licensee shall pay ARCH the following
               -------------------------
minimum royalties:

               (1)  Until the minimum royalties due under Paragraph 3.B.(2) of
this Agreement become due and payable, minimum royalties for such calendar
quarter as set forth below:

          Calendar Quarters Ending                          Minimum Royalties
          ------------------------                          -----------------

          September 30, 1996 through March 31, 1997         $ 6,250
          June 30, 1997 and thereafter                      $12,500

               (2)  Beginning with the year of first commercial sale of a
product in the United States if the total running royalties payable under
Paragraph 3.A.(2) for any calendar year are less than * * *, Licensee shall pay
ARCH the difference between such amount and the actual running royalties due.
Such payment shall be made at the same time the payment for running royalties
for the fourth quarter for such year is due. If no running royalties are being
paid by Licensee for any year in which minimum royalties are due and payable,
the minimum royalties shall be paid in four equal installments within thirty
(30) days of the end of each calendar quarter.

               (3)  The minimum royalties paid in excess of the royalties paid
under Paragraph 3.A. (2) shall be applied as a credit toward future royalties,
provided such credit: (i) shall be applicable only to the four quarterly royalty
payments due immediately following payment of such minimum royalty; and (ii)
shall not exceed fifty percent (50%) of the minimum royalties otherwise due in
any quarter.

          C.   Calculation of Royalties. Royalties shall be payable in U.S.
               ------------------------
currency within forty-five (45) days after the end of each calendar quarter for
the term specified in Paragraph 11.A. below, beginning with the calendar quarter
in which the first commercial sale of a Product occurs. Each payment shall be
accompanied by a statement showing Net Revenue for each country in the Territory
and calculation of the Royalties due. There shall be deducted from all such
payments taxes required to be withheld by any governmental authority and
Licensee shall provide copies of the receipt for such taxes to ARCH along with
each Royalty payment. Any necessary conversion of currency into United States
dollars shall be made at the applicable rate of exchange of Citibank, N.A., in
New York, New York, on the last day of the calendar quarter for which the
Royalty is paid.


____________________

* * * Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

                                       5

<PAGE>

          D.   Records. Licensee shall, and shall cause its Sublicensees and
               -------
Affiliates of either, to keep full and accurate books and records in sufficient
detail so that sums due ARCH hereunder can be properly calculated. Such books
and records shall be maintained for at least three (3) years after the Royalty
reporting period(s) to which they relate. During the term hereof and for three
(3) calendar year thereafter, Licensee shall permit, and shall cause its
Sublicensees and Affiliates of either to permit, accountants designated by ARCH,
to whom Licensee has no reasonable objection, to examine its books and records
for the purpose of verifying the accuracy of the written statements submitted by
Licensee and sums paid or payable. ARCH may conduct such examination no more
than once in any calendar year. After completion of any such examination, ARCH
shall promptly notify Licensee in writing of any proposed modification to
Licensee's statement of sums due and payable. If Licensee accepts such
modification, or if the parties agree on other modifications, one party shall
promptly pay or credit the other in accordance with such resolution. Such
examination shall be made at the expense of ARCH, except that if such
examination discloses a discrepancy of five percent (5%) or more in the amount
of Royalties and other payments due ARCH, then Licensee shall reimburse ARCH for
the cost of such examination and pay the amount due with interest from the date
at which such amount was due as provided in Paragraph 3.B. hereof.

          E.   Overdue Payments. Payments due to ARCH under this Agreement
               ----------------
shall, if not paid when due under the terms of this Agreement, bear simple
interest at the lower of the prime rate of interest (as published by Citibank,
N.A. on the date such payment is due) plus five percent (5%) or the highest rate
permitted by law, calculated on the basis of a 360-day year for the number of
days actually elapsed, beginning on the due date and ending on the day prior to
the day on which payment is made in full. Interest accruing under this Paragraph
shall be due to ARCH on demand or upon payment of past due amounts, whichever is
sooner. The accrual or receipt by ARCH of interest under this Paragraph shall
not constitute a waiver by ARCH of any right it may otherwise have to declare a
default under this Agreement or to terminate this Agreement.

          F.   Single Royalty Payment. Royalties shall be payable only once with
               ----------------------
respect to sales or leases of a single System regardless of the number of Group
I, Group II, Group III and Group IV Patents that cover the System.

     4.   Warrants. On the Effective Date Licensee shall issue to ARCH warrants
          --------
giving ARCH the right, but not the obligation, to purchase two hundred twelve
thousand five hundred (212,500) shares of common stock having voting rights at a
price of four dollars U.S. ($4 U.S.) per share. The warrants shall vest at the
rate of forty two thousand five hundred (42,500) per year, with the warrants to
purchase the first 42,500 shares vesting on the Effective Date and the remaining
warrants vesting in equal amounts on the first, second, third and fourth
anniversaries of this Agreement provided this Agreement has not terminated by
those anniversaries. The warrants may be exercised at any time after vesting and
shall expire ten (10) years after the Effective Date.

     5.   Unrestricted Gift. Within thirty (30) days of the Effective Date and
          -----------------
on the first, second, third and on fourth anniversaries of this Agreement,
Licensee shall make an unrestricted gift in the amount of one hundred seventy
thousand dollars U.S. ($170,000 U.S.) to University provided this Agreement has
not terminated by those anniversaries.


                                       6

<PAGE>

     6.   Prosecution and Maintenance of Patents: Patent Costs
          ----------------------------------------------------

          A.   Prosecution and Maintenance. ARCH shall be solely responsible for
               ---------------------------
the preparation, filing, prosecution and maintenance of the Group IV Patents.
ARCH shall cause its patent counsel to provide Licensee with a list of the
countries in which it has filed and/or intends to file applications. Such list
shall be provided to Licensee at least sixty (60) days prior to the expiration
of one (1) year from the corresponding United States priority date to allow
Licensee to suggest that additional countries be added to the list or that one
or more countries be deleted from the list. ARCH agrees to file applications in
the additional countries requested by Licensee unless it otherwise notifies
Licensee under Paragraph 6.B. Licensee agrees to cooperate, and agrees to cause
its Sublicensees and Affiliates of either to cooperate, with ARCH in the
preparation, filing, prosecution and maintenance of the Group IV Patents by
disclosing such information as may be necessary for the same and by promptly
executing such documents as ARCH may reasonably request in connection therewith.
Licensee and its Sublicensees and Affiliates of either shall bear their own
costs in connection with their cooperation with ARCH under this Paragraph. ARCH
will provide Licensee copies of all material documents received or prepared by
ARCH in the prosecution and maintenance of the Group IV Patents. ARCH shall
provide copies in a timely manner to allow Licensee an opportunity to comment
and request changes in ARCH's documents. ARCH agrees to include all reasonable
comments of Licensee.

          B.   Licensee's Rights to Prosecute and Maintain Patents. ARCH shall
               ---------------------------------------------------
notify Licensee in writing of any country(ies) where it either previously
declared its intention to file under Paragraph 6.A. and subsequently decided not
to file in such country(ies) or previously filed and decided to abandon the
patent application or issued patent. All such notices shall be given so as to
allow Licensee a reasonable time within which to file in countries where ARCH
either does not intend to file or is not going to continue the prosecution or
maintenance of the application or patent, whichever is relevant. In all cases
where Licensee elects to file, Licensee shall file, prosecute and maintain the
applications and patents in ARCH's name and at Licensee's expense. In the case
of Group IV Patents, such patents shall be included in the definition of Group
IV Patents, for all purposes of this Agreement.

          C. Patent Costs. Licensee agrees to pay all necessary and reasonable
             ------------
third party fees and expenses incurred by ARCH in obtaining and
maintaining the Group IV Patents in Canada, France, Germany, Japan, Netherlands,
United Kingdom and the United States, including those incurred by ARCH prior to
the date of this Agreement but not including any fees and expenses already paid
for by * * *. In this regard, Licensee agrees to pay ARCH $288,407 U.S. dollars
within thirty (30) business days of the date hereof as full reimbursement for
such prior fees and expenses incurred through December 5, 1996. Payment for fees
and expenses incurred after the date of this Agreement shall be invoiced to
Licensee on a monthly basis and Licensee agrees to pay such invoices within
thirty (30) days of receipt. Documentation received from the third party vendors
to support the amounts invoiced shall be included with each invoice. Licensee
may raise any objections to such amounts invoiced within the thirty (30) day
time period for payment provided Licensee has not preapproved such amount.

_________________

* * *Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

                                       7




<PAGE>

          D.   Failure to Pay Patent Costs. If Licensee declines or fails to
               ---------------------------
make advance payments or pay or reimburse ARCH for all or any portion of the
patent fees and expenses (including maintenance fees) as required by Paragraph
6.C. for any application or patent, Licensee's rights with respect to all such
applications and patents for which Licensee fails to make advance payments or
does not reimburse ARCH shall terminate effective sixty (60) days after written
notice from ARCH requesting such payment, unless payment in full is made within
such time. Such notice can be sent by ARCH at any time after the expiration of
the thirty (30) days provided in Paragraph 6.C. for payment of invoices if
Licensee has not objected to the amount invoiced or in the case of advance
payments, any time after the date fifteen (15) days before the payment must be
made by ARCH to a third party.

     7.   Due Diligence and Milestones.
          ----------------------------

          A.   Commercialization Plans. Licensee shall provide ARCH with its
               -----------------------
strategic and detailed plans for the commercialization of the Licensed Products.
Such plans shall include research and development plans, product milestones and
related timetable schedules, government or regulatory timetables and sales and
marketing plans. Licensee will update these plans at least on an annual basis.

          B.   Progress Report. Licensee will provide ARCH with Licensee's
               ---------------
quarterly report to stockholders beginning with the quarter ended September 30,
1996. Such report will include the Company's financial performance for the
quarter and will also cover significant developments that have occurred.
Licensee agrees to immediately notify ARCH in writing when commercial products
are first sold and when Licensee's obligation to begin making running Royalty
payments begins.

          C.   License shall commence marketing and distribution of products
which incorporate or utilize License Patents, Copyrights, Software or Technical
Information within three (3) years of the Effective Date. If Licensee fails to
commence marketing and distribution of such products within three (3) years of
the Effective Date, ARCH shall have the right to terminate this Agreement upon
sixty (60) days written notice, provided, however, that if Licensee is utilizing
its best efforts to obtain regulatory approval and commercialize such products
ARCH may, in its sole discretion, extend this Agreement for an additional period
of time.

     8.   All Patents; No other Warranties; Indemnification; Insurance
          ------------------------------------------------------------

          A.   All Patents. ARCH represents and warrants that it shall not
               -----------
assert any existing patents or patents that issue from patent applications
pending as of the Effective Date against Licensee, its Sublicensees or its
customers based upon Licensee's or its Sublicensee's manufacture, use,
importation, offer for sale or sale of Products.

          B.   Disclaimer of Warranties. Except as provided in Paragraph 8.A.,
               ------------------------
ARCH makes no representations or warranties of any kind, express or implied,
with respect to the invention(s) claimed in the Licensed Patents or with respect
to the Licensed Patents themselves or regarding the Technical Information,
including but not limited to, any representations or warranties about (i) the
validity, scope or enforceability of any of the Licensed Patents; (ii) the

                                       8

<PAGE>

accuracy, safety or usefulness for any purpose of any information provided by
ARCH to Licensee, its Sublicensees or Affiliates of either, with respect to the
invention(s) claimed in the Licensed Patents or with respect to the Licensed
Patents themselves or regarding the Technical Information, and any products
developed from or covered by them; (iii) whether the practice of any claim
contained in any of the Licensed Patents will or might infringe a patent or
other intellectual property right owned or licensed by a third party; (iv) the
patentability of any invention claimed in the Licensed Patents; or (v) the
accuracy, safety, or usefulness for any purpose of any product or process made
or carried out in accordance with or through the use of the Licensed Patents or
the Technical Information.

          C.   Indemnification. Licensee agrees, and agrees to cause its
               ---------------
Sublicensees and Affiliates of either, to indemnify, defend and hold harmless
ARCH, its Affiliates and all trustees, directors, officers, employees, fellows
and agents of any of the foregoing (including ARCH and its Affiliates, each an
"Indemnified Person") from and against any and all claims, demands, loss,
damage, penalty, cost or expense (including attorneys, and witnesses' fees and
costs) of any kind or nature, arising from the development, production, use,
sale or other disposition of Products or the Technical Information, and all
activities associated therewith by Licensee, its Sublicensees or Affiliates of
either, or any use of information provided by ARCH to Licensee, its Sublicensees
or Affiliates of either. Licensee agrees and agrees to cause each of its
Sublicenses and Affiliates of either to agree not to sue any Indemnified Person
in connection with the development, production, use, sale or other disposition
of Products or the use of Technical Information, and all activities associated
therewith. ARCH shall be entitled to participate at its option and expense
through counsel of its own selection, and may join in any legal actions related
to any such claims, demands, losses, damages, costs, expenses and penalties.
Licensee, its Sublicensees and Affiliates of either, shall not enter into any
settlement affecting any rights or obligations of any Indemnified Person or
which includes an express or implied admission of liability, negligence or
wrongdoing by any Indemnified Person, without the prior written consent of such
Indemnified Person.

          D.   Assumption of Risk. The entire risk as to the performance, safety
               ------------------
and efficacy of any invention claimed in the Licensed Patents or of any Products
or the Technical Information, is assumed by Licensee, its Sublicensees and
Affiliates of either, provided that such assumption of the risk shall not apply
to the intentional misconduct or gross negligence by Indemnified Persons.
Indemnified Persons shall not, except for their intentional misconduct or gross
negligence, be responsible or liable for any injury, loss, or damage of any
kind, including but not limited to direct, indirect, special, incidental or
consequential damages or lost profits to Licensee, any Sublicensee, Affiliates
of either or customers or any of the foregoing, or for any such injury, loss or
damage to any other individual or entity, regardless of legal theory based on
the development, manufacture, use, sale or other disposition of Products or the
Technical Information, and all activities associated therewith. The above
limitations on liability apply even though the Indemnified Person may have been
advised of the possibility of such injury, loss or damage. Licensee shall not,
and shall require all Sublicensees and Affiliates of either to not, make any
agreements, statements, representations or warranties or accept any liabilities
or responsibilities whatsoever with regard to any person or entity which are
inconsistent with this Paragraph.

                                       9

<PAGE>

          E.   Insurance. Licensee agrees and agrees to cause its Sublicensees
               ---------
and Affiliates of either to list ARCH and its Affiliates, at Licensees, its
Sublicensees, or Affiliates' of either of them, expense, whichever is relevant,
as additional named insureds under each liability policy that Licensee, its
Sublicensees and Affiliates of either shall have or shall obtain that includes
any coverage of claims relating to the Products, the Licensed Patents, or the
inventions claimed in the Licensed Patents. At ARCH's request, Licensee will
supply ARCH from time to time with copies of each such policy, and will notify
ARCH in writing at least 30 days prior to any termination of or change in
coverage under any such policies.

     9.   Confidentiality.
          ---------------

          A.   Confidentiality, Publications and Data Access. All information
               ---------------------------------------------
submitted by one party to the other concerning the Products, the Licensed
Patents, the invention(s) claimed in the Licensed Patents, and the Technical
Information shall be considered as confidential ("Confidential Information") and
shall be utilized only pursuant to the licenses granted hereunder. During the
term of this Agreement and for a period of ten.(10) years thereafter, neither
party shall disclose to any third party any Confidential Information received
from the other party without the specific written consent of such party.
Provided that Licensee may disclose Confidential Information belonging to ARCH
to potential sublicensees for the purpose of evaluating their interest in
entering into a Sublicense but only after entering into a confidentiality
agreement on the same terms as those contained in this Paragraph. The foregoing
shall not apply where Confidential Information a) was or becomes public through
no fault of the receiving party, b) was, at the time of receipt, already in the
possession of the receiving party as evidenced by its written records, c) was
obtained from a third party legally entitled to use and disclose the same, or d)
is required by law to be disclosed to a governmental agency.

          B.   Publications. ARCH shall provide to Licensee copies of any
               ------------
proposed written publication by ARCH containing any Confidential Information
and, to the extent ARCH is aware of them, proposed publications containing any
Confidential information by the Inventor(s). Licensee agree to provide copies of
any proposed written publication of Licensee, its Sublicensees and Affiliates of
either of them to ARCH. The parties shall provide copies of such proposed
written publications at least ninety (90) days in advance of publication in
order to protect potentially patentable subject matter. The receiving party may
request, and the disclosing party agrees, that publication will be withheld for
an additional thirty (30) days, if required, to obtain patent protection. The
receiving party may object to such proposed publication or disclosure on the
grounds that the publication contains Confidential Information of the objecting
party. At the request of the objecting party, Confidential Information of such
party shall be deleted from the publication.

     10.  Infringement. In the event of an infringement of a Licensed Patent the
          ------------
following shall apply:

          A.   Notice. Each party shall give the other written notice if one of
               ------
them becomes aware of any infringement by a third party of any Licensed Patent.
Upon notice of any such infringement, the parties shall promptly consult with
one another with a view toward reaching agreement on a course of action to be
pursued.

                                       10

<PAGE>

          B.   Licensee's Right to Bring Infringement Action.
               ---------------------------------------------

               (1)  If a third party infringes any patent included in the
Licensed Patents within the Field, Licensee shall have the right to institute
and prosecute an action or proceeding to abate such infringement and to resolve
such matter by settlement or otherwise. Licensee agrees to notify ARCH of its
intention to bring an action or proceeding prior to filing the same and in
sufficient time to allow ARCH the opportunity to discuss with Licensee the
choice of counsel for such matter. Licensee agrees to hire counsel reasonably
acceptable to ARCH. Licensee shall keep ARCH timely informed of material
developments in the prosecution or settlement of such action or proceeding.
Licensee shall be responsible for all costs and expenses of any action or
proceeding against infringers which Licensee initiates. ARCH shall cooperate
fully by joining as a party plaintiff if required to do so by law to maintain
such action or proceeding and by executing and making available such documents
as Licensee may reasonably request. Licensee agrees to promptly reimburse ARCH
for its reasonable third party out-of-pocket fees and expenses incurred in
joining an action or proceeding or cooperating with Licensee. ARCH may be
represented by counsel in any such legal proceedings, at ARCH's own expense,
subject to reimbursement under Paragraph 10.B.(3), acting in an advisory but not
controlling capacity.

               (2)  The prosecution, settlement, or abandonment of any action or
proceeding under Paragraph 10.B.(1) shall be at Licensee's reasonable discretion
provided that Licensee shall not have any right to surrender any of ARCH's
rights to the Licensed Patents or to grant any infringer any rights to the
Licensed Patents.

               (3)  Except as provided herein, all amounts of every kind and
nature recovered from an action or proceeding, of infringement by Licensee shall
belong to Licensee. If the amounts recovered by Licensee exceed Licensee's
reasonable third party out-of-pocket fees and expenses, Licensee shall reimburse
ARCH for ARCH's reasonable out-of-pocket fees and expenses incurred in hiring
its own counsel. After deduction of the fees and expenses of both parties to
this Agreement, any remaining amounts recovered shall be considered Net Revenue
under this Agreement and subject to Royalty payments in accordance with
Paragraph 3.

          C.   ARCH's Right to Bring Infringement Action. If a third party
               -----------------------------------------
infringes any patent included in the Licensed Patents within the Field which
ARCH wishes to prosecute, ARCH shall first notify Licensee in writing and
request that Licensee bring an action or proceeding against the infringing third
party. If Licensee declines or fails to bring such an action or proceeding
within ninety (90) of receipt of the notice, ARCH shall have the right, at its
discretion, to institute and prosecute an action or proceeding to abate such
infringement and to resolve such matter by settlement or otherwise. Licensee
shall cooperate fully by joining as a party plaintiff if required to do so by
law to maintain such action and by executing and making available such documents
as ARCH may reasonably request. If the amounts recovered by ARCH exceed its
reasonable out-of-pocket fees and expenses, ARCH agrees to pay Licensee for its
and its Sublicensees' reasonable out-of-pocket third party expenses incurred by
it in cooperating in the action or proceeding. Except as specifically provided
in this Paragraph, ARCH shall have the right to retain all amounts recovered of
every kind and nature. Amounts recovered by ARCH shall not be considered Net
Revenue under this Agreement and shall not give rise to Royalty payments under
Paragraph 3.

                                       11

<PAGE>

     11.  Termination
          -----------

          A.   Term. Unless terminated earlier pursuant to Paragraphs 11.B or
               ----
11.C, this Agreement shall terminate on the later of (i) the expiration of the
royalty obligations under Article 3 hereto and (ii) the day the Licensee ceases
to use the licenses granted in Article 2.

          B.   ARCH's Right to Terminate. ARCH shall have the right to terminate
               -------------------------
this Agreement as follows, in addition to all other available remedies:

               (1) If Licensee fails to make any Royalty or other payment when
due, this Agreement shall terminate effective sixty (60) days after ARCH's
written notice to Licensee to such effect, unless Licensee makes such payment
within the sixty (60) days.

               (2) If Licensee fails to observe any other material obligation of
this Agreement, this Agreement shall terminate effective sixty (60) days after
ARCH's written notice to Licensee describing such failure, unless Licensee cures
such failure within the sixty (60) days.

               (3) If Licensee shall have filed by or against it a petition
under any bankruptcy or insolvency law and such petition is not dismissed within
sixty (60) days of its filing, or if Licensee makes an assignment of all or
substantially all of its assets for the benefit of its creditors ARCH may
terminate this Agreement by written notice effective as of the (i) date of
filing by Licensee of any such petition, (ii) date of any such assignment to
creditors, or (iii) end of the sixty (60) days if a petition is filed against it
and not dismissed by such time, whichever is applicable.

               (4) If Licensee shall be dissolved, liquidated or otherwise
ceases to exist, other than for reasons specified in Paragraph 11.B.(3) above,
this Agreement shall automatically terminate as of (i) the date articles of
dissolution or a similar document is filed on behalf of Licensee with the
appropriate government authority or (ii) the date of establishment of a
liquidating trust or other arrangement for the winding up of the affairs of
Licensee.

          C.   Licensee's Right to Terminate. Licensee may terminate this
               -----------------------------
Agreement at any time by giving ARCH sixty (60) days prior written notice.

          D.   Survival. All causes of action accruing to either party under
               --------
this Agreement shall survive termination for any reason, as well as (1)
Licensee's obligation under Paragraphs 3.A, 3.B and 6.C to pay Royalties and
Patent Costs accrued prior to the date of termination and which were not paid or
payable before termination, along with Licensee's obligation to report Net
Revenue and to keep records as set forth in Paragraphs 3.C and 3.D and (2)
Paragraphs 8 and 9.

     12.  Arbitration.
          -----------

          A.   Panel. If the parties cannot satisfactorily settle any claim,
               -----
disagreement or controversy arising out of or related to this Agreement or its
interpretation, performance, nonperformance, breach or their respective rights
and obligations hereunder, such disagreement shall, at the request of either
party, be settled by arbitration as follows. All such disputes shall be referred
to an arbitration panel comprised of three persons, one to be selected by each
party

                                       12

<PAGE>

hereto and the third selected by the first two. The arbitrators shall be persons
involved in and familiar with the licensing and technology transfer field and
not affiliated with either party. Each party shall select an arbitrator within
twenty (20) days of request for arbitration by either party. The first two
arbitrators shall select the third member of the panel within fifteen (15) days
after their selection. The arbitration shall be held as soon as is reasonably
possible after selection of the arbitration panel. The proceedings shall be held
in an informal manner as reasonably determined by the arbitrators. Except for
the right of appeal as set forth in subparagraph b below, the parties shall be
bound by a decision of the arbitration panel with respect to the matter in
dispute. All proceedings of the arbitration panel shall be held in Wilmington,
Delaware. The panel's costs and fees shall be borne by the party bringing the
action. The arbitrators shall presume that all claims of all Licensed Patents
are valid and enforceable, and shall not have the power to assess the validity
or enforceability of the Licensed Patents.

            B.   Appeals. There shall be no appeal from an arbitration panel's
                 -------
unanimous decision. In the event of a majority decision by the arbitration
panel, a dissatisfied party may appeal the panel's decision to the American
Arbitration Association (AAA) for an independent binding decision. All appeals
shall be heard in Wilmington, Delaware. The dissatisfied party must make such an
appeal within thirty (30) days after receipt of the arbitration panel's decision
and if it loses the appeal must bear the parties' expenses and costs for such
appeal. The AAA is hereby authorized to make arrangements for such arbitration,
to be held under the procedures provided by its arbitration rules. Judgment upon
any award rendered by all or a majority of the appeal arbitrators or a unanimous
judgment of the initial panel, may be entered in any court in any country having
jurisdiction, after any and all applicable appeal periods have passed.

     13.    Advertising
            -----------

     Each party agrees not to use (and Licensee agrees to prohibit its
Affiliates and sublicensees from using) the name of the other party (and,
Licensee agrees not to use, the names of the University and the Inventors under
the Licensed Patents) in any commercial activity, marketing, advertising or
sales brochures except with the prior written consent of the other party, which
such consent may be granted or withheld in such party's sole and complete
discretion, provided that,

            (a)   with the prior written consent of ARCH not unreasonably
withheld or delayed, Licensee may disclose to the banks, commercial finance
institutions or prospective investors from which Licensee may attempt to obtain
debt or equity financing (i) the names of ARCH, the University and the
Inventor(s) under the Licensed Patents, (ii) the identities of ARCH, the
University and the Inventor(s) under the Licensed Patents and their respective
connections to, and ownership interests in, the Licensed Patents, and (iii) the
identity of the Inventor under the Licensed Patents as a founder and scientific
advisor to Licensee in advertising and sales materials; and

            (b)   with the prior written consent of Licensee not unreasonably
withheld or delayed, ARCH or its Affiliates may disclose (i) the name of
Licensee and (ii) the existence of this Agreement.

     14.    Termination of Co-Exclusive License.
            -----------------------------------

                                       13

<PAGE>

     Simultaneously, with execution of this Agreement by both parties, the
Co-Exclusive License Agreement of September 1, 1993 is terminated.

     15.    Miscellaneous
            -------------

            A.   United States Manufacture.  Licensee agrees that any Products
                 -------------------------
that are sold in the United States of America will be manufactured substantially
in the United States of America as required by 35 United States Code Section
204.

            B.   Export Regulations.  To the extent that the United States
                 ------------------
Export Control Regulations are applicable, neither Licensee nor ARCH shall,
without having first fully complied with such regulations, (i) knowingly
transfer, directly or indirectly, any unpublished technical data obtained or to
be obtained from the other party hereto to a destination outside the United
States, or (ii) knowingly ship, directly or indirectly, any product produced
using such unpublished technical data to any destination outside the United
States.

            C.   Entire Agreement, Amendment, Waiver. This Agreement and License
                 -----------------------------------
Agreement I together with the Schedules attached constitute the entire agreement
between the parties regarding the subject matter hereof, and supersedes all
prior written or oral agreements or understandings (express or implied) between
them concerning the same subject matter. This Agreement may not be amended or
modified except in a writing signed by duly authorized representatives of each
party. No waiver of any default hereunder by either party or any failure to
enforce any rights hereunder shall be deemed to constitute a waiver of any
subsequent default with respect to the same or any other provision hereof.

            D.   Notice. Any notice required or otherwise made pursuant to this
                 ------
Agreement shall be in writing, sent by registered or certified mail properly
addressed, or by facsimile with confirmed answer-back, to the other party at the
address set forth below or at such other address as may be designated by written
notice to the other party. Notice shall be deemed effective three (3) business
days following the date of sending such notice if by mail, on the day following
deposit with an overnight courier, if sent by overnight courier, or upon
confirmed answer-back if by facsimile.

If to ARCH:      ARCH Development Corporation
                 1115-25 East 58th Street
                 Chicago, Illinois 60637
                 Attention:  President

If to Licensee:  R2 Technology, Inc.
                 730 Distel Drive
                 Los Altos, California 94022
                 Attention:

            E.   Assignment. This Agreement shall be binding on the parties
                 ----------
hereto and upon their respective successors and assigns. Either party may at any
time, upon written notice to the other party, assign or delegate to a successor
to all or substantially all of its business any of its rights and obligations
hereunder, provided that, any such assignment or delegation shall in no

                                       14

<PAGE>

event relieve either party of its primary responsibility for the same. Except as
provided in the preceding sentence, Licensee may not assign or delegate any
right or obligation hereunder without the prior written consent of ARCH, which
consent shall not be unreasonably withheld, and any attempted assignment or
deletion in violation thereof shall be void. ARCH may assign this Agreement at
any time to any third party on written notice to Licensee. In such event, the
assignee shall be substituted for ARCH as a party hereto, and ARCH shall no
longer be bound hereby.

        F.   Governing Law.  The interpretation and performance of this
             -------------
Agreement shall be governed by the laws of the State of California applicable to
contracts made and to be fully performed in that state.

        G.   The University.  This Agreement is entered into by ARCH in its own
             --------------
private capacity and not on behalf of the University, nor as its contractor or
agent. It is understood and agreed that the University is not a party to this
Agreement and is not liable for nor assumes any responsibility or obligation
under this Agreement, and is not liable for any action or lack thereof by ARCH.

     IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective duly authorized officers or representatives on the
date first above written.

ARCH Development Corporation                 R2 Technology, Inc.


By:  /s/                                     By:  /s/ James W. Pell
     ------------------------------------         ------------------------------
      Its: CEO                                     Its: CEO

                                       15

<PAGE>

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                                   SCHEDULE A
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  UCH #   PAT/APPLN.#   ISSUE/FILING   INVENTOR               TITLE
                            DATE
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***Certain information on this page has been omitted and filed separately with
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