Document:

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                                                                    EXHIBIT 10.7

                              EMPLOYMENT AGREEMENT

               This Employment Agreement (the "Agreement") is entered into by
and between CombiMatrix Corporation (the "Company") and Gerald Knudson
("Employee"), as of the 1st day of February 2000.

        I. EMPLOYMENT

               The Company hereby employs Employee and Employee hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
February 3, 2000 to and including January 31, 2004. This Agreement is subject to
renewal only as set forth in Section VI below.

        II. DUTIES

               A. Employee shall serve during the course of his employment as
President and Chief Executive Officer of the Company, as well as a member of the
Company's Board of Directors, and shall have such other duties and
responsibilities as Company's Board of Directors shall determine from time to
time.

               B. Employee agrees to devote substantially all of his time,
energy and ability to the business of the Company. Nothing herein shall prevent
Employee, upon approval of the Board of Directors of the Company, from serving
as (a) a director or trustee of other corporations or businesses or (b) a member
of advisory boards or industry associations, in each case, which are not in
competition with the business of the Company or Acacia Research Corporation
("Acacia") or any of its and their present or future affiliates; provided that
such activities do not interfere with his responsibilities to Company or the
performance of his duties for Company. Nothing herein shall prevent Employee
from investing in real estate for his own account or from becoming a partner or
a stockholder in any corporation, partnership or other venture not in
competition with the business of Acacia or the Company or any of its and their
current or future affiliates. In addition, Employee may provide services to
Acacia for purposes of identifying and evaluating possible investments by
Acacia.

               C. For the term of this Agreement, Employee shall report to the
Board of Directors of the Company.

        III. COMPENSATION

               A. Base Salary. The Company will pay to Employee a base salary at
the rate of Two Hundred Ninety Five Thousand Dollars ($295,000) per year. Such
salary shall be earned monthly and shall be payable in periodic installments no
less frequently than monthly in accordance with the Company's customary
practices. Amounts payable shall be reduced by standard withholding and other
authorized deductions. The Company may in its discretion increase Employee's
salary but it may not reduce it during the time he serves as President and Chief
Executive Officer.

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               B. Bonus, Incentive, Savings and Retirement Plans. Employee shall
be eligible to be considered for a discretionary bonus by Company's Board of
Directors. In addition, Employee shall be eligible to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other senior executives of the Company.

               C. Welfare Benefit Plans. Employee and/or his family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) (hereinafter referred to
collectively as the "Welfare Benefit Plans") to the extent applicable generally
to other peer executives of the Company.

               D. Moving Expenses. Employee shall be entitled to receive prompt
reimbursement of the actual cost of all reasonable moving related to the moving
of Employee's household goods from South Carolina to the San Francisco Bay Area,
or other headquarter city to be determined.

               E. Expenses. Employee shall be entitled to receive prompt
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other senior executives of the Company.

               F. Fringe Benefits. Employee shall be entitled to fringe benefits
in accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.

               G. Vacation. Employee shall be entitled to paid vacation in
accordance with the plans, policies, programs and practices as in effect
generally with respect to other peer executives of the Company

               H. Modifications. The Company reserves the right to modify,
suspend or discontinue any and all of the above plans, practices, policies and
programs at any time without recourse by Employee so long as such action is
taken generally with respect to other similarly situated peer executives and
does not single out Employee.

        IV. TERMINATION

               A. Death or Disability. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that the Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), it may give to Employee written notice in
accordance with Section XVII of its intention to terminate Employee's
employment. In such event, Employee's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by Employee,
provided that, within the 30 days after such receipt, Employee shall not have
returned to full-time performance of his duties. For purposes of this Agreement,
"Disability" shall mean a physical or mental impairment which renders Employee
unable to perform the essential functions of his position, even with reasonable
accommodation which does not impose an undue hardship on the Company. The
Company reserves the

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right, in good faith, to make the determination of disability under this
Agreement based upon information supplied by Employee and/or his medical
personnel, as well as information from medical personnel (or others) selected by
the Company or its insurers.

               B. Cause. The Company may terminate Employee's employment for
Cause. For purposes of this Agreement, "Cause" shall mean that the Company,
acting in good faith based upon the information then known to the Company,
determines that Employee has engaged in or committed: willful misconduct; gross
negligence; theft, fraud or other illegal conduct; refusal or unwillingness to
perform his duties; sexual harassment; conduct which reflects adversely upon, or
making any remarks disparaging of, the Company, its Board, officers, directors,
advisors or employees or its affiliates or subsidiaries; insubordination; any
willful act that is likely to and which does in fact have the effect of injuring
the reputation, business or a business relationship of the Company; violation of
any fiduciary duty; violation of duty of loyalty; and breach of any term of this
Agreement.

               C. Other than Cause or Death or Disability. The Company may
terminate Employee's employment at any time, with or without Cause, upon written
notice to Employee.

               D. Resignation. Employee may voluntarily terminate his employment
with the Company with 30 days prior written notice to the Company.

               E. Obligations of the Company Upon Termination.

                    1. Death or Disability or Resignation. If Employee's
               employment is terminated by reason of Employee's Death or
               Disability or voluntarily by Employee, this Agreement shall
               terminate without further obligations to Employee or his legal
               representatives under this Agreement, other than for (a) payment
               of the sum of (i) Employee's annual base salary through the date
               of termination to the extent not theretofore paid and (ii) any
               compensation previously deferred by Employee (together with any
               accrued interest or earnings thereon) and any accrued vacation
               pay, in each case to the extent not theretofore paid (the sum of
               the amounts described in clauses (i) and (ii) shall be
               hereinafter referred to as the "Accrued Obligations"), which
               shall be paid to Employee or his estate or beneficiary, as
               applicable, in a lump sum in cash upon termination; and (b)
               payment to Employee or his estate or beneficiary, as applicable,
               any amounts due pursuant to the terms of any applicable Welfare
               Benefit Plans.

                    2. Cause. If Employee's employment is terminated by the
               Company for Cause, this Agreement shall terminate without further
               obligations to Employee other than for the timely payment of
               Accrued Obligations. If it is subsequently determined that the
               Company did not have Cause for termination under this Section
               IV-E-2, then the Company's decision to terminate shall be deemed
               to have been made under Section IV-E-3 and the amounts payable
               thereunder shall be the only amounts Employee may receive under
               this Agreement for his termination.

                    3. Other than Cause or Death or Disability. If the Company
               terminates Employee's employment for other than Cause or Death or
               Disability,

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                this Agreement shall terminate without further obligations to
                Employee other than the timely payment of Accrued Obligations
                (a) the payment to Employee of a lump sum equal to the aggregate
                of (i) twelve months of Employee's base salary and (ii) twelve
                months of benefits under the Welfare Benefit Plans for Employee
                and/or his family, as the case may be, less standard
                withholdings and other authorized deductions, however, that if
                the Company terminates Employee's employment for other than
                Cause, Death or Disability within one year following a Change of
                Control (as defined below) of the Company, then the Company will
                promptly pay to Employee a lump sum equal to the aggregate of
                (a) Accrued Obligations and (b) twenty four months of Employee's
                base salary and twenty four months of benefits under the Welfare
                Benefit Plans for Employee and/or his family, as the case may
                be, less standard withholdings and other authorized deductions.
                For the purposes of this Agreement, "Change in Control" shall
                mean (i) any person or entity (or group of affiliated persons or
                entities) other than Acacia acquires, in one or more
                transactions, ownership of 50.0% or more of the outstanding
                shares of Common Stock of the Company or (ii) any sale, transfer
                or other conveyance of all or substantially all of the Company's
                assets in one transaction or a series of related transactions.

                    4. Exclusive Remedy. Employee agrees that the payments
               contemplated by this Agreement shall constitute the exclusive and
               sole remedy for any termination of his employment, and Employee
               covenants not to assert or pursue any other remedies, at law or
               in equity, with respect to any termination of employment.

        V. ARBITRATION.

               Any controversy or claim arising out of or relating to this
Agreement, its enforcement or interpretation, or because of an alleged breach,
default, or misrepresentation in connection with any of its provisions, shall be
submitted to arbitration, to be held in San Francisco County, California in
accordance with California Civil Procedure Code Sections 1282-1284.2. In the
event either party institutes arbitration under this Agreement, the party
prevailing in any such litigation shall be entitled, in addition to all other
relief, to reasonable attorneys' fees relating to such arbitration. The
nonprevailing party shall be responsible for all costs of the arbitration,
including but not limited to, the arbitration fees, court reporter fees, etc.

        VI. RENEWAL.

               This Agreement shall be automatically renewed for one additional
year each year after the expiration of the stated term, unless one party or the
other gives notice, in writing, at least thirty (30) days prior to the
expiration of this Agreement (or any renewal) of their desire to terminate the
Agreement or modify its terms.

        VII. ANTISOLICITATION.

               Employee promises and agrees that during the term of this
Agreement and for a period of 18 months after the termination of his employment,
he will not influence or

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attempt to influence customers of the Company or any of its present or future
subsidiaries or affiliates, either directly or indirectly, to divert their
business to any individual, partnership, firm, corporation or other entity then
in competition with the business of the Company, or any subsidiary or affiliate
of the Company.

        VIII. SOLICITING EMPLOYEES.

               Employee promises and agrees that he will not, for a period of
one year following termination of his employment or the expiration of this
Agreement or renewal in accordance with Section VI above, directly or indirectly
solicit any of the Company employees who earned annually $25,000 or more as a
Company employee during the last six months of his or his own employment to work
for any other business, individual, partnership, firm, corporation, or other
entity.

        IX. CONFIDENTIAL INFORMATION.

               A. Employee, in the performance of Employee's duties on behalf of
the Company, shall have access to, receive and be entrusted with confidential
information, including, but in no way limited, to business plans and strategies,
development, marketing, organizational, financial, management, administrative,
production, distribution and sales information, data, specifications and
processes presently owned or at any time in the future developed, by the Company
or its agents or consultants, or used presently or at any time in the future in
the course of its business that is not otherwise part of the public domain
(collectively, the "Confidential Material"). All such Confidential Material is
considered secret and will be available to Employee in confidence. Except in the
performance of duties on behalf of the Company, Employee shall not, directly or
indirectly for any reason whatsoever, disclose or use any such Confidential
Material, unless (i) such Confidential Material ceases (through no fault of
Employee's) to be confidential because it has become part of the public domain
or (ii) such disclosure is compelled by legal process or court order (in which
case Employee shall immediately notify the Company and cooperate with the
Company in any motion made by the Company to oppose such disclosure). All
records, files, drawings, documents, equipment and other tangible items,
wherever located, relating in any way to the Confidential Material or otherwise
to the Company's business, which Employee prepares, uses or encounters, shall be
and remain the Company's sole and exclusive property and shall be included in
the Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, Employee shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Employee's
possession or under Employee's control.

               B. Employee hereby acknowledges that the sale or unauthorized use
or disclosure of any of the Company's Confidential Material by any means
whatsoever and any time before, during or after Employee's employment with the
Company shall constitute Unfair Competition. Employee agrees that Employee shall
not engage in Unfair Competition either during the time employed by the Company
or any time thereafter.

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        X. SUCCESSORS.

               A. This Agreement is personal to Employee and shall not, without
the prior written consent of the Company, be assignable by Employee.

               B. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns and any such successor or
assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes.

        XI. WAIVER.

               No waiver of any breach of any term or provision of this
Agreement shall be construed to be, nor shall be, a waiver of any other breach
of this Agreement. No waiver shall be binding unless in writing and signed by
the party waiving the breach.

        XII. MODIFICATION.

               This Agreement may not be amended or modified other than by a
written agreement executed by Employee and an officer of the Company duly
authorized by the Company's Board of Directors.

        XIII. SAVINGS CLAUSE.

               If any provision of this Agreement or the application thereof is
held invalid, the invalidity shall not affect other provisions or applications
of the Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.

        XIV. COMPLETE AGREEMENT.

               This Agreement constitutes and contains the entire agreement and
final understanding concerning Employee's employment with the Company and the
other subject matters addressed herein between the parties. It is intended by
the parties as a complete and exclusive statement of the terms of their
agreement. It supersedes and replaces all prior negotiations and all agreements
proposed or otherwise, whether written or oral, concerning the subject matter
hereof. Any representation, promise or agreement not specifically included in
this Agreement shall not be binding upon or enforceable against either party.
This is a fully integrated agreement.

        XV. GOVERNING LAW.

               This Agreement shall be deemed to have been executed and
delivered within the State of California, and the rights and obligations of the
parties hereunder shall be construed and enforced in accordance with, and
governed by, by the laws of the State of California without regard to principles
of conflict of laws.

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        XVI. CONSTRUCTION.

               Each party has cooperated in the drafting and preparation of this
agreement. Hence, in any construction to be made of this agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this agreement are not part of the provisions hereof
and shall have no force or effect.

        XVII. COMMUNICATIONS.

               All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered or
if mailed by registered or certified mail, postage prepaid, addressed to Gerald
Knudson at 1740 Franklin, Unit 3, San Francisco 94109 at or addressed to the
Company at 887 Mitten Road, Suite 200, Burlingame, California 94010, with a copy
to John A. Laco, Esq. c/o O'Melveny & Myers LLP, 400 South Hope Street, Los
Angeles, California 90071.. Either party may change the address at which notice
shall be given by written notice given in the above manner.

        XVIII. EXECUTION.

               This Agreement is being executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. Photographic copies of such signed
counterparts may be used in lieu of the originals for any purpose.

        XIX. LEGAL COUNSEL.

               In entering this Agreement, the parties represent that they have
relied upon the advice of their attorneys, who are attorneys of their own
choice, and that the terms of this Agreement have been completely read and
explained to them by their attorneys, and that those terms are fully understood
and voluntarily accepted by them

               In witness whereof, the parties hereto have executed this
Agreement as of the date first above written.

COMBIMATRIX CORPORATION                      GERALD D. KNUDSON

By
  -------------------------------            -------------------------------

Its
   ------------------------------

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                                                                    EXHIBIT 10.8

                              EMPLOYMENT AGREEMENT

        This Employment Agreement (the "Agreement") is entered into by and
between CombiMatrix Corporation (the "Company") and Patrick A. Quarles
("Employee"), as of the 12th day of June 2000.

I.      EMPLOYMENT.

        The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from July 17,
2000 to and including July 16, 2004. This Agreement is subject to renewal only
as set forth in Section VI below.

II.     DUTIES.

        A. Employee shall serve during the course of his employment as
President, and Chief Operating Officer of the Company. Employee's duties and
responsibilities shall include management of Advanced Development, Product
Development, Manufacturing and such other duties and responsibilities as
Company's CEO or Board of Directors shall reasonably determine from time to time
consistent with Employee's initial duties and responsibilities.

        B. Employee agrees to devote substantially all of his time, energy and
ability to the business of the Company. Nothing herein shall prevent Employee,
upon approval of the Board of Directors of the Company, from serving as (a) a
director or trustee of other corporations or businesses or (b) a member of
advisory boards or industry associations, in each case, which are not in
competition with the business of the Company or Acacia Research Corporation
("Acacia") or any of its and their present or future affiliates; provided that
such activities do not interfere with his responsibilities to Company or the
performance of his duties for Company. Nothing herein shall prevent Employee
from investing in real estate for his own account or from becoming a partner or
a stockholder in any corporation, partnership or other venture not in
competition with the business of Acacia or the Company or any of its and their
current or future affiliates. In addition, Employee may provide services to
Acacia for purposes of identifying and evaluating possible investments by
Acacia.

        C. For the term of this Agreement, Employee shall report to the Chief
Executive Officer of the Company.

III.    COMPENSATION.

        A. Base Salary. The Company will pay to Employee a base salary at the
rate of Two Hundred Fifty Thousand Dollars ($250,000) per year. Such salary
shall be earned monthly and shall be payable in periodic installments no less
frequently than monthly in accordance with the Company's customary practices.
Amounts payable shall be reduced by standard withholding and other authorized
deductions. The Company may in its discretion increase Employee's salary but it
may not reduce it during the time he serves as an Officer of the Company.

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        B. Bonus, Incentive, Savings and Retirement Plans. Employee shall be
eligible to be considered for a discretionary bonus by Company's Board of
Directors to the extent applicable generally to other peer executives of the
Company. In addition, Employee shall be eligible to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other senior executives of the Company.

        C. Welfare Benefit Plans. Employee and/or his family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the Company
including, without limitation, disability, salary continuance, employee life,
group life, accidental death and travel accident insurance plans and programs,
but specifically excluding medical, prescription medicines and dental coverage
(hereinafter referred to collectively as the "Welfare Benefit Plans") to the
extent applicable generally to other peer executives of the Company. In lieu of
medical, prescription and dental coverage, the Company shall pay Employee a
stipend equal to fifteen percent (15%) of his base salary. This stipend will be
paid coincident with each normal payroll check.

        D. Expenses. Employee shall be entitled to receive prompt reimbursement
for all reasonable employment expenses incurred by him in accordance with the
policies, practices and procedures as in effect generally with respect to other
senior executives of the Company.

        E. Fringe Benefits. Employee shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.

        F. Vacation. Employee shall be entitled to at least four weeks per year
paid vacation.

IV.     TERMINATION.

        A. Death or Disability. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that the Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), it may give to Employee written notice in
accordance with Section XIX of its intention to terminate Employee's employment.
In such event, Employee's employment with the Company shall terminate effective
on the 30th day after receipt of such notice by Employee, provided that, within
the 30 days after such receipt, Employee shall not have returned to full-time
performance of his duties. For purposes of this Agreement, "Disability" shall
mean a physical or mental impairment which renders Employee unable to perform
the essential functions of his position, even with reasonable accommodation
which does not impose an undue hardship on the Company. The Company reserves the
right, in good faith, to make the determination of disability under this
Agreement based upon information supplied by Employee and/or his medical
personnel, as well as information from medical personnel (or others) selected by
the Company or its insurers.

        B. Cause. The Company may terminate Employee's employment for Cause. For
purposes of this Agreement, "Cause" shall mean that the Company, acting in good
faith based upon the information then known to the Company, determines that
Employee has engaged in or committed: a criminal felony; fraud; refusal or
unwillingness to perform his

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duties, provided such refusal or unwillingness is not based on Employee's good
faith compliance with applicable legal or ethical standards; sexual harassment;
violation of any fiduciary duty to the Company; violation of any duty of loyalty
to the Company; or any material uncured (after reasonable written notice and
reasonable time to cure) breach of any term of this Agreement.

        C. Other than Cause or Death or Disability. The Company may terminate
Employee's employment at any time, with or without Cause, upon written notice to
Employee.

        D. Resignation. Employee may voluntarily terminate his employment with
the Company with 30 days prior written notice to the Company.

        E. Obligations of the Company Upon Termination.

                1. Death or Disability or Resignation. If Employee's employment
        is terminated by reason of Employee's Death or Disability or voluntarily
        by Employee, this Agreement shall terminate without further obligations
        to Employee or his legal representatives under this Agreement, other
        than for (a) payment of the sum of (i) Employee's annual base salary
        through the date of termination to the extent not theretofore paid and
        (ii) any compensation previously deferred by Employee (together with any
        accrued interest or earnings thereon) and any accrued vacation pay, in
        each case to the extent not theretofore paid (the sum of the amounts
        described in clauses (i) and (ii) shall be hereinafter referred to as
        the "Accrued Obligations"), which shall be paid to Employee or his
        estate or beneficiary, as applicable, in a lump sum in cash upon
        termination; and (b) payment to Employee or his estate or beneficiary,
        as applicable, any amounts due pursuant to the terms of any applicable
        Welfare Benefit Plans.

                2. Cause. If Employee's employment is terminated by the Company
        for Cause, this Agreement shall terminate without further obligations to
        Employee other than for the timely payment of Accrued Obligations. If it
        is subsequently determined that the Company did not have Cause for
        termination under this Section IV-E-2, then the Company's decision to
        terminate shall be deemed to have been made under Section IV-E-3 and the
        amounts payable thereunder shall be the only amounts Employee may
        receive under this Agreement for his termination.

                3. Other than Cause or Death or Disability. If the Company
        terminates Employee's employment for other than Cause or Death or
        Disability, this Agreement shall terminate without further obligations
        under this Agreement to Employee other than the prompt payment to
        Employee of a lump sum equal to the aggregate of (a) Accrued Obligations
        and (b) twelve months of Employee's base salary and target bonus less
        standard withholdings and other authorized deductions, provided,
        however, that if the Company terminates Employee's employment for other
        than Cause, Death or Disability within one year following a Change of
        Control (as defined below) of the Company, then the Company will
        promptly pay to Employee a lump sum equal to the aggregate of (a)
        Accrued Obligations and (b) the aggregate of twenty four months of
        Employee's base salary and target bonus less standard withholdings and
        other authorized deductions. For the purposes of this Agreement, "Change
        in Control" shall mean (i) any person or entity (or group of affiliated

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        persons or entities) other than Acacia acquires, in one or more
        transactions, ownership of 50.0% or more of the outstanding shares of
        Common Stock of the Company or (ii) any sale, transfer or other
        conveyance of all or substantially all of the Company's assets in one
        transaction or a series of related transactions.

V.      ARBITRATION.

        Any controversy or claim arising out of or relating to this Agreement,
its enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration under the rules of the American Arbitration Association, to be
held in Seattle. In the event either party institutes arbitration under this
Agreement, the party prevailing in any such litigation shall be entitled, in
addition to all other relief, to reasonable attorneys' fees relating to such
arbitration. The nonprevailing party shall be responsible for all costs of the
arbitration, including but not limited to, the arbitration fees, court reporter
fees, etc.

VI.     RENEWAL.

        This Agreement shall be automatically renewed for one additional year
each year after the expiration of the stated term, unless one party or the other
gives notice, in writing, at least thirty (30) days prior to the expiration of
this Agreement (or any renewal) of their desire to terminate the Agreement or
modify its terms.

VII.    ANTISOLICITATION.

        Employee promises and agrees that during the term of this Agreement and
for a period of 12 months after the termination of his employment, he will not
personally influence or attempt to influence customers of the Company or any of
its present or future subsidiaries or affiliates, either directly or indirectly,
to divert their business away from the Company to any individual, partnership,
firm, corporation or other entity then in competition with the business of the
Company, or any subsidiary or affiliate of the Company.

VIII.   SOLICITING EMPLOYEES.

        Employee promises and agrees that he will not, for a period of one year
following termination of his employment or the expiration of this Agreement or
renewal in accordance with Section VI above, directly or indirectly solicit any
of the Company employees who earned annually $25,000 or more as a Company
employee during the last six months of his or his own employment to work for any
other business, individual, partnership, firm, corporation, or other entity.

IX.     CONFIDENTIAL INFORMATION.

        A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including, but in no way limited, to business plans and strategies,
development, marketing, organizational, financial, management, administrative,
production, distribution and sales information, data, specifications and
processes presently owned or at any time in the future developed, by the Company
or its agents or consultants, or used presently or at any time in the future in
the course of its business that is not otherwise part of the public domain

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(collectively, the "Confidential Material"). All such Confidential Material is
considered secret and will be available to Employee in confidence. Except in the
performance of duties on behalf of the Company, Employee shall not, directly or
indirectly for any reason whatsoever, disclose or use any such Confidential
Material, unless (i) such Confidential Material ceases (through no fault of
Employee's) to be confidential because it has become part of the public domain
or (ii) such disclosure is compelled by legal process or court order (in which
case Employee shall immediately notify the Company and cooperate with the
Company in any motion made by the Company to oppose such disclosure). All
records, files, drawings, documents, equipment and other tangible items,
wherever located, relating in any way to the Confidential Material or otherwise
to the Company's business, which Employee prepares, uses or encounters, shall be
and remain the Company's sole and exclusive property and shall be included in
the Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, Employee shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Employee's
possession or under Employee's control. Confidential Material shall not include
any information or material that (a) is or becomes within the public domain
through no act of Employee in breach of this Agreement, (b) was in the
possession of Employee prior to its disclosure hereunder, (c) is independently
developed by Employee without reference to the Confidential Material, (d) is
received from another source without any restriction on use or disclosure, or
(e) is required by law to be disclosed.

        B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material by any means whatsoever
and any time before, during or after Employee's employment with the Company
shall constitute Unfair Competition. Employee agrees that Employee shall not
engage in Unfair Competition either during the time employed by the Company or
any time thereafter.

X.      SUCCESSORS.

        A. This Agreement is personal to Employee and shall not, without the
prior written consent of the Company, be assignable by Employee.

        B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes.

XI.     WAIVER.

        No waiver of any breach of any term or provision of this Agreement shall
be construed to be, nor shall be, a waiver of any other breach of this
Agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.

XII.    EQUITY.

        A. STOCK OPTIONS. (I) Employee shall be granted non qualified stock
options for 400,000 shares of Company common stock, and his stock option
agreement shall reflect the following terms and conditions:

        -       Exercise price per share: $5

                                       5

<PAGE>   6
        -       Vesting: 100,000 options shall be fully vested at the
                origination of this agreement. The remaining 300,000 options
                shall vest and may be exercised by Employee as follows: vesting
                shall occur over four years quarterly at 6.25% per quarter and
                25% per year, with the first 25% vesting on the first
                anniversary of this Agreement; any and all vested options may be
                exercised by Employee; and all options shall be vested and may
                be exercised by Employee on a Change of Control (as defined in
                Section 3) of the Company.

        -       The options shall have a ten year term.

        -       The options shall have the same antidilution, registration,
                preemptive and other rights, if any, associated with the options
                and underlying shares as to the extent applicable generally to
                other peer executives of the Company.

(II) If an equity financing by the Company is successfully completed in the
third quarter of 2000, with at least $20,000,000 of gross proceeds to the
Company is closed, additional options will be granted to Employee to purchase
25,000 shares of Company common stock, with the following terms and conditions:

        -       Exercise price per share: Same price as shares sold in the
                financing.

        -       Vesting: The options shall vest and may be exercised by Employee
                as follows: vesting shall occur over four years quarterly at
                6.25% per quarter and 25% per year; any and all vested options
                may be exercised by Employee; and all options shall be vested
                and may be exercised by Employee on a Change of Control of the
                Company.

        -       The options shall have a ten year term.

        -       The options shall have the same antidilution, registration,
                preemptive and other rights, if any, associated with the options
                and underlying shares as to the extent applicable generally to
                other peer executives of the Company.

(III) Any vested stock options granted to Employee will not be subject to
termination or forfeiture as a result of any termination of employment other
than for Cause under Section 3.

        B. RESTRICTED SHARES: The Employee shall be given the right through
August 17, 2000 to purchase up to 20,000 shares of Company common stock at a
purchase price of $6.50 per share. Such shares will be restricted and subject to
the same general terms and conditions as contained in the Restricted Stock
purchase Agreement between the Company and Gerald Knudson, provided that the
Company's Right of Repurchase shall be at the greater of the then current Fair
Market Value of the common stock of the Company or $6.50 per share and shall
terminate with respect to shares purchased by Employee according to the
following schedule: the shares shall vest and may not be repurchased by the
Company without the Employee's consent as follows: vesting shall occur over
twelve months quarterly at 25% per quarter with full vesting on the one year
anniversary of the date of purchase, and all shares shall be vested on a Change
of Control of the Company. Any vested shares would not be subject to repurchase,
termination or forfeiture as a result of any termination of employment other
than for Cause under Section 3 and shall be released from escrow.

                                       6

<PAGE>   7
XIII.   INDEMNIFICATION.

        The Company shall defend and provide indemnification to Employee
(including advancement of expenses) against any completed, threatened or pending
action, suit or proceeding against or involving Employee or by or in the right
of the Company to procure a judgment in its favor , by reason of the fact that
Employee is or was an officer, employee, director or agent of the Company or is
or was serving at the request of the Company as an officer, employee, director
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by Employee in
connection with such action, suit or proceeding, to the fullest extent permitted
under the laws of the state of Company's incorporation. The Company shall pay,
advance and reimburse any defense costs and expenses (including attorneys' fees)
of Employee in connection with any such action, suit or proceeding to the
fullest extent permitted under the laws of the state of Company's incorporation.
Employee shall stand in the same position under this Agreement with respect to
the resulting or surviving entity if the Company merges with or consolidates
with another entity.

XIV.    MODIFICATION.

        This Agreement may not be amended or modified other than by a written
agreement executed by Employee and an officer of the Company duly authorized by
the Company's Board of Directors.

XV.     SAVINGS CLAUSE.

        If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.

XVI.    COMPLETE AGREEMENT.

        This Agreement constitutes and contains the entire agreement and final
understanding concerning Employee's employment with the Company and the other
subject matters addressed herein between the parties. It is intended by the
parties as a complete and exclusive statement of the terms of their agreement.
It supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matter hereof. Any
representation, promise or agreement not specifically included in this Agreement
shall not be binding upon or enforceable against either party. This is a fully
integrated agreement.

XVII.   GOVERNING LAW.

        This Agreement shall be deemed to have been executed and delivered
within the State of Washington, and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with, and governed by,
by the laws of the State of Washington without regard to principles of conflict
of laws.

                                       7

<PAGE>   8
XVIII.  CONSTRUCTION.

        Each party has cooperated in the drafting and preparation of this
agreement. Hence, in any construction to be made of this agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this agreement are not part of the provisions hereof
and shall have no force or effect.

XIX.    COMMUNICATIONS.

        All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered or if
mailed by registered or certified mail, postage prepaid, addressed to Patrick A.
Quarles at, 15933 NE 83rd Court, Redmond, WA 98052 and at 34935 SE Douglas
Street, Suite 110, Snoqualmie, WA 98065 or addressed to the Company at 34935 SE
Douglas Street, Suite 110, Snoqualmie, WA 98065. Either party may change the
address at which notice shall be given by written notice given in the above
manner.

XX.     EXECUTION.

        This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Photographic copies of such signed counterparts may
be used in lieu of the originals for any purpose.

XXI.    LEGAL COUNSEL.

        In entering this Agreement, the parties represent that they have relied
upon the advice of their attorneys, who are attorneys of their own choice, and
that the terms of this Agreement have been completely read and explained to them
by their attorneys, and that those terms are fully understood and voluntarily
accepted by them. Additionally, the Company represents that its Board of
Directors has authorized and approved the terms of this Agreement.

        In witness whereof, the parties hereto have executed this Agreement as
of the date first above written.

COMBIMATRIX CORPORATION

BY: GERALD D. KNUDSON

------------------------------               -------------------------------
     ITS PRESIDENT & CEO                     PATRICK A. QUARLES

                                       8

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