Document:

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                                                                    Exhibit 10.5

                              XENOGEN CORPORATION
                           INDEMNIFICATION AGREEMENT

     This Indemnification Agreement ("Agreement") is effective as of September
27, 2000 by and between Xenogen Corporation, a Delaware corporation (the
"Company"), and _______________ ("Indemnitee").

     WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;

     WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;

     WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors and officers, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance;

     WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors and officers,
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and

     WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;

     NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.

     1.   Certain Definitions.
          -------------------

          a. "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least two
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
(iii) the shareholders of the Company approve a
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merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the shareholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.

          b. "Claim" shall mean with respect to a Covered Event: any threatened,
pending or completed action, suit, proceeding or alternative dispute resolution
mechanism, or any hearing, inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.

          c. References to the "Company" shall include, in addition to Xenogen
Corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Xenogen Corporation
(or any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors and officers, so that if Indemnitee is or was a director or officer of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.

          d. "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director or officer of the Company, or any
subsidiary of the Company, or is or was serving at the request of the Company as
a director or officer of another corporation, partnership, joint venture, trust
or other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity.

          e. "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.

          f. "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.

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          g. "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).

          h. References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director or
officer of the Company which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants
or its beneficiaries; and if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have
acted in a manner "not opposed to the best interests of the Company" as referred
to in this Agreement.

          i. "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.

          j. "Section" refers to a section of this Agreement unless otherwise
indicated.

          k. "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.

     2.   Indemnification.
          ---------------

          a. Indemnification of Expenses. Subject to the provisions of Section
             ---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.

          b. Review of Indemnification Obligations. Notwithstanding the
             -------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
                      --------  -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a

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determination that Indemnitee is entitled to be indemnified hereunder under
applicable law, any determination made by any Reviewing Party that Indemnitee is
not entitled to be indemnified hereunder under applicable law shall not be
binding and Indemnitee shall not be required to reimburse the Company for any
Expenses theretofore paid in indemnifying Indemnitee until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse
the Company for any Expenses shall be unsecured and no interest shall be charged
thereon.

          c. Indemnitee Rights on Unfavorable Determination; Binding Effect. If
             --------------------------------------------------------------
any Reviewing Party determines that Indemnitee substantively is not entitled to
be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.

          d. Selection of Reviewing Party; Change in Control. If there has not
             -----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Articles of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.

          e. Mandatory Payment of Expenses. Notwithstanding any other provision
             -----------------------------
of this Agreement other than Section 10 hereof, to the extent that Indemnitee
has been successful on the merits or otherwise, including, without limitation,
the dismissal of an action without prejudice, in

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defense of any Claim, Indemnitee shall be indemnified against all Expenses
incurred by Indemnitee in connection therewith.

     3.   Expense Advances.
          ----------------

          a. Obligation to Make Expense Advances. Upon receipt of a written
             -----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.

          b. Form of Undertaking. Any obligation to repay any Expense Advances
             -------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.

          c. Determination of Reasonable Expense Advances. The parties agree
             --------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.

     4.   Procedures for Indemnification and Expense Advances.
          ---------------------------------------------------

          a. Timing of Payments. All payments of Expenses (including without
             ------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefore is presented to the
Company, but in no event later than thirty (30) business days after such written
demand by Indemnitee is presented to the Company, except in the case of Expense
Advances, which shall be made no later than ten (10) business days after such
written demand by Indemnitee is presented to the Company.

          b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
             --------------------------------
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.

          c. No Presumptions; Burden of Proof. For purposes of this Agreement,
             --------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
                                                         ---- ----------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether

                                      -5-
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Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by any Reviewing Party that Indemnitee has
not met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under this Agreement under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by any Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder under applicable law, the burden of proof shall be on the Company to
establish that Indemnitee is not so entitled.

          d. Notice to Insurers. If, at the time of the receipt by the Company
             ------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.

          e. Selection of Counsel. In the event the Company shall be obligated
             --------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently retained by
or on behalf of Indemnitee with respect to the same Claim; provided that, (i)
Indemnitee shall have the right to employ Indemnitee's separate counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.

     5.   Additional Indemnification Rights; Nonexclusivity.
          -------------------------------------------------

          a. Scope. The Company hereby agrees to indemnify the Indemnitee to the
             -----
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer or other corporate agent, it is
the intent of the parties hereto that Indemnitee shall enjoy by this Agreement
the greater benefits afforded by such change. In the event of any change in any
applicable law, statute or rule which narrows the right of a Delaware

                                      -6-
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corporation to indemnify a member of its board of directors or an officer or
other corporate agent, such change, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement, shall have no effect on
this Agreement or the parties' rights and obligations hereunder except as set
forth in Section 10(a) hereof.

           b.  Nonexclusivity. The indemnification and the payment of Expense
               --------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of shareholders or disinterested
directors, the Delaware General Corporation Law, or otherwise. The
indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.

     6.   No Duplication of Payments. The Company shall not be liable under this
          --------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.

     7.   Partial Indemnification. If Indemnitee is entitled under any provision
          -----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.

     8.   Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
          ---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers or other corporate agents
under this Agreement or otherwise. Indemnitee understands and acknowledges that
the Company has undertaken or may be required in the future to undertake with
the Securities and Exchange Commission to submit the question of indemnification
to a court in certain circumstances for a determination of the Company's right
under public policy to indemnify Indemnitee.

     9.   Liability Insurance. To the extent the Company maintains liability
          -------------------
insurance applicable to directors, officers or other corporate agents,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer.

     10.   Exceptions. Notwithstanding any other provision of this Agreement,
           ----------
the Company shall not be obligated pursuant to the terms of this Agreement:

           a.  Excluded Actions or Omissions. To indemnify or make Expense
               -----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.

                                      -7-
<PAGE>

           b.   Claims Initiated by Indemnitee. To indemnify or make Expense
                ------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 317 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, Expense Advances, or insurance recovery, as
the case may be.

           c.   Lack of Good Faith. To indemnify Indemnitee for any Expenses
                ------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.

           d.   Claims Under Section 16(b). To indemnify Indemnitee for Expenses
                --------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.

     11.   Counterparts. This Agreement may be executed in one or more
           ------------
counterparts, each of which shall constitute an original.

     12.   Binding Effect; Successors and Assigns. This Agreement shall be
           --------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director or officer (as applicable) of the Company or of any other enterprise
at the Company's request.

     13.   Expenses Incurred in Action Relating to Enforcement or
           ------------------------------------------------------
Interpretation. In the event that any action is instituted by Indemnitee under
--------------
this Agreement or under any liability insurance policies maintained by the
Company to enforce or interpret any of the terms hereof or thereof, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee with
respect to such action (including without limitation attorneys' fees),
regardless of whether Indemnitee is ultimately successful in such action, unless
as a part of such action a court having jurisdiction over

                                      -8-
<PAGE>

such action makes a final judicial determination (as to which all rights of
appeal therefrom have been exhausted or lapsed) that each of the material
assertions made by Indemnitee as a basis for such action was not made in good
faith or was frivolous; provided, however, that until such final judicial
determination is made, Indemnitee shall be entitled under Section 3 to receive
payment of Expense Advances hereunder with respect to such action. In the event
of an action instituted by or in the name of the Company under this Agreement to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be indemnified for all Expenses incurred by Indemnitee in defense of
such action (including without limitation costs and expenses incurred with
respect to Indemnitee's counterclaims and cross-claims made in such action),
unless as a part of such action a court having jurisdiction over such action
makes a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that each of the material defenses asserted by
Indemnitee in such action was made in bad faith or was frivolous; provided,
                                                                  --------
however, that until such final judicial determination is made, Indemnitee shall
-------
be entitled under Section 3 to receive payment of Expense Advances hereunder
with respect to such action.

     14. Period of Limitations. No legal action shall be brought and no cause of
         ---------------------
action shall be asserted by or in the right of the Company against Indemnitee,
Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.

     15. Notice. All notices, requests, demands and other communications under
         ------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.

     16. Consent to Jurisdiction. The Company and Indemnitee each hereby
         -----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the state courts
of the State of California, which shall be the exclusive and only proper forum
for adjudicating such a claim.

     17. Severability. The provisions of this Agreement shall be severable in
         ------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise

                                      -9-
<PAGE>

unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.

     18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
         -------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of California as applied to
contracts between California residents entered into and to be performed entirely
in the State of California without regard to principles of conflicts of laws.

     19. Subrogation. In the event of payment under this Agreement, the Company
         -----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.

     20. Amendment and Termination. No amendment, modification, termination or
         -------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.

     21. Integration and Entire Agreement. This Agreement sets forth the entire
         --------------------------------
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.

     22. No Construction as Employment Agreement. Nothing contained in this
         ---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.

                  [Remainder of page intentionally left blank]

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<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.

XENOGEN CORPORATION

By:
   -------------------------------------
Name:
     -----------------------------------
Title:
      ----------------------------------

                                             AGREED TO AND ACCEPTED

                                             INDEMNITEE:

                                             -----------------------------------
                                             (Signature)

                                             -----------------------------------
                                             Name

                                             -----------------------------------
                                             Address

                                             -----------------------------------<PAGE>

                                                                    EXHIBIT 10.6

                             EMPLOYMENT AGREEMENT
                             --------------------

     This Employment Agreement is entered into as of January 21, 1998 (the
"Effective Date"), by and between XENOGEN CORPORATION, a California corporation
(the "Company"), and PAMELA CONTAG (the "Employee").

     1.   At-Will Employment. The Employee's employment with the Company is for
          ------------------
an unspecified duration and constitutes "at-will" employment.  The Employee
acknowledges that the employment relationship may be terminated at any time,
with or without good cause or for any or no cause, at the option either of the
Company or the Employee, with or without notice.  Employee will devote her full
business time and attention to her employment with the Company hereunder.

     2.   Salary. For all services to be rendered by the Employee to the
          ------
Company, the Company agrees to pay the Employee an annual salary of $175,000 in
accordance with the Company's standard payroll policies.

     3.   Benefits. During the Employee's employment with the Company, the
          --------
Employee shall be entitled to participate in employee benefit plans or programs
of the Company ("Benefit Plans"), if any, to the extent that the Employee's
position, tenure, salary, age, health and other qualifications make the Employee
eligible to participate, subject to the rules and regulations applicable
thereto.

     4.   Automobile Allowance. The Company will provide the Employee with an
          --------------------
automobile allowance of $600 per month; provided, however, that such allowance
                                        --------  -------
will be terminated (i) on the date on which the Employee's employment with the
Company ceases, either voluntarily or involuntarily or (ii) after December 31,
1998 upon the affirmative action of the Board of Directors.

     5.   Home Mortgage Assistance.
          ------------------------

          (a)  At any time prior to December 31, 1998, the Company will loan the
Employee $100,000 (the "Loan") to be evidenced by a promissory note bearing
interest at the rate of 6% per annum and secured by a Deed of Trust on the home.
The Loan will only be made contemporaneously with or following the purchase by
Employee of a home in reasonable proximity to the Company's principal offices in
Alameda, where employee is employed.  Provided that the Employee's employment
has not been terminated prior to the applicable date (either voluntarily or
involuntarily), the Loan will be forgiven as follows:  (i) on January 1, 1999,
$15,000 of principal and all accrued interest, (ii) on January 1, 2000, $15,000
of principal and all accrued interest, (iii) on January 1, 2001, $15,000 of
principal and all accrued interest and (iv) on January 1, 2002, $55,000 and all
accrued interest.

          (b)  Notwithstanding Section 5(a), the Loan is payable within ninety
(90) days of the earlier of:  (i)  the date on which the Employee's employment
with the Company ceases, either voluntarily or involuntarily or (ii) the date on
which the Employee sells the property securing such Loan.
<PAGE>

     6.   Termination of Employment.
          -------------------------

          (a)  Voluntary Resignation/Termination For Cause. If the Employee
               -------------------------------------------
voluntarily resigns or is terminated by the Company for Cause (as defined
below), then:

               (i)    no salary will be paid for the periods following the date
of termination;

               (ii)   no benefits will be paid or provided for the periods
following the date of termination; and

               (iii)  the number of shares exercisable under the Employee's
outstanding options, if any, and the Company's right to repurchase the
Employee's outstanding Common Stock shall be measured as of the date of
termination.

          (b)  Termination Without Cause. If the Employee is terminated by the
               -------------------------
Company without Cause (as defined below) within one year from the date of the
Agreement, then:

               (i)    the Employee's annual salary will continue to be paid in
accordance with the Company's standard payroll policies for six months following
the date of termination;

               (ii)   the Employee will continue to receive benefits pursuant to
the Company's Benefit Plans, provided that such Benefit Plans permit
continuation post-termination, at the Company's expense for six months following
the date of termination; and

               (iii)  the number of shares exercisable under the Employee's
outstanding options, if any, and the Company's right to repurchase the
Employee's outstanding Common Stock shall be measured as if the termination
occured six months from the actual date of termination; provided, however, that
                                                        --------  -------
the Company's right to repurchase 100,000 shares of Common Stock issued to the
Employee in conjunction with the Series C Preferred Stock Purchase Agreement of
even date herewith and subject to that certain Restricted Stock Purchase
Agreement of even date herewith shall be determined as of the actual date of
termination.

     The post-employment payments and benefits under Sections 6(b)(i) and (ii)
shall be terminated prior to one year from the date of termination upon the
acceptance by the Employee of new employment.

          (c)  Termination Without Cause. If the Employee is terminated by the
               -------------------------
Company without Cause (as defined below) following one year from the date of
this Agreement and prior to two years from the date of this Agreement, then:

               (i)    the Employee's annual salary will continue to be paid in
accordance with the Company's standard payroll policies for nine months
following the date of termination;

               (ii)   the Employee will continue to receive benefits pursuant to
the Company's Benefit Plans, provided that such Benefit Plans permit
continuation post-termination, at the Company's expense for nine months
following the date of termination; and

                                       2
<PAGE>

               (iii)  the number of shares exercisable under the Employee's
outstanding options, if any, and the Company's right to repurchase the
Employee's outstanding Common Stock shall be measured as if the termination
occured nine months from the actual date of termination; provided, however, that
                                                         --------  -------
the Company's right to repurchase 100,000 shares of Common Stock issued to the
Employee in conjunction with the Series C Preferred Stock Purchase Agreement of
even date herewith and subject to that certain Restricted Stock Purchase
Agreement of even date herewith shall be determined as of the actual date of
termination.

     The post-employment payments and benefits under Sections 6(c)(i) and (ii)
shall be terminated prior to one year from the date of termination upon the
acceptance by the Employee of new employment.

          (d)  Termination Without Cause. If the Employee is terminated by the
               -------------------------
Company without Cause (as defined below) following two years from the date of
this Agreement, then:

               (i)    the Employee's annual salary will continue to be paid in
accordance with the Company's standard payroll policies for one year following
the date of termination;

               (ii)   the Employee will continue to receive benefits pursuant to
the Company's Benefit Plans, provided that such Benefit Plans permit
continuation post-termination, at the Company's expense for one year following
the date of termination; and

               (iii)  the number of shares exercisable under the Employee's
outstanding options, if any, and the Company's right to repurchase the
Employee's outstanding Common Stock shall be measured as if the termination
occured one year from the actual date of termination; provided, however, that
                                                      --------  -------
the Company's right to repurchase 100,000 shares of Common Stock issued to the
Employee in conjunction with the Series C Preferred Stock Purchase Agreement of
even date herewith and subject to that certain Restricted Stock Purchase
Agreement of even date herewith shall be determined as of the actual date of
termination.

     The post-employment payments and benefits under Sections 6(d)(i) and (ii)
shall be terminated prior to one year from the date of termination upon the
acceptance by the Employee of new employment.

          (e)  As used in this Agreement, Cause shall mean:

               (i)    the Employee's failure to substantially perform the duties
associated with the Employee's position;

               (ii)   the Employee's personally engaging in conduct that the
Employee reasonably should know or that the Employee intends to be seriously
injurious to the Company, its affiliates or employees;

               (iii)  a material and willful violation of a federal or state law
or regulation applicable to the business of the Company;

                                       3
<PAGE>

               (iv)   the Employee's being convicted of a felony under the laws
of the United States or any State, or the misappropriation of material property
belonging to, the Company or its affiliates; or

               (v)    the Employee knowingly and intentionally breaching in any
material respect the terms of the Employee's Proprietary Information Agreement.

     7.   Arbitration. Any dispute or controversy arising under or in connection
          -----------
with this Agreement shall be settled exclusively by arbitration in Palo Alto,
California, in accordance with the rules of the American Arbitration Association
then in effect by an arbitrator selected by both parties within 20 days after
either party has notified the other in writing that it desires a dispute between
them to be settled by arbitration.  In the event the parties cannot agree on
such arbitrator within such 20-day period, each party shall select an arbitrator
and inform the other party in writing of such arbitrator's name and address
within 5 days after the end of such 20-day period and the two arbitrators so
selected shall select a third arbitrator within 15 days thereafter; provided,
                                                                    --------
however, that in the event of a failure by either party to select an arbitrator
-------
and notify the other party of such selection within the time period provided
above, the arbitrator selected by the other party shall be the sole arbitrator
of the dispute.  Each party shall pay its own expenses associated with such
arbitration, including the expense of any arbitrator selected by such party and
the Company will pay the expenses of the jointly selected arbitrator.  The
decision of the arbitrator or a majority of the panel of arbitrators shall be
binding upon the parties and judgment in accordance with that decision may be
entered in any court having jurisdiction thereover.  Punitive damages shall not
be awarded.

     8.   Notices. For purposes of this Agreement, notices and other
          -------
communications provided for in this Agreement shall be in writing and shall be
delivered personally or sent by United States certified mail, return receipt
requested, postage prepaid, to the address set forth on the signature pages to
this Agreement.

     9.   Applicable Law. This Agreement shall be governed by and construed in
          --------------
accordance with the internal substantive laws of the State of California without
reference to choice or conflicts of laws.

     10.  Counterparts. This Agreement may be executed in one or more
          ------------
counterparts, none of which need contain the signature of more than one party
hereto, and each of which shall be deemed to be an original, and all of which
together shall constitute a single agreement.

                                       4
<PAGE>

     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.

"COMPANY"                                         "EMPLOYEE"

By: /s/ David W. Carter                            /s/ Pamela Reilly Contag
    -----------------------------                  -----------------------------
                                                   Pamela Contag
Title: __________________________

Address:                                           Address:

_________________________________                   ____________________________

_________________________________                   ____________________________

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