Document:

<PAGE>   1
                                                                   EXHIBIT 10.34

                            SECOND AMENDMENT OF LEASE

This Second Amendment of Lease ("Amendment") is made and entered into this 5th
day of May, 1999, by and between WVP Income Plus III, a California Limited
Partnership ("Lessor"), and Camitro, Inc., a California Corporation ("Lessee").

                                    RECITALS

A. Lessor and Lessee entered into a lease dated February 4, 1999, and a First
Amendment of Lease dated March 8, 1999 (collectively referred to as the "Lease")
wherein Lessee agreed to lease from Lessor approximately 15,716 rentable square
feet located at 4040 Campbell Ave., Menlo Park, California ("Premises").

B. Lessor and Lessee now desire to amend the terms of the Lease.

NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt of which is hereby acknowledged, Lessor and Lessee
agree as follows:

1. Commencing on the Effective Date (hereinafter defined), the Premises shall
also include approximately 9,242 rentable square feet on the first floor,
currently leased to Progenitor ("2nd Additional Space"). The Effective Date
shall be defined as the later to occur of (a) Lessor's delivery of possession to
Lessee of the 2nd additional space, or (b) October 1, 1999, (the "Effective
Date"). The new total rentable square feet shall be approximately 24,958
rentable square feet. The revised Premises shall consist of the entire ground
floor of the building located at 4040) Campbell Ave., excluding the lobby. The
lobby shall be common area and shall be shared with other tenants in the
building on a non-exclusive basis. Lessor and Lessee hereby agree that the
rentable square footage of the Premises as defined in this Second Amendment of
Lease is an approximation which Lessor and Lessee agree is reasonable and is not
subject to revision whether or not the actual square footage is more or less.

2. The lease term shall be extended such that it shall end on September 30,
2002.

3. Commencing on the Effective Date, monthly installments of Rent shall be as
stated on Exhibit "A" attached hereto.

4. The option in Paragraph #61 of the Lease Addendum is hereby modified such
that if Lessee does exercise its option, it shall also include the 1st
Additional Space and the 2nd Additional Space. The monthly rent during the
option period shall be as stated on Exhibit "A".

5. Upon execution of this Lease Amendment, Lessee shall increase its security
deposit to be equal to two (2) times the October 1, 1999 rent on the total
space, which shall be $87,573.00.

6. Lessor, at Lessor's sole cost and expense, shall replace damaged ceiling
tiles and defective lighting fixtures and paint and re-carpet the 2nd Additional
Space. Lessor shall use its best efforts to match the existing paint and carpet,
but Lessee acknowledges that it may not be possible to do so. Additionally,
Lessor shall use its best efforts to complete these improvements as soon after
October 1st as possible. However, rent on said 2nd Additional Space shall
commence on the
<PAGE>   2
Effective Date, even though these improvements may be in progress during the
month of October. Lessor shall also give Lessee a credit of $500 towards the
October 1999 rent for Lessee to use to replace any damaged floor tiles that
Lessee should desire to replace. Except as provided herein, Lessee agrees to
accept the 2nd Additional Space in "AS-IS" condition. Lessee shall not be
responsible for any debris/chemicals left behind by previous tenants.

7. Notwithstanding any to the contrary contained herein, Lessee shall have the
right, upon fourteen (14) days prior to written notice to Lessor, to occupy and
commence rent on the 2nd Additional Space at any time prior to October 1, 1999.
If Lessee does exercise this option, then the Effective Date shall be the date
of Lessee's possession. Lessee's right in this paragraph is contingent upon
Lessor receiving necessary termination agreements from the existing tenant,
Progenitor. If Lessee should exercise this right, the rent shall be the same as
the rent for October 1999 and the expiration date of the Lease shall not change.

8. All other terms of the Lease shall remain in full force and effect.

The parties have signed this Second Amendment of Lease, which for reference
purposes shall be deemed to be dated as of the date first written above.

LESSOR                                       LESSEE
WVP Income Plus III,                         Camitro, Inc.,
A California Limited Partnership             a California Corporation
BY: West Valley Properties, Inc.
Its General Partner

By: /s/                                      By:  /s/
   --------------------------------             --------------------------------
                                                Janet J. Swearson
                                                Vice President and CFO

                                       2
<PAGE>   3
                                    Exhibit A
                            Camitro Rent Calculation

<TABLE>
<CAPTION>
                             Original      1st Addt'l    2nd Addt'l
                              Space          Space         Space         Total
                           -----------------------------------------------------
<S>                        <C>             <C>           <C>           <C>
Square Feet                     12,100          3,616         9,242       24,958

Rent Rate 10/1/99           $     1.95     $     0.60    $     1.95
Mo. Rent 10/1/99            $23,595.00     $ 2,169.60    $18,021.90    43,786.50

Rent Rate 4/1/00            $     2.00     $     0.65    $     2.00
Mo. Rent 4/1/00             $24,200.00     $ 2,350.40    $18,484.00    45,034.40

Rent Rate 4/1/01            $     2.05     $     0.70    $     2.05
Mo. Rent 4/1/01             $24,805.00     $ 2,531.20    $18,946.10    46,282.30

Rent Rate 4/1/02            $     2.10     $     0.75    $     2.10
Mo. Rent 4/1/02              25,410.00       2,712.00     19,408.20    47,530.20

Option Period Rent Rate     $     2.15     $     0.80    $     2.15
Option Period Mo. Rent       26,015.00       2,892.80     19,870.30    48,778.10
</TABLE>

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<PAGE>   4
                            FIRST AMENDMENT OF LEASE

This First Amendment of Lease ("Amendment") is made and entered into this 8th
day of March, 1999, by and between WVP Income Plus III, a California Limited
Partnership ("Lessor") and Camitro, Inc., a California Corporation ("Lessee").

                                    RECITALS

A. Lessor and Lessee entered into a lease dated February 4, 1999 ("Lease")
wherein Lessee agreed to lease from Lessor approximately 12,500 rentable square
feet located at 4040 Campbell Ave., Menlo Park, California ("Premises").

B. Lessor and Lessee now desire to amend the terms of the Lease

NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt of which is hereby acknowledged, Lessor and Lessee
agree as follows:

1. The Premises shall also include approximately 3,500 rentable square feet
("Additional Space"). The revised Premises is shown on Exhibit "A" attached
hereto. The new total rentable square feet shall be approximately 16,000
rentable feet and shall be measured by a space planner hired by Lessor, and the
square footage shall be adjusted accordingly.

2. Commencing April 1, 1999, monthly installments of Rent on the Additional
Space shall be as follows:

<TABLE>
<CAPTION>
                                            MONTHLY INSTALLMENT
                                            -------------------
<S>                                         <C>
Commencing April 1, 1999                    $0.60 per rentable square foot
Commencing April 1, 2000                    $0.65 per rentable square foot
Commencing April 1, 2001                    $0.70 per rentable square foot
</TABLE>

3. Lessee shall take the Additional Space in "AS IS" Condition.

4. The Option in Paragraph #61 of the Lease Addendum shall be amended such that
if Lessee does exercise its option, it shall also include the Additional Space.
The monthly rent on the Additional Space during the option period shall be at
$0.75 per rentable square foot.

5. Security Deposit. Upon execution of this Amendment, Lessee shall increase its
security deposit to be equal to two (2) times the first months rent on the total
revised space.

6. All other terms of the Lease shall remain in full force and effect.

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<PAGE>   5
The parties have signed this First Amendment of Lease, which for reference
purposes shall be deemed to be dated as of the date first written above.

LESSOR                                       LESSEE
WVP Income Plus III,                         Camitro, Inc.,
A California Limited Partnership             a California Corporation
BY: West Valley Properties, Inc.
Its General Partner

By:  /s/                                     By: /s/
   -----------------------------                --------------------------------

                                       5
<PAGE>   6
                                    EXHIBIT A

                         [DIAGRAM OF FLOOR PLAN OMITTED]

                                       6
<PAGE>   7
                          STANDARD OFFICE LEASE - GROSS
                   AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS").

1.1 PARTIES: This Lease, dated, for reference purposes only, February 4, 1999 is
made by and between WVP Income Plus 3, a California limited partnership (herein
called "Lessor") and Camitro, Inc., a California corporation doing business
under the name of _____________________ (herein called "Lessee").

1.2 PREMISES: Suite Number(s) _____________________ floors, consisting of
approximately 12,500 rentable square feet, more or less, defined in paragraph 2
and as shown on Exhibit "A" hereto (the "Premises").

1.3 BUILDING: Commonly described as being located at 4040 Campbell Ave. in the
city of Menlo Park, County of San Mateo, State of California, as more
particularly described in Exhibit ___________ hereto, and as defined in
paragraph ______________.

1.4 USE: General office, laboratory research and other legally related uses,
subject to paragraph ___.

1.5 TERM: 36 months commencing April 1, 1999 ("Commencement Date") and ending
March 31, 2002, as defined in paragraph ___.

1.6 BASE RENT: $24,375.00 per month, payable on the 1st day of each month per
paragraph 4.1.

1.7 BASE RENT INCREASE: On ____* SEE ADDENDUM ______ the monthly Base Rent
payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3
below.

1.8 RENT PAID UPON EXECUTION: $24,375.00 for the first month's rent.

1.9 SECURITY DEPOSIT: $48,750.00

1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: N/A % as defined in paragraph
4.2.

2. PREMISES, PARKING AND COMMON AREAS.

2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" Identified in paragraph 1.2 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2, as
the "Premises," including rights to the Common Areas as hereinafter specified.

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2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to the
rules and regulations attached hereto, and as established by Lessor from to
time, Lessee shall be entitled to rent and use N/A parking spaces in the Office
Building Project at the monthly rate applicable from time to time for monthly
parking as set by Lessor and/or its licensee.

2.2.1 If Lessee commits, permits or allows any of the prohibited activities
described in the Lease or the rules then in effect, then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove or tow away the vehicle involved and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.

2.2.2 The monthly parking rate per parking space will be $ N/A per month at the
commencement of the term of this Lease and is subject to change upon five (5)
days prior written notice to Lessee. Monthly parking fees shall be payable one
month in advance prior to the first day of each calendar month.

2.3 COMMON AREAS - DEFINITION: The term "Common Areas" is defined as all areas
and facilities outside the Premises and within the exterior boundary line of the
Office Building Project that are provided and designated by the Lessor from time
to time for the general non-exclusive use of Lessor, Lessee and of other lessees
of the Office Building Project and their respective employees, suppliers,
shippers, customers and invitees, including but not limited to common entrances,
lobbies, corridors, stairways and stairwells, public restrooms, elevators,
escalators, parking areas to the extent not otherwise prohibited by this Lease,
loading and unloading areas, trash areas, roadways, sidewalks, parkways, ramps,
driveways, landscaped areas and decorative walls.

2.4 COMMON AREAS - RULES AND REGULATIONS: Lessee agrees to abide by and conform
to the rules and regulations attached hereto as Exhibit B with respect to the
Office Building Project and Common Areas, and to cause its employees, suppliers,
shippers, customers, and invitees to so abide and conform. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to modify,
amend and enforce said rules and regulations. Lessor shall not be responsible to
Lessee for the non-compliance with said rules and regulations by other lessees,
their agents, employees and invitees of the Office Building Project.

2.5 COMMON AREAS - CHANGES: Lessor shall have the right, in Lessor's sole
discretion, from time to time:

(a) To make changes to the Building interior and exterior and Common Areas,
including, without limitation, changes in the location, size, shape, number, and
appearance thereof, including but not limited to the lobbies, windows,
stairways, air shafts, elevators, escalators, restrooms, driveways, entrances,
parking spaces, parking areas, loading and unloading areas, ingress, egress,
direction of traffic, decorative walls, landscaped areas and walkways; provided,
however, Lessor shall at all times provide the parking facilities required by
applicable law;

(b) To close temporarily any of the Common Areas for maintenance purposes so
long as reasonable access to the Premises remains available;

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<PAGE>   9
(c) To designate other land and improvements outside the boundaries of the
Office Building Project to be a part of the Common Areas provided that such
other land and improvements have a reasonable and functional relationship to the
Office Building Project;

(d) To add additional buildings and improvements to the Common Areas;

(e) To use the Common Areas while engaged in making additional improvements,
repairs or alterations to the Office Building Project, or any portion thereof;

(f) To do and perform such other acts and make such other changes in, to or with
respect to the Common Areas and Office Building Project as Lessor may, in the
exercise of sound business judgment deem to be appropriate.

3. TERM.

3.1 TERM. The term and Commencement Date of this Lease shall be as specified in
paragraph 1.5 of the Basic Lease Provisions.

3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any
reason Lessor cannot delivery possession of the Premises to Lessee on said date
and subject to paragraph 3.2.2, Lessor shall not be subject to any liability
therefore, nor shall such failure affect the validity of this Lease or the
obligations of Lessee hereunder or extend the term hereof; but, in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided, however,
that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs
incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor
shall return any money previously deposited by Lessee (less any offsets due
Lessor for Non-Standard Improvements); and provided further, that if such
written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease hereunder shall terminate and be of
no further force or effect.

3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall be deemed
tendered to Lessee ("Tender of Possession") when (1) the improvements to be
provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready for use in the Premises, (3) Lessee has reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2) and (3), above of this paragraph 3.2.1.

3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the
sixty (60) day period following the Commencement Date before which Lessee's
right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended
to the extend of any delays caused by acts or omissions of Lessee, Lessee's
agents, employees and contractors.

                                       9
<PAGE>   10
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement
Date, such occupancy shall be subject to all provisions of this Lease, such
occupancy shall not change the termination date, and Lessee shall pay rent for
such occupancy.

3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is
defined as the completion of the improvements, Lessee and Lessor shall execute
an amendment to this Lease establishing the date of Tender of Possession (as
defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.

4. RENT.

4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.3,
and except as may be otherwise expressly provided in this Lease, Lessee shall
pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the
Basic Lease Provisions, without offset or deduction, Lessee shall pay Lessor
upon execution hereof the advance Base Rent described in paragraph 1.8 of the
Basic Lease Provisions. Rent for any period during the term hereof which is for
less than one month shall be prorated based upon the actual number of days of
the calendar month involved. Rent shall be payable in lawful money of the United
States to Lessor at the address stated herein or to such other persons or at
such other places as Lessor may designate in writing.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay rent or other charges due hereunder, or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default for the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all or any portion of
said deposit, Lessee shall within ten (10) days after written demand therefor
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount then required of Lessee. If the monthly Base Rent shall, from time
to time, increase during the term of this Lease, Lessee shall, at the time of
such increase, deposit with Lessor additional money as a security deposit so
that the total amount of the security deposit held by Lessor shall at all times
bear the same proportion to the then current Base Rent as the initial security
deposit bears to the Initial Base Rent set forth in paragraph 1.6 of the Basic
Lease Provisions. Lessor shall not be required to keep said security deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.

6. USE.

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<PAGE>   11
6.1 USE. The Premises shall be used and occupied only for the purpose set forth
in paragraph 1.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for one other purpose.

6.2 COMPLIANCE WITH LAW.

(a) Lessor warrants to Lessee that the Premises, in the state existing on the
date that the Lease term commences, but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, or any
applicable building code, regulation or ordinance in effect on such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated, then it shall be the obligation of the Lessor, after written notice
from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such
violation.

(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense,
promptly comply with all applicable statutes, ordinances, rules, regulations,
orders, covenants and restrictions of record, and requirements of any first
insurance underwriters or rating bureaus, now in effect or which may hereafter
come into effect, whether or not they reflect a change in policy from that now
existing, during the term or any part of the term hereof, relating in any manner
to the Premises and the occupation and use by Lessee of the Premises. Lessee
shall conduct its business in a lawful manner and shall not use or permit the
use of the Premises or the Common Areas in any manner that will tend to create
waste or a nuisance or shall tend to disturb other occupants of the Office
Building Project.

6.3 CONDITION OF PREMISES.

(a) Lessor shall delivery the Premises to Lessee in a clean condition on the
Lease Commencement Date (unless Lessee is already in possession) and Lessor
warrants to Lessee that the plumbing, lighting, air conditioning, and heating
system in the Premises shall be in good operating condition. In the event that
it is determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting forth
with specificity the nature of the violation, to promptly, at Lessor's sole
cost, rectify such violation.

(b) Except as otherwise provided in this Lease, Lessee hereby accepts the
Premises and the Office Building Project in their condition existing as of the
Lease Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.

7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.

7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas, and
the equipment whether used

                                       11
<PAGE>   12
exclusively for the Premises or in common with other premises, in good condition
and repair, provided, however, Lessor shall not be obligated to paint, repair or
replace wall coverings, or to repair or replace any improvements that are not
ordinarily a part of the Building or are above then Building standards. Except
as provided in paragraph 9.5, there shall be no abatement of rent or liability
of Lessee on account of any injury or interference with Lessee's business with
respect to an improvements, alterations or repairs made by Lessor to the Office
Building Project or any part thereof. Lessee expressly waives the benefits of
any statute now or hereafter in effect which would otherwise afford Lessee the
right to make repairs at Lessor's expense or to terminate this Lease because of
Lessor's failure to keep the Premises in good order, condition and repair.

7.2 LESSEE'S OBLIGATIONS.

(a) Notwithstanding Lessor's obligation to keep the Premises in good condition
and repair, Lessee shall be responsible for payment of the cost thereof to
Lessor as additional rent for that portion of the cost of any maintenance and
repair of the Premises, or any equipment (wherever located) that serves only
Lessee or the Premises, to the extent such cost is attributable to causes beyond
normal wear and tear. Lessee shall be responsible for the cost of painting,
repairing or replacing wall coverings, and to repair or replace any Premises
improvements that are not ordinarily a part of the Building or that are above
then Building standards. Lessor may, at its option, upon reasonable notice,
elect to have Lessee perform any particular such maintenance or repairs the cost
of which is otherwise Lessee's responsibility hereunder.

(b) On the last day of the term hereof, or on any sooner termination, Lessee
shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishing and equipment.
Except as otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings
and plumbing on the Premises and in good operation condition.

7.3 ALTERATIONS AND ADDITIONS.

(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility installations or repairs in, on or
about the Premises, or the Office Building Project. As used in this paragraph
7.3 the term "Utility Installation" shall mean carpeting, window and wall
coverings, power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment. At the expiration of the term, Lessor may require the removal of any
or all of said alterations, improvements, additions or Utility installations,
and the restoration of the Premises and the Office Building Project to their
prior condition, at Lessee's expense. Should Lessor permit Lessee to make its
own alterations, improvements, additions or Utility installations, Lessee shall
use only such contractor as has been expressly approved by Lessor, and Lessor
may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half times the estimated
cost of such improvements, to insure

                                       12
<PAGE>   13
Lessor against any liability for mechanic's and materialmen's liens and to
insure completion of the work. Should Lessee make any alterations, improvements,
additions or Utility installations without the prior approval of Lessor, or use
a contractor not expressly approved by Lessor, Lessor may, at any time during
the term of this Lease, require that Lessee remove any part or all of the same.

(b) Any alterations, improvements, additions or Utility installations in or
about the Premises or the Office Building Project that Lessee shall desire to
make shall be presented to Lessor in written form, with proposed detailed plans.
If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.

(c) Lessee shall pay, when due, all claims for labor or materials furnished or
alleged to have been furnished to or for Lessee at or for use in the Premises,
which claims are or may be secured by any mechanic's or materialmen's lien
against the Premises, the Building or the Office Building Project, or any
interest therein.

(d) Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in the Premises by Lessee, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises or the
Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.

(e) All alterations, improvements, additions and Utility installations (whether
or not such Utility installations constitute trade fixtures of Lessee), which
may be made to the Premises by Lessee, including but not limited to, floor
coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and
lighting and telephone or communication systems, conduit, wiring and outlets,
shall be made and done in a good and workmanlike manner and of good and
sufficient quality and materials and shall be the property of Lessor and remain
upon and be surrendered with the Premises at the expiration of the Lease term,
unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided
Lessee is not in default, notwithstanding the provisions of this paragraph
7.3(e), Lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed without material damage to
the Premises or the Building, and other than Utility installations, shall remain
the property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.

(f) Lessee shall provide Lessor with as-built plans and specifications for any
alterations, improvements, additions or Utility installations.

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<PAGE>   14
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional
utility facilities throughout the Office Building Project for the benefit of
Lessor or Lessee, or any other lessee of the Office Building Project, including,
but not by way of limitation, such utilities as plumbing, electrical systems,
communication systems, and fire protection and detection systems, so long as
such installations do not unreasonably interfere with Lessee's use of the
Premises.

8. INSURANCE; INDEMNITY.

8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease a policy of Comprehensive General
Liability Insurance utilizing an Insurance Services Office standard form with
Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount
of not less than $1,000,000 per occurrence of bodily injury and property damage
combined or in a greater amount as reasonably determined by Lessor and shall
insure Lessee with Lessor as an additional insured against liability arising out
of the use, occupancy or maintenance of the Premises. Compliance with the above
requirement shall not, however, limit the liability of Lessee hereunder.

8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force during
the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad
Form Property Damage Insurance, plus coverage against such other risks Lessor
deems advisable from time to time, insuring Lessor, but not Lessee, against
liability arising out of the ownership, use, occupancy or maintenance of the
Office Building Project in an amount not less than $5,000,000.00 per occurrence.

8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.

8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies or insurance covering loss or damage
to the Office Building Project Improvements, but not Lessee's personal property,
fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined n paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor.

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<PAGE>   15
Lessee shall pay the entirety of any increase in the property insurance premium
for the Office Building Project over what it was immediately prior to the
commencement of the term of this Lease if the increase is specified by Lessor's
insurance carrier as being caused by the nature of Lessee's occupancy or any act
or omission of Lessee.

8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
Commencement Date of this Lease. No such policy shall be cancelable or subject
to reduction of coverage or other modification except after thirty (30) days'
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with renewals thereof.

8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the
other, and waive their entire right of recovery against the other, for direct or
consequential loss or damage arising out of or incident to the perils covered by
property insurance carried by such party, whether due to the negligence of
Lessor or Lessee or their agents, employees, contractors and/or invitees. If
necessary all property insurance policies required under this Lease shall be
endorsed to so provide.

8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents,
Lessor's mater or ground lessor, partners and lenders, from and against any and
all claims for damage to the person or property of anyone or any entity arising
from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees, or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon, or about the Office Building Project arising
from any cause and Lessee hereby waives all claims in respect thereof against
Lessor.

8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall
not be liable for injury to Lessee's business or any loss of income therefrom or
for loss of or damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises or the Office Building Project, nor shall Lessor be liable for
injury to the person of Lessee, Lessee's employees, agents or contractors,
whether such damage or injury is caused by or results from theft, first, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether said damage
or

                                       15
<PAGE>   16
injury results from conditions arising upon the Premises or upon other portions
of the Office Building Project, or from other sources or places, or from new
construction or the repair, alteration or improvement of any part of the Office
Building Project, or of the equipment, fixtures or appurtenances applicable
thereto, and regardless of whether the cause of such damage or injury or the
means of repairing the same is inaccessible, Lessor shall not be liable for any
damages arising from any act or neglect of any other lessee, occupant or user of
the Office Building Project, nor from the failure of Lessor to enforce the
provisions of any other lease of any other lessee of the Office Building
Project.

8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that
the limits or forms of coverage of insurance specified in this paragraph 8 are
adequate to cover Lessee's property or obligations under this Lease.

9. DAMAGE OR DESTRUCTION.

9.1 DEFINITIONS.

(a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any
extent.

(b) "Premises Building Partial Damage" shall mean if the Building of which the
Premises are a part is damaged or destroyed to the extent that the cost to
repair is less than fifty percent (50%) of the then Replacement Cost of the
building.

(c) "Premises Building Total Destruction" shall mean if the Building of which
the Premises are a part is damaged or destroyed to the extent that the cost to
repair is fifty percent (50%) or more of the then Replacement Cost of the
Building.

(d) "Office Building Project Buildings" shall mean all of the buildings on the
Office Building Project site.

(e) "Office Building Project Buildings Total Destruction" shall mean if the
Office Building Project Buildings are damaged or destroyed to the extent that
the cost of repair is fifty percent (50%) or more of the then Replacement Cost
of the Office Building Project Buildings.

(f) "Insured Loss" shall mean damage or destruction which was caused by an event
required to be covered by the insurance described in paragraph 8. The fact that
an Insured Loss has a deductible amount shall not make the loss an uninsured
loss.

(g) "Replacement Cost" shall mean the amount of money necessary to be spent in
order to repair or rebuild the damaged area to the condition that existed
immediately prior to the damage occurring, excluding all improvements made by
lessees, other than those installed by Lessor at Lessee's expense.

9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.

(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage which is an Insured Loss and
which falls into the classification of either Premises Damage or Premises
Building Partial Damage, then Lessor shall,

                                       16
<PAGE>   17
as soon as reasonably possible and to the extent the required materials and
labor are readily available through usual commercial channels, at Lessor's
expense repair such damage (but not Lessee's fixtures, equipment or tenant
improvements originally paid for by Lessee) to its condition existing at the
time of the damage, and this Lease shall continue in full force and effect.

(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at
any time during the term of this Lease there is damage which is not an Insured
Loss and which falls within the classification of Premises Damage or Premises
Building Partial Damage, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense), which damage
prevents Lessee from making any substantial use of the Premises. Lessor may at
Lessor's option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after the
date of the occurrence of such damage of Lessor's intention to cancel and
terminate this Lease as of the date of the occurrence of such damage, in which
event this Lease shall terminate as of the date of the occurrence of such
damage.

9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.

9.4 DAMAGE NEAR END OF TERM.

(a) Subject to paragraph 9.4(b), if at any time during the last twelve (12)
months of the term of this Lease there is substantial damage to the Premises,
Lessor may at Lessor's option cancel and terminate this Lease as of the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within 30 days after the date of occurrence of such damage.

(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to
extend or renew this Lease, and the time within which said option may be
exercised has not yet expired, Lessee shall exercise such option, if it is to be
exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss failing within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixture, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said twenty (20) day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's

                                       17
<PAGE>   18
election to do so within ten (10) days after the expiration of said twenty (20)
day period, notwithstanding any term or provision in the grant of option to the
contrary.

9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) In the event Lessor repairs or restores the Building or Premises pursuant to
the provisions of this paragraph 9, and any part of the Premises are not usable
(including loss of use due to loss of access or essential services), the rent
payable hereunder (including Lessee's Share of Operating Expense Increase) for
the period during which such damage, repair or restoration continues shall be
abated, provided (1) the damage was not the result of the negligence of Lessee,
and (2) such abatement shall only be to the extent the operation and
profitability of Lessee's business as operated from the Premises is adversely
affected. Except for said abatement of rent, if any, Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.

(b) If Lessor shall be obligated to repair or restore the Premises or the
Building under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within ninety (90) days after such occurrence, of if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.

(c) Lease agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.

9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to
this paragraph 9, an equitable adjustment shall be made concerning advance rent
and any advance payments made by Lessee to Lessor. Lessor shall, in addition,
return to Lessee so much of Lessee's security deposit as has not theretofore
been applied by Lessor.

9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate
to termination of leases when leased property is destroyed and agree that such
event shall be governed by the terms of this Lease.

10. REAL PROPERTY TAXES.

10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined n
paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.

10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for payment any
increase in real property tax specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real

                                       18
<PAGE>   19
property tax if assessed solely by reason of additional improvements placed upon
the Premises by Lessee or at Lessee's request.

10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real property
tax" shall include any form of real estate tax or assessment, general, special,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project of in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a service or
right not charged prior to June 1, 1978, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.

10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which are
to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately
assessed, Lessee's portion of that tax shall be equitably determined by Lessor
from the respective valuations assigned in the assessor's work sheets or such
other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.

10.5 PERSONAL PROPERTY TAXES.

(a) Lessee shall pay prior to delinquency all taxes assessed against and levied
upon trade fixtures, furnishings, equipment and all other personal property of
Lessee contained in the Premises or elsewhere.

(b) If any of Lessee's said personal property shall be assessed with Lessor's
real property, Lessee shall pay to Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.

11. UTILITIES.

11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air
conditioning, and janitorial service as reasonably required, reasonable amounts
of electricity for normal lighting and office machines, water for reasonable and
normal drinking and lavatory use, and replacement light bulbs and/or fluorescent
tubes and ballasts for standard overhead fixtures.

                                       19
<PAGE>   20
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat,
light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.

11.3 HOURS OF SERVICE. Said services and utilities shall be provided during
generally accepted business days and hours or such other days or hours as may
hereafter be set forth. Utilities and services required at other times shall be
subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof.

11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities
except by or through existing outlets and shall not install or use machinery or
equipment in or about the Premises that uses excess water, lighting or power, or
suffer or permit any act that causes extra burden upon the utilities or
services, including but not limited to security services, over standard office
usage for the Office Building Project. Lessor shall require Lessee to reimburse
Lessor for any excess expenses or costs that may arise out of a breach of this
subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's
expense supplemental equipment and/or separate metering applicable to Lessee's
excess usage or loading.

11.5 INTERRUPTIONS. There shall be no abatement of rent or Lessor shall not be
liable in any respect whatsoever for the inadequacy, stoppage, interruption or
discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control or
in cooperation with governmental request or directions.

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of
law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or
any part of Lessee's interest in the Lease or in the Premises, without Lessor's
prior written consent, which Lessor shall not unreasonably withhold. Lessor
shall respond to Lessee's request for consent hereunder in a timely manner and
any attempted assignment, transfer, mortgage, encumbrance or subletting without
such consent shall be void, and shall constitute a material default and breach
of this Lease, without the need for notice to Lessee under paragraph 13.1
"Transfer" within the meaning of this paragraph 12 shall include the transfer or
transfers aggregating (a) if Lessee is a corporation, more than twenty-five
percent (25%) of the voting stock of such corporation, or (b) if Lessee is a
partnership, more than twenty-five percent (25%) of the profit and loss
participation in such partnership.

12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12 hereof,
Lessee may assign or sublet the Premises, or any portion thereof, without
Lessor's consent, to any corporation which controls, is controlled by or is
under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee

                                       20
<PAGE>   21
under this Lease and (b) lessor shall be given written notice of such assignment
and assumption. Any such assignment shall not, in any way, affect or limit the
liability of Lessee under the terms of this Lease even if after such assignment
or subletting the terms of this Lease are materially changed or altered without
the consent of Lessee, the consent of whom shall not be necessary.

12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

(a) Regardless of Lessor's consent, no assignment or subletting shall release
Lessee of Lessee's obligations hereunder or alter the primary liability of
Lessee to pay the rent and other sums due Lessor hereunder including Lessee's
Share of Operating Expense Increase and to perform all other obligations to be
performed by Lessee hereunder.

(b) Lessor may accept rent from any person other than Lessee pending approval or
disapproval of such assignment.

(c) Neither a delay in the approval or disapproval of such assignment or
subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 of this Lease.

(d) If Lessee's obligations under this Lease have been guaranteed by third
parties, then an assignment or sublease, and Lessor's consent thereto, shall not
be effective unless said guarantors give their written consent to such sublease
and the terms thereof.

(e) The consent by Lessor to any assignment or subletting shall not constitute a
consent to any subsequent assignment or subletting by Lessee or to any
subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; however, such persons shall not be responsible to the extent any such
amendment or modification enlarges or increases the obligations of the Lessee or
sublessee under this Lease or such sublease.

(f) In the event of any default under this Lease, Lessor may proceed directly
against Lessee, any guarantors or any one else responsible for the performance
of this Lease, including the sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor, or
any security held by Lessor or Lessee.

(g) Lessor's written consent to any assignment or subletting of the Premises by
Lessee shall not constitute an acknowledgement that no default then exists under
this Lease of the obligations to be performed by Lessee nor shall such consent
be deemed a waiver of any then existing default, except as may be otherwise
stated by Lessor at the time.

(h) The discovery of the fact that any financial statement relied upon by Lessor
in giving its consent to an assignment or subletting was materially false shall,
at Lessor's election, render Lessor's said consent null and void.

                                       21
<PAGE>   22

12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of
Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in
all rental and income arising from any sublease heretofore or hereafter made by
Lessee, and Lessor may collect such rent and income and apply same toward
Lessee's obligations under this Lease, provided, however, that until a default
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may receive, collect and enjoy the rents accruing under such sublease. Lessor
shall not, by reason of this or any other assignment of such sublease to Lessor
nor by reason of the collection of the rents from a sublessee, be deemed liable
to the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
notice from Lessor stating that a default exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents due and to become due
under the sublease. Lessee agrees that such sublessee shall have the right to
rely upon any such statement and request from Lessor, and that such sublessee
shall pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Lessee to the contrary. Lessee shall have no right or claim against said
sublessee or Lessor for any such rents so paid by said sublessee to Lessor.

(b) No sublease entered into by Lessee shall be effective unless and until it
has been approved in writing by Lessor in entering into any sublease. Lessee
shall use only such form of sublessee as is satisfactory to Lessor, and once
approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublease shall, by reason of entering into a
sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed
and agreed to conform and comply with each and every obligation herein to be
performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.

(c) In the event Lessee shall default in the performance of its obligations
under this Lease, Lessor at its option and without any obligation to do so, may
require any sublessee to attorn to Lessor, in which event Lessor shall undertake
the obligations of Lessee under such sublease from the time of the exercise of
said option to the termination of such sublease; provided, however, Lessor shall
not be liable for any prepaid rents or security deposit paid by such sublessee
to Lessee or for any other prior defaults of Lessee under such sublease.

(d) No sublessee shall further assign or sublet all or any part of the Premises
without Lessor's prior written consent.

(e) With respect to any subletting to which Lessor has consented, Lessor agrees
to deliver a copy of any notice of default by Lessee to the sublessee. Such
sublessee shall have the right to cure a default of Lessee within three (3) days
after service of said notice of default upon such sublessee, and the sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such defaults cured by the sublessee.

                                       22
<PAGE>   23
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the Premises
or request the consent of Lessor to any assignment or subletting or if Lessee
shall request the consent of Lessor for any act Lessee proposes to do then
Lessee shall pay Lessor's reasonable costs and expenses incurred in connection
therewith, including attorneys', architects', engineers' or other consultants'
fees.

12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any approval
to assign or sublet upon Lessor's determination that (a) the proposed assignee
or sublessee shall conduct a business on the Premises of a quality substantially
equal to that of Lessee and consistent with the general character of the other
occupants of the Office Building Project and not in violation of any exclusives
or rights then held by other tenants, and (b) the proposed assignee or sublessee
be at least as financially responsible as Lessee was expected to be at the time
of the execution of this Lease or of such assignment or subletting, whichever is
greater.

13.  DEFAULT; REMEDIES.

13.1 DEFAULT. The occurrence of any one or more of the following events shall
constitute a material default of this Lease by Lessee.

(a) The vacation or abandonment of the Premises by Lessee. Vacation of the
Premises shall include the failure to occupy the Premises for a continuous
period of sixty (60) days or more, whether or not the rent is paid.

(b) The breach by Lessee of any of the covenants, conditions or provisions of
paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting),
13.1(a) vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false
statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions),
or 41.1 (easements), all of which are hereby deemed to be material, non-curable
defaults without the necessity of any notice by Lessor to Lessee thereof.

(c) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, where such failure
shall continue for a period of three (3) days after written notice thereof from
Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay
Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to
Pay Rent or Quit shall also constitute the notice required by this subparagraph.

(d) The failure by Lessee to observe or perform any of the covenants, conditions
or provisions of this Lease to be observed or performed by Lessee other than
those referenced in subparagraphs (b) and(c), above, where such failure shall
continue for a period of thirty (30) days after written notice thereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default of Lessee
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.

(e) (i) The making by Lessee of any general arrangement or general assignment
for the benefit of creditors, (ii) Lessee becoming a "debtor" as defined in 11
USC Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty

                                       23
<PAGE>   24
(60) days, (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to lessee within thirty
(30) days, or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days in the event that any provision of this paragraph 13.1(e) is, contrary to
any applicable law, such provision shall be of no force or effect.

(f) The discovery by Lessor that any financial statement given to Lessor by
lessee, or its successor in interest or by any guarantor of Lessee's obligation
hereunder, was materially false.

13.2 REMEDIES. In the vent of any material default or breach of this Lease by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default.

(a) Terminate Lessee's right to possession of the Premises by any lawful means,
in which case this Lease and the term hereof shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises, expenses of reletting including necessary renovation
and alteration of the Premises, reasonable attorneys' fees, and any real estate
commission actually paid; the worth at the time of award by the court having
jurisdiction thereof of the amount by which the unpaid rent for the balance of
the term after the time of such award exceeds the amount of such rental loss for
the same period that Lessee proves could be reasonably avoided; that portion of
the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the
unexpired term of this Lease.

(b) Maintain Lessee's right to possession in which case this Lease shall
continue in effect whether or not Lessee shall have vacated or abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.

(c) Pursue any other remedy now or hereafter available to Lessor under the laws
or judicial decisions of the state wherein the Premises are located. Unpaid
installments of rent and other unpaid monetary obligations of Lessee under the
terms of this Lease shall bear interest form the date due at the maximum rate
then allowable by law.

13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to
perform obligations required of Lessor within a reasonable time, but in no event
later than thirty (30) days after written notice by Lessee to Lessor and to the
holder of any first mortgage or deed of trust covering the Premises whose name
and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation, provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
lessor commences performance within such 30-day period and thereafter diligently
pursues the same to completion.

                                       24
<PAGE>   25
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to
Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums
due hereunder will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Office Building Project. Accordingly, if any installment of
Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.

14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation") this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs, provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within thirty (30) days after the condemning authority shall
have taken possession), to terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent and Lessee's
Share of Operating Expense Increase shall be reduced in the proportion that the
floor area of the Premises taken bears to the total floor area of Premises
Common Areas taken shall be excluded from the Common Areas usable by Lessee and
no reduction of rent shall occur with respect thereto or by reason thereof.
Lessor shall have the option in its sole discretion to terminate this Lease as
of the taking of possession by the condemning authority, by giving written
notice to Lessee of such election within thirty (30) days after receipt of
notice of a taking by condemnation of any part of the Premises or the Office
Building Project. Any award for the taking of all or any part of the Premises or
the Office Building Project under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages, provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such Improvements shall be amortized over the original term of this Lease
excluding any options in the event that this Lease is not terminated by reason
of such condemnation. Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, repair any damage to the
Premises caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.

                                       25
<PAGE>   26
15. BROKER'S FEE.

(a) The brokers involved in this transaction are _West Valley Properties, Inc.
and Cornish and Carey __as "listing broker" and _ Cornish and Carey _ as
"cooperating broker," licensed real estate broker(s). A "cooperating broker" is
defined as any broker other than the listing broker entitled to a share of any
commission arising under this Lease. Upon execution of this Lease by both
parties, Lessor shall pay to said brokers jointly, or in such separate shares as
they may mutually designate in writing, a fee as set froth in a separate
agreement between Lessor and said broker(s), or in the event there is no
separate agreement between Lessor and said broker(s), the sum of $___ n/a _____,
for brokerage services rendered by said broker(s) to lessor in this transaction.

(b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in
paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or
any subsequently granted option which is substantially similar to an Option
granted to lessee under this Lease, or (ii) if Lessee acquires any rights to the
Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
lessee been exercised, or (iii) if Lessee remains in possession of the Premises
after the expiration of the term of this Lease after having failed to exercise
an Option, or (iv) if said broker(s) are the procuring cause of any other lease
or sale entered into between the parties pertaining to the Premises and/or any
adjacent property in which Lessor has an interest, or (v) if the Base Rent is
increased, whether by agreement or operation of an escalation clause contained
herein, then as to any of said transactions or rent increases, Lessor shall pay
said broker(s) a fee in accordance with the schedule of said broker(s) in effect
at the time of execution of this Lease. Said fee shall be paid at the time such
increased rental is determined.

(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 15 to the
extent of their interest in any commission arising under this Lease and may
enforce that right directly against Lessor, provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.

(d) Lessee and Lessor each represent and warrant to the other that neither has
had any dealings with any person, firm, broker or finder (other that the
person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.

16. ESTOPPEL CERTIFICATE.

                                       26
<PAGE>   27
(a) Each party (as "responding party") shall at any time upon not less than ten
(10) days' prior written notice form the other party ("requesting party")
execute, acknowledge and deliver to the requesting party a statement in writing
(i) certifying that this Lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to which the
rent and other charges are paid in advance, if any, and (ii) acknowledging that
there are not, to the responding party's knowledge, any uncured defaults on the
part of the requesting party, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Office Building or of the business of Lessee.

(b) At the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and effect without
modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance and (iii) if
Lessor is the requesting party, not more than one month's rent has been paid in
advance.

(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such file or
interest, Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.

18. SEVERABILITY. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.

19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.

20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to
be performed under this Lease.

                                       27
<PAGE>   28
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense increase and any other payable by Lessee hereunder shall be deemed to be
rent.

22. INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease. Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents o any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act. The legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.

23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt of the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such parties at such addresses as Lessor may from time to time hereafter
designate by notice to Lessee.

24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.

25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.

26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be two hundred percent (200%) of the rental payable immediately preceding
the termination date of this Lease, and all Options, if any, granted under

                                       28
<PAGE>   29
the terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.

29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.

30. SUBORDINATION.

(a) This Lease, and any Option or right of first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee s not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee. This Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior to subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.

(b) Lessee agrees to execute any documents required to effectuate an attornment,
or subordination, or to make this Lease or any Option granted herein prior to
the lien of any mortgage, deed of trust or ground lease, as the case may be.
Lessee's failure to execute such documents within ten (10) days after written
demand shall constitute a material default by Lessee hereunder without further
notice to Lessee or, at Lessor's option, Lessor shall execute such documents on
behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make,
constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in
Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).

31. ATTORNEYS' FEES.

31.1 If either party or the broker(s) named herein bring an action to enforce
the terms hereof or declare rights herein, the prevailing party in any such
action, trail or appeal thereon, shall be entitled to his reasonable attorney's
fees to be paid by the losing party as fixed by the court in the same or a
separate suit, and whether or not such action is pursue to decision or judgment.
The

                                       29
<PAGE>   30
provisions of this paragraph shall insure to the benefit of the broker named
herein who seeks to enforce a right hereunder.

31.2 The attorneys' fee aware shall not be computed in accordance with any court
fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.

31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs
and expenses incurred in the preparation and service of notice of default and
consultations in connection therewith, whether or not a legal transaction is
subsequently commence in connection with such default.

32. LESSOR'S ACCESS.

32.1 Lessor and Lessor's agents shall have the right to enter the Premises at
reasonable times for the purpose of inspecting the same, performing any services
required of Lessor, showing the same to prospective purchasers, lenders, or
lessees taking such safety measures, erecting such scaffolding or other
necessary structures, making such alterations, repairs, improvements or
additions to the Premises or the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.

32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.

32.3 Lessor shall have the right to retain keys to the Premises and to unlock
all doors in or upon the Premises other than to files, vaults and sales, and in
the case of emergency to enter the Premises by any reasonably appropriate means,
and any such entry shall not be deemed a forceable or unlawful entry or detainer
of the Premises or an eviction. Lessee waives any charges for damages or
injuries or interference with Lessee's property or business in connection
therewith.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of its paragraph shall constitute a material default of this Lease.

34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.

35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor,

                                       30
<PAGE>   31
terminate all or any existing subtenancies or may, at the option of Lessor,
operate as an assignment to Lessor of any or all of such subtenancies.

36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.

37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under the Lease.

38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The Individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.

39. OPTIONS.

39.1 DEFINITION. As used in this paragraph the word "Option" has the following
meaning: (1) the right or option to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (2) the option of right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other space within the Office Building Project or other property of Lessor
or the right of first offer to lease other space within the Office Building
Project or other property of Lessor; (3) the right or option to purchase the
Premises or the Office Building Project, or the right of first refusal to
purchase the Premises or the Office Building Project or the right of first offer
to purchase the Premises or the Office Building Project, or the right or option
to purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other property
of Lessor.

39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal
to the original Lessee and may be exercised only by the original Lessee while
occupying the Premises who does so without the intent of thereafter assigning
this Lease or subletting the Premises or any portion thereof, and may not be
exercised or be assigned, voluntarily or involuntarily, by or to any person or
entity other than Lessee; provided, however, that an Option may be exercised by
or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease.
The Options, if any, herein granted to Lessee are not assignable separate and
apart from this Lease, nor may any Option be separated from this Lease in any
manner, either by reservation or otherwise.

39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.

39.4 EFFECT OF DEFAULT ON OPTIONS.

                                       31
<PAGE>   32
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary, (i) during the time commencing
from the date Lessor gives to Lessee a notice of default pursuant to paragraph
13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice
of default is cured, or (iii) during the period of time commencing on the day
after a monetary obligation to Lessor is due from Lessee and unpaid (without any
necessity for notice thereof to Lessee) and continuing until the obligation is
paid, or (iii) in the event that Lessor has given to Lessee three or more
notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not
the defaults are cured, during the 12 month period of time immediately prior to
the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has
committed any non-curable breach, including without limitation those described
in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants
or conditions of this Lease.

(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of paragraph 39.4(a).

(c) All rights of Lessee under the provisions of an Option shall terminate and
be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if
Lessee has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.

40. SECURITY MEASURES - LESSOR'S RESERVATIONS.

40.1 Lessee hereby acknowledged that Lessor shall have no obligation whatsoever
to provide guard service or other security measures for the benefit of the
Premises or the Office Building Project. Lessee assumes all responsibility for
the protection of Lessee, its agents, and invitees and the property of Lessee
and of Lessee's agents and invitees from acts of third parties. Nothing herein
contained shall prevent Lessor, at Lessor's sole option, from providing security
protection for the Office Building Project or any part thereof, in which event
the cost thereof shall be included within the definition of Operating Expenses,
as set forth in paragraph 4.2(b).

40.2 LESSOR SHALL HAVE THE FOLLOWING RIGHTS.

(a) To change the name, address or title of the Office Building Project or
building in which the Premises are located upon not less than 90 days prior
written notice;

                                       32
<PAGE>   33
(b) To, at Lessee's expense, provide and Install Building standard graphics on
the door of the Premises and such portions of the Common Areas as Lessor shall
reasonably deem appropriate;

(c) To permit any lessee the exclusive right to conduct any business as long as
such exclusive does not conflict with any rights expressly given herein;

(d) To place such signs, notices or displays as Lessor reasonably deems
necessary or advisable upon the roof, exterior of the buildings or the Office
Building Project or on pole signs in the Common Areas;

40.3 LESSEE SHALL NOT.

(a) Use a representation (photographic or otherwise) of the Building or the
Office Building Project or their name(s) in connection with Lessee's business;

(b) Suffer or permit anyone, except in emergency, to go upon the roof of the
Building.

41. EASEMENTS.

41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications. Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.

41.2 The obstruction of Lessee's view, air, or light by any structure erected in
the vicinity of the Building, whether by Lessor or third parties, shall in no
way affect this Lease or impose any liability upon Lessor.

42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.

43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty(30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.

44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.

                                       33
<PAGE>   34
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.

46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.

47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.

48. WORK LETTER. This lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee, attached hereto as Exhibit C and
incorporated herein by this reference.

49. ATTACHMENTS. Attached hereto are the following documents which constitute a
part of this Lease:

                                 LEASE ADDENDUM

                                       34
<PAGE>   35
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

       IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
       YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
       MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
       ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
       LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
       RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
       OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

LESSOR                                           LESSEE

WVP Income Plus #3                               Camitro Corp.

By: West Valley Properties, Inc.
By:                   /s/                        By: /s/     Harold E. Selick
    ----------------------------                    ----------------------------
    Its: President                                  Its: President & CEO
By:                                                 By:
   -----------------------------                      --------------------------
   Its:                                               Its:

Executed at:                                     Executed at:
            --------------------                            --------------------

on:                                              on:
   -----------------------------                   -----------------------------

Address:
        ------------------------                   -----------------------------

--------------------------------                   -----------------------------

                                       35
<PAGE>   36
                                    EXHIBIT A

                         [DIAGRAM OF FLOOR PLAN OMITTED]

                                       36
<PAGE>   37
                                    EXHIBIT B

                            RULES AND REGULATIONS FOR
                              STANDARD OFFICE LEASE

Dated February 4, 1999

By and Between WVP Income Plus 3, a California limited partnership and Camitro,
Inc., a California corporation.

                                  GENERAL RULES

1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and sidewalks.

2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the Office
Building Project and its occupants.

3. Lessee shall not make or permit any noise or odors that annoy or interfere
with other lessees or persons having business within the Office Building
Project.

4. Lessee shall not keep animals or birds within the Office Building Project,
and shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.

5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.

6. Lessee shall not alter any lock or install new or additional locks or bolts.

7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.

8. Lessee shall not deface the walls, partitions or other surfaces of the
premises or Office Building Project.

9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.

10. Furniture, significant freight and equipment shall be moved into or out of
the building only with the Lessor's knowledge and consent, and subject to such
reasonable limitations, techniques and timing, as may be designated by Lessor.
Lessee shall be responsible for any damage to the Office Building Project
arising from any such activity.

11. Lessee shall not employ any service or contractor for services or work to be
performed in the Building, except as approved by Lessor.

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<PAGE>   38
12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of P.M. and A.M.
of the following day. If Lessee uses the Premises during such periods, Lessee
shall be responsible for securely locking any doors it may have
opened for entry.

13. Lessee shall return all keys at the termination of its tenancy and shall be
responsible for the cost of replacing any keys that are lost.

14. No window coverings, shades or awnings shall be installed or used by Lessee.

15. No Lessee, employee or Invitee shall go upon the roof of the Building.

16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.

17. Lessee shall not use any method of heating or air conditioning other than as
provided by Lessor.

18. Lessee shall not install, maintain or operate any vending machines upon the
Premises without Lessor's written consent.

19. The Premises shall not be used for lodging or manufacturing, cooking or food
preparation.

20. Lessee shall comply with all safety, fire protection and evacuation
regulations establishes by Lessor or any applicable governmental agency.

21. Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not constitute a
waiver of any other rule or regulation or any subsequent application thereof to
such Lessee.

22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be requires.

23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.

                                  PARKING RULES

1. Parking areas shall be used only for parking by vehicles no longer than full
size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles
other than Permitted Size Vehicles are herein referred to as "Oversize
Vehicles."

2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.

                                       38
<PAGE>   39
3. Parking stickers or identification devices shall be the property of Lessor
and be returned to Lessor by the holder thereof upon termination of the holder's
parking privileges. Lessee will pay such replacement charges as is reasonably
established by Lessor for the loss of such devices.

4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.

5. Lessor reserves the right to relocate all or a part of parking spaces from
floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.

6. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.

7. Unless otherwise instructed, every person using the parking areas is required
to park and lock his own vehicle. Lessor will not be responsible for any damage
to vehicles, injury to persons or loss of property, all of which risks are
assumed by the party using the parking area.

8. Validation, if established, will be permissible only by such method or
methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.

9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.

10. Lessee shall be responsible for seeing that all of its employees, agents and
invitees comply with the applicable parking rules, regulations, laws and
agreements.

11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking area.

12. Such parking use as is herein provided is intended merely as a license only
and no bailment is intended or shall be created hereby.

                                       39
<PAGE>   40
                                 LEASE ADDENDUM

This Lease Addendum ("Addendum") is made pursuant to and in connection with that
certain lease agreement ("Lease") dated as of February 4, 1999 by and between
WVP Income Plus 3, a California Limited Partnership ("Lessor") and Camitro, Inc.
a California Corporation, ("Lessee") covering certain premises more particularly
described in Paragraph 2 of the Lease. In consideration of the mutual covenants
contained below, Lessor and Lessee hereby agree as follows:

50. Lessee agrees to accept the premises under this new lease in "as is"
condition and Lessor shall have no responsibility to perform any Lessee
Improvements, except those as specified in this new lease. Except as expressly
provided herein. Lessee acknowledges that Lessor, including Lessor's Agent, has
made no representations or warranty regarding the condition of the Premises or
the Building, and that in entering into this lease Lessee is not relying on any
statements b y Lessor or by Agent. Notwithstanding the above, Lessor agrees to
keep all operating systems, including but not limited to, plumbing, electrical,
HVAC, and the roof, in good working condition.

51. The Premises are a part of the Building which is a part of the Office
Building Project and in this connection, Lessee agrees to abide by, keep and
observe all reasonable rules and regulations which Lessor may make from time to
time for the management, safety, care and cleanliness of the industrial center.
Without limiting the foregoing, Lessee shall not use, keep or permit to be kept,
any foul or noxious gas or substance in the Premises, or permit or suffer the
Premises to be occupied or used in a manner that unreasonably interferes in any
way with other lessees or those having business in the Office Building Project.

52. Any claim by Lessee against Lessor shall be limited as described in the
lease, and furthermore, Lessee expressly waives any and all rights to proceed
against the individual partners, General Partners, officers or agents of Lessor,
and shall look solely to the assets of the Partnership, WVP Income Plus 3, for
any liability that Lessor may have to Lessee.

53. Lessee acknowledges Lessor's representation that the existing Lessees may be
using hazardous materials under legal permits from Menlo Park. Lessor will not
indemnify Lessee of any such hazardous materials.

54. Lessor shall supply HVAC to the Premises Monday - Saturday 7:00 am. to 6:00
p.m. Lessor reserves the option to install an HVAC measuring meter, to monitor
HVAC costs beyond the provided hours to the building (Monday - Saturday 7:00 am.
to 6:00 PM.). In such event, Lessee agrees to pay for after hours use at the
rate of $25 per hour.

55. This Lease Agreement, and the obligations of Lessor, shall be subject to and
contingent upon the receipt by Lessor of approval of this Lease from Lessor's
1st mortgage holder, no later than 21 days after mutual execution of this Lease.
Lessor agrees to use its best efforts to obtain said approval by said date.

56. Lessor shall, at Lessor's sole cost and expense, shall paint and carpet the
Premises and shall clean all tiled floors. Lessor shall make reasonable efforts
to commence these improvements when the existing Tenant, Progenitor, vacates the
Premises. However, subject to section 3.2, in

                                       40
<PAGE>   41
the event that the improvements are not completed by the Commencement Date, the
Commencement Date shall not change and Lessee shall commence paying rent on the
Commencement Date. Tenant shall be responsible for moving any furniture to
enable Landlord to complete these improvements. Landlord shall not be
responsible for any inconvenience to Tenant or damage caused by the construction
of or the installation of these improvements.

57. The Security Deposit and the first month's rent shall be paid upon execution
of this Lease.

58. Lessee shall have the right to use, on a non-exclusive basis, the common
lobby, lunch area and the kitchen, common areas, and the existing parking lot of
4005 Bohannon Drive.

59. Lessee, at Lessee's sole cost and expense, subject to Lessor's approval, and
subject to governmental approvals, shall have the right to (a) place a lobby
sign directing people to Lessee's Premises; and (b) place a sign on the exterior
of the building.

60. Lessor, at Lessor's sole cost and expense, shall be responsible for the
Building complying with Title 24 and The Americans with Disabilities Act (ADA),
as well as all California Life, Safety, and Handicap Access Laws. However,
notwithstanding the above, Lessee shall be responsible and shall pay for any
improvements, repairs, or modifications that are required which are triggered by
any action of Lessee including but not limited to any improvements performed by
Lessee.

61. Providing that Lessee is not in default under the Lease, lessor hereby
grants to Lessee one (1) option to renew the Lease for a period of eighteen (18)
months, under the same terms and conditions as set forth in the Lease, except
rent, which shall be at the rate of $2.15 per rentable square foot per month,
full service. Lessee shall give Lessor written notice, no less than 6 months
prior to the termination of its Lease, that Lessee is exercising its option.
Failure to give said notice within said timeframe shall make this option null
and void.

62. The total rentable square feet shall be approximately 12,500 rentable square
feet and shall be measured by a space planner hired by Lessor, and the square
footage shall be adjusted accordingly.

63. This Lease Amendment shall be subject to and contingent upon Lessor
obtaining from Progenitor a release of the Premises from Lessor's current lease
with Progenitor, Inc.

64. The monthly base rent payable under the lease shall be increased as follows:

         Commencing April 1, 2000 - $2.00 per rentable square foot
         Commencing April 1, 2001 - $2.05 per rentable square foot

65. HAZARDOUS MATERIALS

A. DEFINITIONS.

As used herein, the term "Hazardous Materials" shall mean any hazardous wastes,
materials or substances and other pollutants or contaminates, which are or
become regulated by any federal, state or local laws, ordinances, regulations,
rules or requirements, including but not limited to,

                                       41
<PAGE>   42
the Resource Conservation and Recovery Act, as amended, (42 U.S.C. Sections 6901
et. seq.), the Comprehensive Environmental Response, Compensation and Liability
Act, as amended, (42 U.S.C.Sections 9601 et seq.), the California Hazardous
Materials Control Act, as amended, (Cal. Health & Safety Code Sections 25100
et seq.), the California Hazardous Substance Account Act, as amended, (Cal.
Health & Safety Code Sections 25300 et seq.), and the Safe Drinking Water
and Toxic Enforcement Act (Cal. Health & Safety Code Sections 25249.8)
(Proposition 65). Without limiting the above, the term "Hazardous Materials"
also includes petroleum (including crude oil and any of its fractions),
radioactive materials, asbestos, pesticides, PCB's, and medical or biologic
wastes.

B. COMPLIANCE WITH LAW.

(1) Lessee shall comply with all federal, state and local laws, ordinances,
regulations, rules or requirements relating to the Lessee's use and occupancy of
the Leased Premises, including but not limited to those relating to worker
safety, public health and the environment ("Applicable Laws"). Specifically, but
without limiting Lessee's obligations described above, Lessee shall establish
and adhere to any hazardous material management plan (the "Plan") required by
the County of San Mateo, City of Menlo Park or any other federal, state or local
governmental agency having jurisdiction ("Agency"), and if a Plan is required,
Lessee shall, not later than six months from the commencement of this Lease,
allow Lessor and Agency Representatives to inspect the Leased Premises for
compliance with the Plan, and correct any items not in compliance with the Plan,
and correct any items not in compliance with Applicable Laws. Lessor may require
that Lessee coordinate its Plan with other occupants of the Building. Lessee
also shall not cause, maintain or permit any nuisance in, on or about the
Premises, and shall not install any tanks outside or within the Premises, above
or below ground, without the express written consent of Lessor.

(2) If any Agency directs Lessee or Lessor to take any action with respect to
the presence, release or threatened release of any Hazardous Materials on, under
or about the Premises, and that directive arises out of Lessee's use of
Hazardous Materials at the Premises or at any common areas, Lessee shall
promptly commence and thereafter diligently prosecute to completion, at Lessee's
sole expense, any and all actions required by the Agency. Lessor shall retain
the right to review and approve any remediation action proposed by Lessee.
Lessee shall notify Lessor prior to taking any action in response to the
directive.

C. LESSEE'S USE OF HAZARDOUS MATERIALS.

(1) Lessee shall not, and Lessee shall not permit its employees, agents,
contractors, sublessees, licensees, customers, invitees or parties permitted to
enter the Premises by any of the foregoing (Lessee and such persons,
collectively, "Lessee Parties") to, manage, handle, store or use in any way on
the Premises any Hazardous Materials other than those necessary or useful for
Lessee's business, and all activity involving Hazardous Materials must be in
full and strict compliance with all Applicable Laws. Lessee parties shall not
spill, leak, pump, pour, emit, empty, discharge, inject, leach, dump or dispose
(hereinafter "Release") any Hazardous Materials onto, into or about the
Premises, except to the extent permitted under Applicable Laws. Upon Lessor's
request, Lessee shall provide Lessor with a list of all Hazardous Materials
managed, handled, stored, used, or located on the Leased Premises at any time
during the Lease Term, together with evidence that Lessee has complied with all
Applicable Laws, including obtainment

                                       42
<PAGE>   43
of a state identification number for Hazardous Materials uses, if Applicable
Laws require that Lessee obtain the same. Lessee shall comply fully, including
the completion of any corrective or remediation action, with any premises
closure requirements under Applicable Laws relating to Lessee's or Lessee
Parties use of Hazardous Materials not later than the end of the Lease Term.

(2) Lessee shall have an individual on staff (on at least a part-time basis) who
is trained and assigned to handle environmental, health and safety matters, such
as, but not limited to, radiation safety and emergency planning.

D. LESSOR'S RIGHT TO INSPECT.

Upon prior written notice to Lessee, Lessor shall have the right at all times
during the Lease Term to conduct a reasonable inspection of the Premises,
including performing reasonable tests and investigations to determine if Lessee
is in compliance with the terms of this Lease. In conducting these inspections,
Lessor shall use its best efforts not to unreasonably disrupt Lessee's business
operations. Lessor shall bear the cost of any tests and/or investigations,
except that the cost of such test and/or investigations shall be borne by Lessee
if (a) the tests and/or investigations indicate that Hazardous Materials are
present on or under the Premises at concentrations exceeding levels for which
remediation is required under any Applicable Law, and (b) Lessee is responsible
for the presence of such Hazardous Materials.

E. NOTICES.

Lessee will immediately notify Lessor orally (with a written follow-up notice
within five days) if Lessee knows or has reasonable cause to believe that a
Release of Hazardous Material has come or will come to be located on, in, about,
or beneath the Premises in violation of Applicable Laws, provided that such
notification obligations shall not in itself imply the existence of a
remediation obligation on the part of Lessee. Lessee also shall notify Lessor of
(a) any formal or informal correspondence or communication from any Agency
concerning the release of Hazardous Materials on or migrating to or from the
Premises, or the violation or possible violation of any Applicable Law; or (b)
any claims made or threatened by any third party relating to loss, damage or
injury claimed to have been caused by and Lessee Party's handling, storage or
use of any kind of Hazardous Materials on the Premises or any Leased Party's
alleged violation of any Applicable Laws.

F. INDEMNIFICATION.

(1) Lessee shall indemnify, defend (with Legal counsel acceptable to Lessor) and
hold Lessor, its shareholders, officers, agents, employees, successor's and
assigns harmless from any and all claims, demands, judgments, damages,
liabilities or losses (including diminution in value of the Premises or damages
from loss or restriction on use of the Premises), costs and expenses (including
attorney's fees, consulting fees and expert fees), response and/or removal costs
(including costs associated with site restoration, monitoring, corrective
action, or closure), penalties, fines and punitive damages arising out of or in
connection with the handling, storage, use, generation, treatments, manufacture,
or other management or Release of any Hazardous Materials by any Lessee Party.

                                       43
<PAGE>   44
(2) Lessor shall indemnify, defend and hold Lessee, its shareholders, officers,
agents, employees, successors and assigns harmless from any and all claims,
demands, judgments, liabilities or losses, penalties, fines and punitive damages
arising out of or in connection with the handling, storage, use, generation,
treatment, manufacture, or other management or Release of any Hazardous
Materials in or about the Premises, the Building or Industrial Center caused by
any person or entity other than a Lessee Party. Without limiting the generality
of the foregoing, Lessor acknowledges that the Premises room 1123 may contain
trace elements of radioactivity which were not caused by Lessee. Lessee shall
have no responsibility or liability for the clean up of such radioactivity.

G. REMEDIATION OF HAZARDOUS MATERIALS.

If a Release of any Hazardous Materials occurs on the Leased Premises during the
term of the Lease as a result of any act or omission of any Lessee Party,
Lessee, at its sole expense, shall (a) promptly make all reasonable efforts to
contain and mitigate such Release, (b) provide prompt notification to the proper
authorities if required by an Applicable Law, and (c) upon notice to Lessor and
with Lessor's approval, investigate and take all appropriate removal or remedial
actions necessary to comply with any Applicable Law. This provision shall
survive the expiration or termination of this Lease.

IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE LESSOR
OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTIONS
RELATING THERETO.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date of the Lease.

"LESSOR"                                      "LESSEE"

WVP Income Plus III,                           Camitro, Inc.,
a California Limited Partnership               a California Corporation
By:  West Valley Properties, Inc.,
General Partner

By  /s/                                        By   /s/
  ---------------------------------              -------------------------------

                                       44
<PAGE>   45
RIDER TO A.I.R.E.A. STANDARD OFFICE LEASE - GROSS - DATED, FOR REFERENCE
PURPOSES FEBRUARY 4, 1999, BY AND BETWEEN WVP INCOME PLUS ("LESSOR"), AND
CAMITRO, INC. ("LESSEE").

This Rider is attached to and made a part of the above-referenced Lease. In the
event of any conflict between the Lease and this Rider, the terms and provisions
of this Rider shall govern. If any addenda or amendments are also attached to
the Lease, such addenda or amendments shall govern to the extent of any conflict
between the terms and provisions of this Rider and such addenda or amendments.
All references in the following paragraphs are to corresponding sections of the
typeset portion of the Lease, except as otherwise expressly provided herein.

INSERT 3.2.1: POSSESSION TENDERED - DEFINED.

(3) the Premises is free from equipment and debris and in a broom-clean
condition, (4) Lessor or Lessee's predecessor has obtained regulatory closure of
its operations at the Premises, including having performed any necessary cleanup
or remediation and having received all necessary authorizations and approvals
from regulatory authorities having jurisdiction over such site closure, and (5)

INSERT 6.2(a): COMPLIANCE WITH LAW.

Lessor makes no representations or warranties respecting the existence of
Hazardous Materials in the Premises. However, Lessor hereby releases Lessee from
any liability in connection with any Hazardous Materials in the Premises that
are not caused by Lessee. Additionally, in the event that any third party
regulatory agency or governmental agency requires any work done to or about the
Premises, and such work is not the result of any Hazardous Materials caused by
Lessee, such work shall be done at the sole expense of Lessor.

INSERT 6.2(b): COMPLIANCE WITH LAW.

Notwithstanding anything to the contrary contained in this Lease, throughout the
term hereof, Lessee shall not be responsible for compliance with any laws,
codes, or ordinances where such compliance (i) is not related specifically to
Lessee's use and occupancy of the Premises. For example, if any governmental
authority should require buildings to be structurally strengthened against
earthquake, such compliance shall be performed by and at the sole cost of
Lessor, or (ii) is not triggered by any alterations or improvements done by, or
at the direction of, Lessee to the Premises.

INSERT 7.1: LESSOR'S OBLIGATIONS.

Notwithstanding the provisions of Paragraph 7.1, if Lessor fails to perform its
maintenance and repair obligations (with respect to the roof or the plumbing,
electricity or HVAC systems) in compliance with its obligations under Paragraph
13.3 and, as a consequence, Lessee's use of the Premises is substantially
impaired, Lessee will provide Lessor with written notice that a repair is
needed. If within 30 days following the notice the repair has not been
commenced, Lessee shall have the right to solicit three competitive bids for the
repair and shall deliver copies of such bids to Lessor. Lessor shall have seven
calendar days within which to either commence such work, or to approve of one of
the submitted bids. If Lessor fails to either commence such work or

                                       45
<PAGE>   46
approve a bid within the seven calendar day period, then Lessee shall be
entitled to choose any one of the three bids and cause such repair or
maintenance to be performed at Lessor's expense and Lessor agrees to reimburse
Lessee, upon demand, for the costs thereof.

INSERT 8.7: INDEMNITY.

Notwithstanding anything to the contrary in this Lease, Lessee shall not be
required to indemnify, defend, or hold Lessor harmless from or against any
claims, liability, loss, cost, or expense arising out of (i) the breach by
Lessor, or Lessor's agents, employees, licensees, invitees, or independent
contractors (collectively Lessor's Agents), of any covenant, representation or
warranty under this Lease, or (ii) any negligence or willful misconduct of
Lessor or Lessor's Agents.

INSERT 12.2: LESSEE AFFILIATE.

Additionally, "Lessee Affiliate" shall include any entity which acquires
substantially all of the assets of Tenant, as a going concern, with respect to
the business that is being conducted in the Premises; or any entity that
acquires any stock, the beneficial ownership, or effective voting control of
Tenant from the person(s) having effective voting control as of the date of
Tenant's execution of this Lease.

INSERT 32: LESSOR'S ACCESS.

Notwithstanding anything in this Lease to the contrary, Lessor shall provide
Lessee with at least 24 hours' prior actual notice before entering the Premises
and such entry shall be subject to Lessee's reasonable security requirements. In
the event of an emergency, the determination of which shall require Lessor to be
reasonable, Lessor shall not be required to provide such notice. In the event of
any entry by Lessor onto the Premises, Lessor shall use its best efforts not to
interfere with the conduct of Lessee's business.

INSERT 50: RIGHT OF FIRST REFUSAL.

Subject to the currently existing rights of any other tenant(s) in the building,
in the event that the balance of the first floor of the Building becomes
available for lease (the "Available Space"), Lessor shall give Lessee written
notice of such availability, identifying the same and specifying the basic terms
and conditions on which Lessor proposes to lease the Available Space (the
"Availability Notice"). Lessee shall have five (5) business days after its
receipt of the Availability Notice in which Lessee may either give Lessor
written notice of Lessee's acceptance of the Available Space on the terms and
conditions specified in the Availability Notice (the "Acceptance Notice") or
written notice of a counteroffer by Lessee for the lease of the Available Space
(the "Counter Notice").

Prior to giving the Availability Notice to Lessee and for five (5) business days
thereafter, Lessor shall not enter into any agreement for the Available Space
with any other person. If during such five (5) business day period Lessee gives
Lessor an Acceptance Notice, Lessor and Lessee shall then promptly enter into a
lease for the Available Space on the terms and conditions specified in the
Availability Notice (and otherwise on the terms and conditions contained in this
Lease). If during such five (5) business day period Lessee gives Lessor a
Counteroffer Notice, Lessor shall

                                       46
<PAGE>   47
then give Lessee written notice either accepting such counteroffer (in which
event, Lessor and Lessee shall promptly enter into a lease for the Available
Space of the terms and conditions specified in the Counteroffer Notice and
otherwise on the terms and conditions set forth in this Lease) or rejecting such
counteroffer.

After the expiration of such five (5) business day period, if Lessee has not
given Lessor a timely Acceptance Notice or a timely Counteroffer Notice, then
Lessor shall be free to enter into a lease for the use of the Available Space to
any other person or entity on any terms and conditions. After the expiration of
such five (5) business day period, if Lessee has given Lessor a timely
Counteroffer Notice which Lessor has rejected, Lessor shall be free to enter
into a lease for the use of the Available Space to any other person or entity on
any terms and conditions; provided, however, that Lessor shall not enter into a
lease for the use of the Available Space with any other person or entity on
basic terms materially less favorable to Lessor (i.e. greater than a 10%
discount) than those set forth in the Counteroffer Notice (or, if more than one
Counteroffer Notice was timely given, then in the last such Counteroffer Notice)
without giving Lessee at least five (5) business days prior written notice of
such proposed lease and the opportunity (during such five (5) business day
period by delivery of written notice to Lessor) to agree to lease the Available
Space on the same terms and conditions as those of such proposed lease. In
determining whether "lease terms" are materially less favorable than the terms
offered to Lessee, no terms other than rent, improvement allowance (if any) and
minimum term shall be considered.

WVP INCOME PLUS III                          CAMITRO CORPORATION

By:   West Valley Properties, Inc.           By:        /s/
   -------------------------------------        --------------------------------
            (signature)                              (signature)

By:      /s/                                 By:   Harold E. Selick
   --------------------------------------      ---------------------------------
     (printed name)                                         (printed name)

Title:         President                     Title:  President & CEO
      -----------------------------------         ------------------------------

Date:         3/11/99                        Date:    3/10/99
     -------------------------------------        ------------------------------

                                       47<PAGE>   1
                                                                   Exhibit 10.36

                       COLLABORATION AND LICENSE AGREEMENT

This Collaboration and License Agreement dated as of November 27, 2000 (the
"Effective Date") is between SmithKline Beecham Corporation ("SB"), a
Pennsylvania corporation, and ArQule, Inc. ("ArQule"), a Delaware corporation.

                                 R E C I T A L S

        WHEREAS, ArQule has expertise relating to the discovery and optimization
of compounds for use in the Field; and

        WHEREAS, SB has expertise with respect to certain biological targets
within the Field; and

        WHEREAS, SB desires to collaborate with ArQule to screen certain
compounds within ArQule's compound libraries and certain compounds produced by
SB against SB's biological targets in the Field to identify, optimize and
develop compounds that exhibit activity against such targets.

        NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, SB and ArQule hereby agree as follows:

1.      Certain Definitions. The following meanings shall be ascribed to
capitalized terms used herein without definition:

        1.1.    "Active Compound" means an ArQule Compound that exhibits
significant functional activity against a Target, as determined by SB in a
manner consistent with the manner SB uses to evaluate other similarly situated
compounds being developed by SB within the Field.

        1.2.    "Affiliate" means any legal entity (such as a corporation,
partnership, or limited liability company) that control, is controlled by or is
under common control with a party to this Agreement. For the purposes of this
definition, the term "control" means (i) beneficial ownership of at least fifty
percent (50%) of the voting securities of a corporation or other business
organization with voting securities (or such lesser percentage which is the
maximum allowed by a foreign corporation in a particular jurisdiction), (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities, or (iii)
the ability to direct the affairs of any such entity.

        1.3.    "Analog Compound" means a chemical compound that ***** "ArQule
Analog Compound" shall mean an Analog Compound developed from an ArQule Compound
(as the parent compound) in the course of an optimization program by ArQule or
SB as contemplated by this Agreement ***** For the avoidance of doubt, a
compound is not an ArQule Analog Compound if that compound is acquired,
discovered, or developed by or on behalf of SB independent of this Agreement.
"SB Analog Compound " means an Analog Compound developed from an SB Compound (as
the parent compound) in the course of an optimization

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<PAGE>   2
program by ArQule or SB as contemplated by this Agreement ***** For the
avoidance of doubt, a compound is not an SB Analog Compound if that compound is
acquired, discovered, or developed by or on behalf of SB independent of this
Agreement.

        1.4.    "ArQule Compound" means a chemical compound owned or controlled
by ArQule provided by ArQule to SB pursuant to this Agreement as part of a
screening library, including without limitation the compounds provided in the
Compass Array Library and Mapping Array Libraries.

        1.5.    "Available Compound" means an Active Compound which ArQule has
determined in good faith is not (i) licensed or otherwise committed to a third
party in the Field or (ii) committed to an internal ArQule program in the Field.
For purposes of (i) above, "committed" shall mean a third party with contractual
or other legal rights to claim such compound for development and
commercialization has notified ArQule in writing that such third party has
claimed such compound for development and commercialization. For purposes of
(ii) above, "committed" shall mean that the compound has been designated by
ArQule as committed to an internal development program at ArQule (initiated and
conducted without use of any information generated in the course of this
Agreement) in accordance with its ordinary procedures, as evidenced by the
status of such compound in its corporate database, and is under bona fide
evaluation or is the subject of an active and funded internal development
program at ArQule.

        1.6.    "Compass Array(TM) Library" means a collection of ArQule
Compounds that is a diverse representative subset of the Mapping Array Libraries
used for initial screening of the Mapping Array Libraries. The description of,
and the specifications for, the Compass Array(TM) Library are set forth in
Schedule A attached hereto.

        1.7.    "Confidential Information" means any non-public technical or
business information furnished by one party (the "Disclosing Party") to the
other party (the "Receiving Party") in connection with this Agreement or
generated pursuant to this Agreement. Such Confidential Information may include,
without limitation, the identity or use of a chemical compound, the identity or
use of a biological target, computer models, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, collaboration and development activities, JSC reports,
royalty reports, product and marketing plans, clinical development plans,
customer and supplier information, compound locations within Compass Array
Libraries and the Markush structures of ArQule Compounds.

        1.8.    "Field" means all applications in *****.

        1.9.    "Full-Time Equivalent" or "FTE" shall mean the effort equivalent
to one (1) qualified full-time employee of ArQule working on a specific project
or task for a period of one year.

        1.10.   "Inactive ArQule Compound" means an ArQule Compound (i) which is
selected by SB from the same Mapping Array Library as one or more Active
Compounds with activity for the same Target, and (ii) which is not active
against the same Target as such Active Compounds,

    ***** Confidential Treatment has been requested for the marked portion.

                                       2
<PAGE>   3
as determined by SB in a manner consistent with the manner SB uses to evaluate
other similarly situated compounds being developed by SB within the Field.

        1.11.   "IND" means an investigational new drug application filed with
the United States Food and Drug Administration (or its foreign equivalent) prior
to beginning clinical trials in humans or any comparable application filed with
the regulatory authorities of a country other than the United States, prior to
beginning clinical trials in humans in that country; provided however, that for
purposes of this definition, an IND shall not include an investigational new
drug application regarding the testing of several closely related compounds, or
formulations or other adaptations of the same compound, to aid in the selection
of a lead compound for further human clinical development.

        1.12.   "IND Candidate Compound" means any Royalty-Bearing Product that
is designated by SB as an IND Candidate pursuant to Section 4.4.

        1.13.   "Lead Optimization Array" means a set of ArQule Analog Compounds
or SB Analog Compounds synthesized by ArQule pursuant to Section 4.2. of this
Agreement.

        1.14.   "Licensed Compound" means any Available Compound or Inactive
ArQule Compound that has been designated as a Licensed Compound as provided in
Subsection 4.1.4 below.

        1.15.   "Licensed Compound Set" means a set of one or more Licensed
Compounds from the same Mapping Array Library that have biological activity for
the same Target, as well as any ArQule Analog Compounds of such Licensed
Compounds that are synthesized by a party in the course of optimizing those
Licensed Compounds.

        1.16.   "Mapping Array(TM) Library" means a set of ArQule Compounds
consisting of diverse, structurally related small organic chemical compounds
arranged in a spatially addressable format, such as a microtiter screening
plate, which ArQule makes available to its collaborators for screening on a
non-exclusive basis. The description of, and the specifications for, the Mapping
Array(TM) Libraries are set forth in Exhibit A attached hereto.

        1.17.   "Net Sales" means the gross amount billed or invoiced on sales
by SB, its Affiliates and sublicensees of Royalty-Bearing Products, less the
following: *****. In any transfers of Royalty-Bearing Products among SB, an
Affiliate and/or a sublicensee, Net Sales shall be calculated based on the final
sale of the Royalty-Bearing Product to an independent third party. In the event
that SB, an Affiliate or a sublicensee receives non-monetary consideration for
any Royalty-Bearing Products, Net Sales shall be calculated based on the average
price charged by that party for such Royalty-Bearing Products during the
preceding Royalty Period or, in the absence of such sales, the fair market value
of the non-monetary consideration as determined by the parties in good faith.

        1.18.   "Patent Rights" means any United States and foreign patent
application and any divisional, continuation, or continuation-in-part of such
patent application (to the extent the claims are directed to subject matter
specifically described therein), as well as any patent issued thereon and any
reissue or reexamination of such patent, and any foreign counterparts to such

    ***** Confidential Treatment has been requested for the marked portion.

                                       3
<PAGE>   4
patents and patent applications. "ArQule Patent Rights" means Patent Rights that
are either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a
party other than SB, or (iii) licensed to or otherwise controlled by ArQule, in
each case to the extent that ArQule has the ability to license or sublicense the
rights required under this Agreement without payment to a third party. "SB
Patent Rights" means Patent Rights that are either (i) assigned solely to SB
(including Patent Rights in Analog Compounds pursuant to Section 6.1.), (ii)
assigned jointly to SB and a party other than ArQule, or (iii) licensed to or
otherwise controlled by SB, in each case to the extent that SB has the ability
to license or sublicense the rights required under this Agreement without
payment to a third party. "Joint Patent Rights" means Patent Rights assigned to
both ArQule and SB as joint owners. Joint Patent Rights will include (i) Patent
Rights claiming Joint Technology and (ii) Patent Rights claiming both ArQule
Technology and SB Technology in a single filing, but will not include Patent
Rights in Analog Compounds assigned by ArQule to SB pursuant to Section 6.1.

        1.19.   "Program Status Compound" means any Royalty-Bearing Product that
is designated by SB as eligible to enter the Program Phase pursuant to Section
4.3.

        1.20.   "Proprietary Materials" means any tangible materials, whether
biological, chemical, physical, or otherwise, that one party (the "Provider")
furnishes to the other party (the "Recipient") under this Agreement and
designates as proprietary or confidential including, without limitation all
ArQule Compounds and SB Compounds.

        1.21.   "Royalty Period" means the partial calendar quarter commencing
on the date on which the first Royalty-Bearing Product is sold and every
complete or partial calendar quarter thereafter during which SB has the
obligation to pay a royalty pursuant to Section 7.6.

        1.22.   "Royalty-Bearing Product" means a product containing as one of
its constituents, *****.

        1.23.   "SB Compound" means any chemical molecule owned or controlled by
SB that is provided by SB or its Affiliates to ArQule for lead optimization
under this Agreement.

        1.24.   "Screening Phase" means the period commencing on the Effective
Date and continuing for ***** years thereafter during the term of this
Agreement, as extended by the parties through the Steering Committee or pursuant
to Section 4.2.6.

        1.25.   "Target" means any biological target selected by SB in its
discretion including, without limitation (a) any genetic material, gene,
nucleotide, protein, or peptide, (b) any collections of genetic material, genes,
proteins or peptides, and (c) any cellular activity in the Field that, in any
case, SB selects for screening against ArQule Compounds. ***** Target" means any
Target within the Field that has utility in the treatment, prophylaxis or
diagnosis of ***** diseases. ***** Target" means any Target within the Field
that has utility in the treatment, prophylaxis or diagnosis of disease caused by
*****. The term "Target" shall include all ***** Targets and ***** Targets.

        1.26.   "Technology" means any proprietary development, information,
know-how, idea, design, concept, technique, process, invention, compound,
discovery, improvement whether or not patentable or copyrightable. "ArQule
Technology" means Technology that is either (i)

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                                       4
<PAGE>   5
assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other
than SB, or (iii) licensed to or otherwise controlled by ArQule, in each case to
the extent that ArQule has the ability to license or sublicense the rights
required under this Agreement without payment to a third party. "SB Technology"
means Technology that is either (i) assigned solely to SB, (ii) assigned jointly
to SB and a party other than ArQule, or (iii) licensed to or otherwise
controlled by SB, in each case to the extent that SB has the ability to license
or sublicense the rights required under this Agreement without payment to a
third party. "Joint Technology" means Technology that is developed or discovered
jointly by one or more employees or consultants of SB and one or more employees
or consultants of ArQule in connection with this Agreement.

        1.27.   "Valid Claim" means either (i) a claim of an issued patent that
has not been held unenforceable or invalid by an agency or a court of competent
jurisdiction in any unappealable or unappealed decision or (ii) a claim of a
pending patent application that has not been abandoned or finally rejected
without the possibility of appeal or refiling.

2.      Nature and Objective of Collaboration. The primary objective of the
collaboration is to discover and develop compounds provided by both ArQule and
SB that demonstrate potential as human therapeutic products for the treatment,
prophylaxis or diagnosis of infectious diseases caused by bacterial organisms.
In order to achieve this objective, the parties shall (i) perform compound
screening activities using ArQule Compounds to identify Active Compounds, (ii)
perform lead qualification activities on Active Compounds that are determined to
be Available Compounds to prioritize such compounds for lead optimization, (iii)
perform lead optimization activities on Licensed Compounds to develop one or
more Program Status Compounds that may result in Royalty-Bearing Products, and
(iv) perform lead optimization activities on SB Compounds to develop one or more
Program Status Compounds that may result in Royalty-Bearing Products, in each
case as further described below.

                                       5
<PAGE>   6
3.      Management of Collaboration.

        3.1.    Establishment of Joint Steering Committee. The parties hereby
establish a Joint Steering Committee (the "JSC") comprised of six (6) members,
with three (3) representatives appointed by each party, one of whom from each
party shall fulfill the role of alliance manager for the collaboration. The
members initially designated by SB are John Elliott, Gary Woodnutt, and Mitchell
Gross. The members initially designated by ArQule are Norton Peet, David
Hartsough, and Sheila DeWitt. The JSC shall be chaired by one of the SB
representatives. A party may change any of its representatives to the JSC at any
time upon written notice to the other party.

        3.2.    Duties of Joint Steering Committee. The JSC shall plan, monitor,
manage, and administer the collaboration under this Agreement. In general, the
JSC will act on behalf of the parties and, subject to Section 3.3, will be
responsible for approving specific research and development objectives and
milestones, determining when and if milestones are met, and recommending
resource allocation requirements. In particular, the activities of the JSC will
include reviewing progress made in the various phases of the collaboration and
recommending necessary changes to the collaboration. The JSC will be responsible
for research data, i.e. any laboratory notes, technical data or specifications,
test results, or other information or materials that arise as a result of the
collaboration. The JSC may also establish one or more Research Committees to
assist in project management.

        3.3.    Decisions Reserved to SB. Notwithstanding anything to the
contrary in this Agreement, the parties agree that SB shall have the final
decision on the following matters:

        (i)     approval of all material research allocation (e.g., FTE
                funding);

        (ii)    definition of criteria for selection and identification of
                qualified lead compounds suitable for optimization;

        (iii)   the minimum eligibility requirements for a compound to be
                considered an Active Compound, Inactive Compound, Program Status
                Compound (subject to Section 4.3.), and IND Candidate Compound
                (subject to Section 4.4.).

        3.4.    Meetings of Joint Steering Committee. Unless otherwise
determined by the JSC, the JSC shall meet at least once each calendar quarter
alternately at the location of each party, or at other times, locations, or
manner (e.g., telephone conferences) determined by the JSC. Dates for the next
meeting will be decided within fifteen (15) days after the previous meeting. A
representative of the JSC jointly appointed by its members shall provide each
member with five (5) business days notice of the time and location of each
quarterly meeting, unless such notice is waived by all members. If a designated
representative of a party cannot attend a meeting of the JSC, such party may
designate a different representative for that meeting without notice to the
other party, and the substitute member will have full power to vote on behalf of
the permanent member. Except as otherwise provided in this Agreement, all
actions and decisions reserved for the JSC will require the unanimous consent of
all of its members. If the JSC fails to reach agreement upon any matter that is
not subject to a final decision by SB as set forth in Section 3.3,

                                       6
<PAGE>   7
the dispute will be resolved in accordance with the procedures set forth in
Article 13 below. Within ten (10) business days following each quarterly meeting
of the JSC, a representative of the JSC jointly appointed by its members shall
prepare and deliver, to both parties, a written report describing the program
status and the issues, decisions, conclusions, and other actions taken by the
JSC. SB will appoint an SB person as chairperson for the JSC.

        3.5.    Cooperation. Each party agrees to provide the JSC with
information and documentation as reasonably required for the JSC and each party
to fulfill its duties under this Agreement. In addition, each party agrees to
make available its employees and consultants as reasonably requested by the JSC.
The parties anticipate and intend that members of the JSC will communicate
informally with each other and with employees and consultants of the parties on
matters relating to the collaboration.

4.      Conduct of Collaboration.

        4.1.    Screening Phase. All activities described in this Section 4.1
shall end when the Screening Phase ends. SB may extend the Screening Phase upon
six (6) months written notice to ArQule, provided that the parties reach
agreement on terms and conditions for such extension during the six-month notice
period. The Screening Phase may also extend automatically as provided in
Subsection 4.2.6.

                4.1.1.  Compass Array Library. Within ten (10) business days of
the Effective Date, ArQule will supply SB with one (1) copy of the Compass Array
Library in accordance with the specifications set forth in Schedule A attached
hereto. During the Screening Phase, SB will screen the ArQule Compounds within
the Compass Array Library against ***** Targets using efforts consistent with
its normal scientific and business practices. In addition, SB may also screen
the Compass Array Library against ***** Targets and other Targets as set forth
in Subsection 4.1.6 below. SB shall periodically submit to ArQule a list
containing the array plate number and well number of all Active Compounds by
facsimile transmission followed by a confirmatory letter. ArQule will promptly
determine whether the listed Active Compounds are Available Compounds and notify
SB of such determination. If any Active Compound is not an Available Compound,
ArQule shall not disclose the structure and SB shall have no rights under this
Agreement with respect to that Active Compound; provided however, that ArQule
shall promptly notify SB if such Active Compound later becomes an Available
Compound. If an Active Compound is an Available Compound, ArQule shall reserve
such Active Compound as an Available Compound to SB under this Agreement and,
promptly thereafter, ArQule shall disclose to SB the structure of such Available
Compound correlated to its well location. Upon request of SB, ArQule shall
disclose which Mapping Array Library corresponds to any Active Compound whether
or not such ArQule Compound is an Available Compound, including the Markush
structure of the Mapping Array Library, as described in Schedule A.

                4.1.2.  Mapping Array Library. After SB screens the Compass
Array Library and thereafter at any point during additional screening activities
(as described below) on Available Compounds from the Compass Array Library, and
as determined by SB in consultation with the JSC, SB may screen one or more
Mapping Array Libraries corresponding to any Active Compound(s) identified from
the Compass Array Library to obtain initial structure-activity

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                                       7
<PAGE>   8
relationship ("SAR") data with respect to those Active Compounds and to identify
additional Active Compounds for development. If SB elects to access these
Mapping Array Libraries, SB shall provide ArQule with written notice identifying
the Mapping Array Libraries selected for such purposes. ArQule shall provide SB
with the relevant Mapping Array Libraries within ten (10) business days of
receipt of such notice. Initially, ArQule will not identify the structures of
the individual ArQule Compounds within any delivered Mapping Array Library.
ArQule will, however, provide SB with Markush structures of each Mapping Array
Library furnished to SB upon shipment. SB shall periodically submit to ArQule a
list containing the array plate number and well number of all Active Compounds
with the Mapping Array Library by facsimile transmission followed by a
confirmatory letter. ArQule will promptly determine whether the listed Active
Compounds are Available Compounds and notify SB of such determination. If any
Active Compound is not an Available Compound, ArQule shall not disclose the
structure and SB shall have no rights under this Agreement with respect to that
Active Compound; provided however, that ArQule shall promptly notify SB if such
Active Compound later becomes an Available Compound. If an Active Compound is an
Available Compound, ArQule shall reserve such Active Compound as an Available
Compound to SB under this Agreement and, promptly thereafter, ArQule shall
disclose to SB (i) the structure of such Available Compound correlated to its
well location, and (ii) upon request of SB, the structures but not the locations
of inactive ArQule Compounds in the same Mapping Array Library. *****

                4.1.3.  Resynthesis and Additional Screening.

                        (a)     Resynthesis. ArQule shall resynthesize and
deliver to SB an additional quantity of any Available Compound requested by SB
to enable SB to conduct screening activities. The Available Compounds may come
from the Compass Array Library or a Mapping Array Library. SB shall provide
ArQule with written notice of the Available Compounds that SB desires to have
resynthesized by ArQule, in accordance with the specifications set forth in
Schedule A. In each case the amount of, and delivery schedule for, resynthesized
Available Compounds will be determined by SB, subject to approval by the JSC.

                        (b)     Additional Screening. SB will promptly conduct
additional screening of the resynthesized Available Compounds and submit such
results as necessary to the JSC.

                4.1.4.  Designation of Licensed Compounds. At any time after SB
has screened the Compass Array Library and the Mapping Array Libraries
corresponding to Available Compounds identified in the Compass Array Library
(i.e., confirmation in secondary screens is unnecessary), SB may select any
reserved Available Compound or reserved Inactive ArQule Compound as a Licensed
Compound under this Agreement. In such event, SB shall provide ArQule with
written notice of its selection and ArQule will change the status of such ArQule
Compounds from "reserved" to "licensed". Upon the designation of an ArQule
Compound as a Licensed Compound, the licenses set forth in Subsection 5.2 shall
automatically become effective. All Licensed Compounds from a Mapping Array
Library that share activity for the same Target, ***** shall form a Licensed
Compound Set for the purposes of this Agreement.

                4.1.5.  Optimization Rights. SB shall have the right to conduct
lead optimization of any Licensed Compound Set, provided that SB shall submit
one Licensed Compound Set to

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                                       8
<PAGE>   9
ArQule for optimization as provided below. In the event that SB conducts
optimization of a Licensed Compound Set, then at the request of SB, ArQule will
provide SB with synthetic protocols to enable SB to make those Licensed
Compounds. In addition, SB may request that ArQule provide additional
resynthesized quantities of those Licensed Compounds and, subject to the
availability of chemists and reagents, ArQule will provide SB with such
resynthesized quantities at the rates set forth in Section 7.2 (but, for
clarity, only during the Screening Phase).

                4.1.6.  Screening Rights for Targets other than ***** Targets.

                        (a)     ***** Targets. SB may screen the Compass Array
Library against ***** Targets and then conduct the activities described in this
Section 4 with respect to Available Compounds identified in such screens;
provided that before the parties commence such activities, the parties shall
negotiate in good faith the commercially reasonable financial terms pertaining
to such compounds as described in Sections 7.5. and 7.6. below, which terms
shall be set forth in a separate agreement. In addition, if SB desires to
conduct an optimization project with ArQule on any resulting Licensed Compounds,
the parties shall negotiate in good faith the applicable commercially reasonable
FTE rate unless the project is a substitute project as described in Subsection
4.2.6.

                        (b)     Other Targets. In the event that (i) SB fails to
identify any Active Compounds from the Compass Array Library in its screens
against ***** Targets and, if applicable, ***** Targets and decides not to
initiate any additional screening activities of ArQule Compounds against *****
Targets or ***** Targets, or (ii) SB identifies fewer than ***** Available
Compounds from the Compass Array Library in its screens against ***** Targets
and, if applicable, ***** Targets, then SB may screen the unused quantities of
any ArQule Compounds from the Compass Array Library retained by SB against other
Targets for the duration of the Screening Phase; provided that, SB shall give
ArQule written notice prior to undertaking such additional screening activities,
which notice shall identify such other Targets; and, provided further that
before the parties commence such activities, the parties shall negotiate in good
faith the commercially reasonable financial terms pertaining to such compounds
as described in Section 7.5. and 7.6. below, which terms shall be set forth in a
separate agreement. In addition, if SB desires to conduct an optimization
project with ArQule on any resulting Licensed Compounds, the parties shall
negotiate in good faith the applicable commercially reasonable FTE rate unless
the project is a substitute project as described in Subsection 4.2.6.

                4.1.7.  Reverse Engineering. SB shall not attempt to reverse
engineer, or attempt to determine the structure of, any ArQule Compound until
the structure of such compound has been disclosed to SB by ArQule pursuant to
this Section 4.

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        4.2.    Lead Optimization Phase.

                4.2.1.  Committed Lead Optimization Projects. ArQule agrees to
perform, and SB agrees to perform and fund, two lead optimization projects in
accordance with the terms and conditions of this Agreement. One of the committed
projects will come from a Licensed Compound Set with activity for an *****
Target, which project will be selected as described in Subsection 4.2.2 (b)
should SB desire to optimize an Available Compound. For the avoidance of doubt,
in the event SB does not elect to optimize an Available Compound, SB shall have
no obligation to fund or perform an optimization project for any Licensed
Compound Set for an ***** Target and, as a result, SB shall only have an
obligation to fund and perform the optimization project described in the next
sentence. The other committed project will come from a series of SB Compounds
that SB has determined to have activity for an ***** Target, which project will
be selected by SB and submitted to ArQule as described in Subsection 4.2.2 (a).
SB will define the general guidelines and goals of the project and the JSC will
develop a defined workplan for each project in accordance with such guidelines
and goals, including project deliverables, and then the JSC will coordinate and
monitor the projects. The project deliverables are subject to approval by both
parties through the JSC, but SB has the final decision for all other aspects of
the lead optimization projects. Each lead optimization project under this
Section will commence not later than the end of the Screening Phase and shall
continue for the initial periods set forth in Section 4.2.4 and such extension
as set forth in Section 4.2.5, but not more than ***** years, unless earlier
terminated as described in Subsection 4.2.6.

                4.2.2   Selection of Projects.

                        (a)     SB Compounds. On or before the Effective Date,
SB shall disclose to ArQule the structures of the SB Compounds that SB will
submit to ArQule for lead optimization, together with all data, synthetic
protocols, and other information in the possession of SB which may assist ArQule
in the project. ArQule shall commence work on this project within thirty (30)
days after the JSC develops and approves a workplan.

                        (b)     ArQule Compounds. At any time during the
Screening Phase, SB will provide a list of Licensed Compound Sets with *****
activity to the JSC for consideration as lead optimization projects. The JSC
will select one of these Licensed Compound Sets for optimization by ArQule under
this Agreement. ArQule shall commence work on this project promptly after the
JSC develops and approves a workplan.

                4.2.3.  Responsibilities of Parties. Subject to modification by
the JSC and in accordance with the applicable workplan, ArQule will generally
perform ***** activities associated with lead optimization projects including,
without limitation, ***** as described in Schedule A, and SB will generally
perform ***** activities associated with lead optimization projects, including
without limitation, ***** SB shall also perform such other activities as it
deems necessary or appropriate in connection with the lead optimization project.
Either party may perform ***** as directed from time to time by the JSC. The
specific responsibilities of each party shall be described in the applicable
workplan. Each party will promptly report all research results related to such
lead optimization activities to the JSC.

                4.2.4.  Initial Resource Commitments. SB commits to fund the two
(2) projects

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<PAGE>   11
described in Section 4.2.1 in the following manner. On the Effective Date,
ArQule will initially allocate at least ***** for ***** to a project derived
from the series of SB Compounds for an ***** Target as described in Subsection
4.2.2(a). In addition, upon selection by the JSC of a Licensed Compound Set for
a lead optimization project, ArQule will initially allocate at least ***** for
***** to the project derived from the Licensed Compound Set for an ***** Target
as described in Subsection 4.2.2(b). SB agrees to fund the FTEs for these two
projects at the rates set forth in Section 7.4 for at least a ***** period for
each project, subject to early termination as set forth in Subsection 4.2.6
below.

                4.2.5.  Ongoing Resource Commitments. When a project begins, the
JSC will, subject to Section 3.3, agree to an estimated number of FTEs per
project to complete the approved workplan and timeline to add those FTEs. ArQule
agrees to provide a maximum of ***** FTEs per project in the following manner.
The JSC will determine the actual number of FTEs for each project at any given
time, subject to SB approval. Actual changes to the FTE commitment beyond the
project minimum detailed in Subsection 4.2.4 will require sixty (60) days
written notice by SB to ArQule. If an FTE increase is required, ArQule will make
a reasonable effort to increase the FTEs at the rate of at least ***** per
quarter. If an FTE decrease is required, SB will make a reasonable effort to
reduce FTEs at the rate of no more than ***** per quarter. SB will fund the FTEs
applied to each project at the rates set forth in Section 7.4. SB may extend a
project beyond the ***** minimum at its discretion, for additional ***** -month
periods not to exceed a total of ***** additional years. SB will give ArQule at
least ninety (90) days written notice before the ***** anniversary date of
project commencement if SB desires to extend, and will estimate the additional
time period in ***** month increments. Thereafter, SB will give ArQule at least
ninety (90) days written notice before the end of the extension period for any
subsequent extensions. In the event SB elects not to extend a project, SB shall
have no further funding obligations with respect to such project.

                4.2.6.  Project Termination. At any time after a period of *****
from the initiation of a lead optimization project, SB may terminate the project
for any reason upon ninety (90) days prior written notice to ArQule; provided
that such notice period shall be reduced to sixty (60) days if SB reasonably
determines that ArQule is not proceeding diligently to meet the deliverables
defined in the corresponding workplan. In the event of termination, SB will have
no further obligation to fund the FTEs involved in that project except for
accrued expenses and subject to the following. If SB terminates the project
based on a Licensed Compound Set during the first year of the project and such
termination is not due to a lack of diligence by ArQule to meet the deliverables
defined in the workplan, then (i) ArQule will have no obligation to refund any
payments for FTEs actually received from SB and SB shall have an obligation to
make any remaining quarterly payments for the FTEs committed by ArQule during
the first year of the project, but ArQule shall apply the unused balance to
other services and products under this Agreement (e.g., resynthesis fees,
Mapping Array Library access fees, or another project) and (ii) the parties will
endeavor to identify another mutually acceptable Licensed Compound Set to submit
to ArQule as a lead optimization project. If the parties identify a mutually
acceptable substitute project within ninety (90) days after SB terminates the
original project, then SB shall have the benefit of the FTE rates in this
Agreement for the balance of such ***** year period (plus the delay of up to
ninety days while the parties decided on the substitute project). If the parties
identify a substitute project after this ninety-day period expires, the FTE rate
in the

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<PAGE>   12
Agreement will not apply but SB may still apply any unused credits of FTE
payments to the new project. If SB terminates the project based on a Licensed
Compound Set during the first year of the project and such termination is due to
a lack of diligence by ArQule to meet the deliverables defined in the workplan,
then SB shall have no further obligation to fund that project.

        4.3.    Program Phase. SB may declare Program Status for Royalty-Bearing
Products using the criteria set forth in Schedule B or other criteria
subsequently agreed upon by the parties. SB may select a Program Status Compound
at any time. SB will make its selections of Program Status Compounds in its sole
discretion under the criteria in Schedule B or other criteria subsequently
agreed upon by the parties, however SB will not treat Licensed Compounds or
ArQule Analog Compounds differently from other compounds that SB considers for
Program Status. SB shall promptly furnish ArQule with written notice upon the
selection of a Royalty-Bearing Product as a Program Status Compound. Effective
upon receipt of this notice by ArQule, the Program Status Compound and all other
ArQule Compounds and Analog Compounds in the same Licensed Compound Set will no
longer be subject to reversion as described in Section 9.3. At the request of
SB, ArQule will transfer synthetic protocols for Program Status Compounds if
transfer did not previously occur.

        4.4.    IND Candidate. SB may designate a Royalty-Bearing Product as an
IND Candidate Compound using the criteria set forth in Schedule C or other
criteria subsequently agreed upon by the parties. SB may select an IND Candidate
Compound at any time. SB will make its selections of IND Candidate Compounds in
its sole discretion under the criteria in Schedule C or other criteria
subsequently agreed upon by the parties, however SB will not treat Licensed
Compounds or ArQule Analog Compounds differently from other compounds that SB
considers as IND Candidates. SB shall promptly furnish ArQule with written
notice upon the selection of a Royalty-Bearing Product as an IND Candidate
Compound.

5.      License Grants.

        5.1.    Screening Licenses.

                5.1.1.  Primary Targets. Subject to the terms and conditions of
this Agreement, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in the ArQule Technology to screen ArQule Compounds
delivered under the collaboration against ***** Targets and ***** Targets in the
Field, but only during the Screening Phase.

                5.1.2.  Other Targets. Subject to the terms and conditions of
this Agreement, and specifically subject to the limitations set forth in
Subsection 4.1.6(b) above, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in ArQule Technology to screen ArQule Compounds
delivered under the collaboration against Targets in the Field other than *****
Targets and ***** Targets, but only during the Screening Phase.

        5.2     Development and Commercialization License. Subject to the terms
and conditions of this Agreement, ArQule hereby grants to SB and its Affiliates
the following licenses:

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        (i)     an exclusive, worldwide license (with the right to sublicense)
                under the ArQule Patent Rights and other rights in ArQule
                Technology to conduct development of Licensed Compounds in the
                Field, including the right to develop Analog Compounds based on
                Licensed Compounds.;

        (ii)    an exclusive, worldwide license (with the right to sublicense)
                under the ArQule Patent Rights and other rights in ArQule
                Technology to make, have made, use, have used, sell, and import
                Licensed Compounds and certain identified Analog Compounds, as
                described below, in the Field; and

        (iii)   a non-exclusive, worldwide license (with the right to
                sublicense) under the ArQule Patent Rights and other rights in
                ArQule Technology to use chemical synthesis methods within the
                ArQule Patent Rights and ArQule Technology to make and have made
                Royalty-Bearing Products.

SB and ArQule acknowledge and agree that the exclusive license granted under
clause (i) of this Section prohibits ArQule from granting any third party any
right or license to develop Analog Compounds based on Licensed Compounds in the
Field, but does not extend to the composition or use of Analog Compounds except
as follows. At any time during the term of this Agreement, SB may disclose to
ArQule the structure of one or more Analog Compounds that SB desires to include
within the license grant set forth in clause (ii) above. In such event, ArQule
will promptly determine in good faith whether the identified Analog Compound(s)
are not (a) licensed or otherwise committed to a third party in the Field or (b)
committed to an internal ArQule program in the Field,. For purposes of (a)
above, "committed" shall mean a third party with contractual or other legal
rights to claim such compound for development and commercialization has notified
ArQule in writing that such third party has claimed such compound for
development and commercialization. For purposes of (b) above, "committed" shall
mean that the compound has been designated by ArQule as committed to an internal
development program at ArQule in accordance with its ordinary procedures, as
evidenced by the status of such compound in its corporate database, and is under
bona fide evaluation or is the subject of an active and funded internal
development program at ArQule (without any use of information under this
Agreement). If the identified Analog Compound(s) are not licensed or
"committed", as defined above, in the Field, then ArQule shall include such
Analog Compound(s) within the license grant set forth in clause (ii) above;
otherwise, such Analog Compound(s) shall not be included in such license grant.
SB further acknowledges and agrees that the license grant in clause (iii) of
this Section is subject to the terms, conditions, and limitations of any
agreement under which ArQule has acquired rights in a chemical synthesis method
from a third party and, in such event, ArQule may require SB to enter into a
separate sublicense agreement before such license grant shall take effect.
Notwithstanding the definitions of ArQule Patent Rights and ArQule Technology,
ArQule represents and warrants that SB will not incur any payment obligation to
a third party as a result of the practice of the license grant in clause (iii)
of this Section for third party licenses that ArQule has executed as of the
Effective Date and ArQule covenants that ArQule shall notify SB prior to
implementation of any ArQule Technology that would subject SB to a payment
obligation to a third party as a result of the practice of the license grant in
clause (iii) of this Section for third party licenses that ArQule executes after
the Effective Date. In the event that SB decides to sublicense its rights under
this

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<PAGE>   14
Section to a third party, SB shall furnish ArQule with written notice of the
sublicense grant and shall ensure that all sublicense agreements conform to this
Agreement.

6.      Intellectual Property Rights.

        6.1.    Rights in Compounds. SB shall have the sole right to prepare,
file, prosecute, and maintain Patent Rights that claim the composition or use of
ArQule Analog Compounds or SB Analog Compounds developed by either party under
this Agreement. ArQule shall assign to SB all right, title, and interest in any
Patent Rights filed by SB that claim the composition or use of such ArQule
Analog Compounds or SB Analog Compounds. Therefore, such Patent Rights are
considered SB Patent Rights under this Agreement rather than Joint Patent
Rights.

        6.2.    Ownership of Intellectual Property. Other than as expressly
provided herein, neither party shall have any rights in Patent Rights and
Technology that is invented, developed or discovered by the other party prior to
the Effective Date or outside the research performed under this Agreement.
Ownership of Patent Rights and Technology arising from the research performed
under this Agreement shall be allocated in accordance with US patent law.

        6.3.    Management of Patent Rights. SB shall have sole responsibility
for, and control over, the management of SB Patent Rights and ArQule shall have
sole responsibility for, and control over, the management of ArQule Patent
Rights; provided, however, that ArQule shall consult with SB with respect to any
ArQule Patent Rights that claim an ArQule Compound that is part of a Licensed
Compound Set. Each party will bear its own expenses in connection with such
Patent Rights. In the case of Joint Technology, the JSC will decide whether to
seek Joint Patent Rights claiming that Technology. If the JSC decides to seek
any Joint Patent Rights under this Section 6.3, the parties shall jointly
prepare, file, prosecute, and maintain such Patent Rights, and all related
expenses shall be borne equally by the parties. In the event that one party
declines to pay or desires to cease further payment of patent-related expenses
for such Joint Patent Rights in any country and the other party desires to
maintain the Joint Patent Rights, the withdrawing party may assign to the
continuing party all rights in such Joint Patent Rights in such country and
thereafter have no further obligation to pay such expenses.

        6.4.    Cooperation. Each party agrees to cooperate fully with the other
in the preparation, filing, and prosecution of any Joint Patent Rights. ArQule
agrees to cooperate fully with SB in the preparation, filing, and prosecution of
any Patent Rights that ArQule has assigned to SB pursuant to Section 6.1. Such
cooperation includes, but is not limited to:

        (i)     executing all papers and instruments, or requiring its employees
                or agents, to execute such papers and instruments, so as to
                effectuate the ownership of Patent Rights as established under
                this Agreement and to enable the other party to apply for and to
                prosecute patent applications in any country;

        (ii)    promptly informing the other party of any matters coming to such
                party's attention that may affect the preparation, filing, or
                prosecution of any such patent applications; and

        (iii)   undertaking no actions that are potentially deleterious to the
                preparation, filing, or

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<PAGE>   15
                prosecution of such patent applications.

        6.5.    Infringement.

                6.5.l.  Offensive Actions. With respect to infringement of any
SB Patent Right or ArQule Patent Right claiming the composition or use of a
Licensed Compound, Analog Compound, or Royalty-Bearing Product, SB shall have
the primary right, but not the obligation, to enforce such Patent Right under
its sole control and at its sole expense. In such event, SB shall be exclusively
entitled to all proceeds or recoveries resulting therefrom, but from such
proceeds or recoveries SB shall pay ArQule a royalty in accordance with Section
7.6. on sales lost to the infringer. In the event that SB declines to enforce
such Patent Right with respect to a Royalty-Bearing Product where the sales of
the alleged infringer are at least ***** percent ***** of the worldwide market
for said product, then ArQule shall have the secondary right to enforce such
Patent Right under its sole control and at its sole expense. In such event,
ArQule shall be exclusively entitled to all proceeds or recoveries resulting
therefrom.

        6.5.2.  Defensive Actions. SB will indemnify, defend, and hold harmless
ArQule, its Affiliates, and their respective officers, directors, employees, and
agents from any and all loss, damage, cost, and expense (including reasonable
attorneys fees) and amounts paid in settlement arising from any actual or
alleged infringement claim brought by a third party, in law or in equity, based
on activities undertaken by SB or by ArQule at the direction of SB pursuant to
this Agreement (except for claims based solely on the practice of an ArQule
Patent Right or the use of ArQule Technology) or based on the manufacture or
sale of a Royalty-Bearing Product. In the event that ArQule intends to claim
indemnification under this Subsection, ArQule shall promptly notify SB of the
infringement action and SB shall assume the defense of the action under its sole
control, including the right to effect a settlement. A failure by ArQule to
deliver notice to SB within a reasonable time shall relieve SB of its indemnity
obligation under this Subsection to the extent such failure prejudices the
ability of SB to defend such action. ArQule shall cooperate fully with SB and
its legal representatives in the investigation and defense of the action. In the
event of a settlement, SB shall obtain the consent of ArQule before agreeing to
any settlement that imposes restrictions which are inconsistent with the rights
and obligations of the parties under this Agreement.

        6.6.    ArQule Representation and Warranty. ArQule represents and
warrants to SB that, to the best of ArQule's knowledge and belief, the practice
of the combinatorial library design, synthesis, and analysis technology within
the ArQule Technology (commonly referred to and collectively defined herein as
the "AMAP Chemistry Operating System") as of the Effective Date does not
infringe any Valid Claim of any Patent Right of a third party in a manner that
would have a material adverse effect on SB as a result of this Agreement. In
addition, ArQule covenants that, during the term of this Agreement, ArQule will
use its best efforts to ensure that the practice of the AMAP Chemistry Operating
System will not infringe any Valid Claim of any Patent Right of a third party in
a manner that would have a material adverse effect on SB as a result of this
Agreement. In the event that the preceding representation and warranty is
untrue, or if ArQule breaches the preceding covenant, then upon written notice
by SB to ArQule of such event:

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        (i)     ArQule shall use its reasonable best efforts to modify the
                ArQule Technology such that the practice of the ArQule
                Technology no longer infringes the relevant Patent Right or to
                secure a license to such Patent Right at no cost to SB.

        (ii)    ArQule will indemnify, defend, and hold harmless SB, its
                Affiliates, and their respective officers, directors, employees,
                and agents from any and all loss, damage, cost, and expense
                (including reasonable attorneys fees) and amounts paid in
                settlement arising from any claim brought by a third party, in
                law or in equity, based on such material breach. In the event
                that SB intends to claim indemnification under this Section, SB
                shall promptly notify ArQule of the infringement action and
                ArQule shall assume the defense of the action under its sole
                control, including the right to effect a settlement. A failure
                by SB to deliver notice to ArQule within a reasonable time shall
                relieve ArQule of its indemnity obligation under this Section to
                the extent such failure prejudices the ability of ArQule to
                defend such action. SB shall cooperate fully with ArQule and its
                legal representatives in the investigation and defense of the
                action. In the event of a settlement, ArQule shall obtain the
                consent of SB before agreeing to any settlement that imposes
                restrictions which are inconsistent with the rights and
                obligations of the parties under this Agreement.

SB agrees that the maximum liability of ArQule under this Section, including
without limitation legal expenses, damages, and settlement payments resulting
from the indemnity granted in clause (ii) above, shall be limited to *****
dollars (*****).

7.      Payments.

        7.1.    Compass Array Access Fee. In partial consideration of SB
obtaining access to the Compass Array Library as set forth in Subsection 4.1.1
of this Agreement, SB shall pay to ArQule an access fee in the amount of *****,
payable within forty-five (45) days of the Effective Date, upon invoice from
ArQule. If SB, at its sole discretion, obtains a second copy of the Compass
Array Library, SB shall pay to ArQule a fee in the amount of ***** payable
within forty-five (45) days after SB receives the second copy, upon invoice from
ArQule.

        7.2.    Compound Resynthesis Fees. In partial consideration of the
production and delivery by ArQule of resynthesized Available Compounds pursuant
to Subsection 4.1.3(a) and 4.1.5. or any applicable workplan, SB agrees to pay
ArQule ***** per ***** mg and ***** for up to ***** mg of resynthesized
Available Compound, payable within forty-five (45) days of delivery; provided,
that, the aggregate funding for the resynthesis of all Available Compounds for
each fiscal quarter shall not, unless SB expressly authorizes an increase,
exceed ***** per fiscal quarter or ***** per fiscal year.

        7.3.    Mapping Array Delivery Fee. In partial of consideration of the
delivery by ArQule to SB of Mapping Array Libraries in accordance with
Subsection 4.1.2 hereof, SB shall pay ArQule ***** per Mapping Array Library,
payable within forty-five (45) days of delivery, upon invoice from ArQule.

    ***** Confidential Treatment has been requested for the marked portion.

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        7.4.    Optimization Program Funding. In partial consideration of the
performance by ArQule of the lead optimization projects described in Section 4.2
hereof, SB shall pay ArQule for the FTEs assigned to such projects at the
"Applicable FTE Rate" (as defined below) payable in advance in equal quarterly
installments, with the first such payment to be made within forty-five (45) days
of notification to the JSC of project initiation, and with each installment
thereafter payable within five (5) business days of the first day of each fiscal
quarter thereafter, upon invoice from ArQule. The "Applicable FTE Rate" will be
determined as follows:

        (i)     For the lead optimization project on an SB Compound (as
                described in Subsection 4.2.2(a)), the Applicable FTE Rate from
                project initiation through ***** shall be ***** per FTE for the
                first ***** FTEs and ***** for the next ***** FTEs, and the
                Applicable FTE rate from ***** onwards shall be ***** per FTE
                for up to ***** FTEs. SB and ArQule will negotiate a separate
                Applicable FTE Rate if the number of FTEs employed by ArQule for
                a project exceeds ***** at any time.

        (ii)    For the lead optimization project on a Licensed Compound Set (as
                described in Subsection 4.2.2(b)), the Applicable FTE Rate from
                project initiation through ***** shall be ***** per FTE for the
                first ***** FTEs and ***** for the next ***** FTEs, and the
                Applicable FTE rate thereafter shall be ***** per FTE for up to
                ***** FTEs. SB and ArQule will negotiate a separate Applicable
                FTE Rate if the number of FTEs employed by ArQule for a project
                exceeds ***** at any time.

        The parties hereby acknowledge and agree that the FTE rate for any
additional optimization programs will be negotiated in good faith by the parties
and set forth in a separate agreement to be executed by the parties.

        7.5.    Milestone Payments.

                7.5.1.  *****Milestone Payments.

                        (a)     Payments. In partial consideration of the
performance by ArQule of the activities described in Section 4.2., SB shall pay
ArQule the following amount within forty-five (45) days after a compound
resulting from such a project (whether synthesized by ArQule or SB) in which
ArQule participated achieves *****. The amount to be paid upon achievement of
each ***** will be calculated in accordance with the formula set forth below:

                *****

The above milestone payments shall be non-refundable and shall not be credited
against royalties payable to ArQule under this Agreement.

                        (b)     Exception. No payment for achievement of the
***** Milestone will be made under this Subsection with respect to a particular
optimization project if SB terminates that project due to lack of diligent
efforts by ArQule pursuant to Subsection 4.2.6. hereof, regardless of whether
such compound meets the criteria for an *****

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In addition, the parties agree that the ***** Milestone shall only be paid on
the initial Royalty-Bearing Product to achieve such milestone within the same
activity profile previously defined by SB and agreed by the JSC.

                7.5.2.  Other Development Milestone Payments.

                        (a)     Payments. In partial consideration of the
delivery of the Compass Array Library and Mapping Array Libraries and the
performance by ArQule of the optimization activities described in Section 4.2.
of this Agreement, SB shall pay ArQule the following development milestone
payments within forty-five (45) days after each occurrence of each event for
each Royalty-Bearing Product, upon invoice from ArQule:

                *****

                        (b)     Exceptions. The above milestone payments shall
be non-refundable and shall not be credited against royalties payable to ArQule
under this Agreement. However, the parties agree that development milestones
shall only be paid on the initial Royalty-Bearing Product to achieve such
milestone within the same activity profile previously defined by SB and agreed
by the JSC; provided, that, if a second Royalty-Bearing Product within the same
activity profile reaches a given milestone which would have resulted in a
greater milestone payment, SB shall pay such difference.

                7.5.3.  Other Milestones. The parties shall negotiate in good
faith the commercially reasonable financial terms pertaining to payments for
achievement of development milestones relating to Royalty-Bearing Products based
on compounds resulting from the screening described in Section 4.1.6 or for uses
of a Royalty-Bearing Product within the Field for purposes other than as a human
therapeutic or prophylactic for *****, which terms shall be set forth in a
separate agreement.

        7.6.    Product Royalties.

                7.6.1.  Earned Royalties within the Field. In partial
consideration of the performance by ArQule of the activities set forth in
Article 4, SB shall pay to ArQule the following royalties on the incremental Net
Sales of Royalty-Bearing Products within the Field in accordance with the
procedures set forth in Article 8 hereof.

*****

                7.6.2   Royalty Term. The foregoing royalty obligations shall
commence with the first commercial sale of a Royalty-Bearing Product in any
country and shall continue on a country-by-country basis for a period of *****
years after the first commercial sale (i.e. the date of first sale of a
Royalty-Bearing Product in the ordinary course of business in any country by SB
or an Affiliate or sublicensee of SB) of the Royalty-Bearing Product in such
country. Upon expiration of the ***** year royalty payment obligations in a
country, SB shall thereafter have, in perpetuity, a fully paid up license under
Section 5.2 of this Agreement.

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                7.6.3.  Other Royalties. The parties shall negotiate in good
faith the financial terms pertaining to royalty payments for sales of
Royalty-Bearing Products based on compounds resulting from the screening
described in Subsection 4.1.6 or for uses of a Royalty-Bearing Product within
the Field for purposes other than as a human therapeutic or prophylactic for
*****, which terms shall be set forth in a separate agreement.

                7.6.4   Third Party Royalties. SB shall be responsible for
procuring such licenses as it deems, in its sole discretion, appropriate for the
manufacture, use, marketing, sale or distribution of Royalty-Bearing Products by
SB and its Affiliates and sublicensees, and for the payment of any amounts due
third parties under such licenses; provided SB may offset, against the royalties
owed to ArQule with respect to a Royalty-Bearing Product in a country, ***** of
royalties that SB pays to a third party in order to license in the relevant
country a Valid Claim covering the composition of a Licensed Compound contained
in that Royalty-Bearing Product or the use of a synthetic protocol provided by
ArQule to SB under this Agreement to manufacture that Royalty-Bearing Product,
up to (i) in the case of an issued patent, a maximum of ***** or (ii) in the
case of a patent application, a maximum of *****, of the royalty owed to ArQule
in any quarter with respect to the applicable Royalty-Bearing Product in the
applicable country. Any such amounts which are not credited in a quarter may be
carried forward until expended.

8.      Reports, Records, and Payment Procedures.

        8.1.    Royalty Reports and Payments. Within sixty (60) days after the
conclusion of each Royalty Period, SB shall deliver to ArQule a report
containing the following information:

        (i)     the gross sales of Royalty-Bearing Products during the
                applicable Royalty Period in each country of sale in sufficient
                detail to permit confirmation of the accuracy of the royalty
                payment;

        (ii)    adjustments and calculation of Net Sales for the applicable
                Royalty Period in each country of sale; and

        (iii)   total Net Sales in U.S. dollars, together with the exchange
                rates used for conversion.

If no payment is due to ArQule for any reporting period, the report shall so
state. All such reports shall be considered Confidential Information under this
Agreement. Concurrent with this report, SB shall remit to ArQule any payment due
for the applicable Royalty Period.

        8.2.    Method and Currency of Payment. All amounts payable by SB to
ArQule under this Agreement shall be by check or wire transfer for immediately
available funds. All payments due to ArQule under this Agreement shall be
payable in United States dollars. Conversion of foreign currency to U.S. dollars
shall be made using the actual average exchange rates for such currency as used
by SB in producing its quarterly and annual accounts, as confirmed by SB's
auditors. Subject to Section 8.5, such payments shall be without deduction of
exchange, collection, or other charges. If by law, regulation, or fiscal policy
of a particular country, conversion into United States dollars or transfer of
funds of a convertible currency to the United States is restricted or forbidden,
SB shall give ArQule prompt written notice of such restriction,

    ***** Confidential Treatment has been requested for the marked portion.

                                       19
<PAGE>   20
which notice shall satisfy the payment deadlines in this Agreement. SB shall pay
any amounts due to ArQule through whatever lawful methods ArQule reasonably
designates; provided, however, that if ArQule fails to designate such payment
method within thirty (30) days after being notified of the restriction, SB may
deposit such payment in local currency to the credit of ArQule in a recognized
banking institution selected by SB and identified by written notice to ArQule,
and such deposit shall fulfill all obligations of SB to ArQule with respect to
such payment.

        8.3.    Late Payments. Any payment by SB that is not paid on or before
the date such payment is due under this Agreement shall bear interest, to the
extent permitted by law, at two percentage points above the "Prime Rate" of
interest as reported in the Wall Street Journal on the date payment is due, with
interest calculated based on the number of days that payment is delinquent.

        8.4.    Records. SB shall maintain, and shall require its Affiliates and
other authorized sellers of Royalty-Bearing Products to maintain, complete and
accurate records of Royalty-Bearing Products made, used, or sold under this
Agreement, and any amounts payable to ArQule in relation to such Royalty-Bearing
Products, which records shall contain sufficient information to permit ArQule to
confirm the accuracy of any reports delivered to ArQule in accordance with
Section 8.1. SB shall retain such records relating to a given Royalty Period for
at least five (5) years after the conclusion thereof. ArQule shall have the
right, at its own expense, to cause an independent certified public accountant
reasonably acceptable to SB to inspect such records during normal business hours
for the sole purpose of verifying any reports and payments delivered under this
Agreement. The accountant shall conduct the audit at a date and time reasonably
acceptable to SB but not later than fifteen (15) business days after ArQule
notifies SB of the audit. Such accountant shall not disclose to ArQule any
information other than information relating to accuracy of reports and payments
delivered under this Agreement and shall provide SB with a copy of any report
given to ArQule. The parties shall reconcile any underpayment or overpayment
within sixty (60) days after the accountant delivers the results of the audit.
In the event that any audit performed under this Section reveals an underpayment
in excess of five percent (5%) in any Royalty Period, SB shall bear the full
cost of such audit. ArQule shall not exercise its audit right under this Section
more than once in any twelve-month period.

        8.5.    Withholding and Similar Taxes. Any tax required to be withheld
by SB or any Affiliate or sublicensee of SB under the laws of any foreign
country for the account of ArQule under this Section 8 shall be promptly paid by
SB or said Affiliate or sublicensee for and on behalf of ArQule to the
appropriate governmental authority, and SB or said Affiliate or sublicensee
shall furnish ArQule with proof of payment of such tax together with official or
other appropriate evidence issued by the appropriate governmental authority
sufficient to enable ArQule to support a claim for income tax credit in respect
of any sum so withheld.

9.      Diligence.

        9.1.    Diligence. SB shall use reasonable efforts to develop,
manufacture, market, and sell a Royalty-Bearing Product based on each Licensed
Compound Set in accordance with its scientific, medical, business and legal
judgment.

                                       20
<PAGE>   21
        9.2.    Status Reports. SB will furnish ArQule with a brief *****
statement, within thirty (30) days after ***** of each calendar year, that
describes the status of each Licensed Compound Set which remains under
development by SB as a Royalty-Bearing Product. After SB completes development
of a Royalty-Bearing Product, SB will promptly notify ArQule of the first
commercial sale of that Royalty-Bearing Product in each country. In addition, SB
agrees to inform ArQule at least ***** regarding the status of any SB Analog
Compounds that SB develops based on SB Analog Compounds developed by the parties
under this Agreement.

        9.3.    Return of ArQule Compounds. For a period of ***** after an
ArQule Compound is designated as a Licensed Compound under this Agreement, or
such longer period as ArQule is conducting a lead optimization project with
respect to such Licensed Compound, SB shall be deemed to comply with the
diligence requirements of Section 9.1. Thereafter, in the event that SB ceases
to use reasonable efforts to develop at least one Licensed Compound or Analog
Compound within a Licensed Compound Set as a Royalty-Bearing Product in
accordance with Section 9.1, including without limitation the cessation of
efforts to optimize such Licensed Compound Set prior to reaching Program Status
(other than for lack of diligence by ArQule), then (i) rights in any ArQule
Compounds within such Licensed Compound Set shall revert to ArQule, (ii) all
licenses granted to SB under this Agreement with respect to such ArQule
Compounds shall terminate, and (iii) SB shall assign to ArQule the ownership of
such ArQule Compounds and all SB Patent Rights and Joint Patent Rights in the
composition of such ArQule Compounds. Notwithstanding the foregoing, once SB
designates a Licensed Compound within a Licensed Compound Set as a Program
Status Compound, then the entire Licensed Compound Set will no longer be subject
to this Section 9.3.

10.     Confidential Information.

        10.1.   Designation of Confidential Information. Confidential
Information that is disclosed in writing or by electronic transmission which can
be converted into writing shall be marked with a legend indicating its
confidential status. Confidential Information that is disclosed orally or
visually shall be documented in a written notice prepared by the Disclosing
party and delivered to the Receiving party within thirty (30) days of the date
of disclosure; such notice shall summarize the Confidential Information
disclosed to the Receiving Party and reference the time and place of disclosure.

        10.2.   Obligations. The Receiving Party agrees that it shall:

        (i)     maintain all Confidential Information in strict confidence,
                except that the Receiving Party may disclose or permit the
                disclosure of any Confidential Information to its, and its
                Affiliates, directors, officers, employees, consultants, and
                advisors who are obligated to maintain the confidential nature
                of such Confidential Information and who need to know such
                Confidential Information for the purposes set forth in this
                Agreement;

        (ii)    use all Confidential Information solely for the purposes set
                forth in, or as permitted by, this Agreement; and

    ***** Confidential Treatment has been requested for the marked portion.

                                       21
<PAGE>   22
        (iii)   allow its directors, officers, employees, consultants, and
                advisors to reproduce the Confidential Information only to the
                extent necessary to effect the purposes set forth in this
                Agreement, with all such reproductions being considered
                Confidential Information.

        10.3.   Exceptions. The obligations of the Receiving Party under Section
10.2. above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:

        (i)     was in the public domain prior to the time of its disclosure
                under this Agreement;

        (ii)    entered the public domain after the time of its disclosure under
                this Agreement through means other than an unauthorized
                disclosure resulting from an act or omission by the Receiving
                Party;

        (iii)   was independently developed or discovered by the Receiving Party
                without use of the Confidential Information;

        (iv)    is or was disclosed to the Receiving Party at any time, whether
                prior to or after the time of its disclosure under this
                Agreement, by a third party having no fiduciary relationship
                with the Disclosing Party and having no obligation of
                confidentiality to the Disclosing Party with respect to such
                Confidential Information; or

        (v)     is required to be disclosed to comply with applicable laws or
                regulations (such as disclosure to the FDA or the United States
                Patent and Trademark Office or to their foreign equivalents), or
                to comply with a court or administrative order, provided that
                the Disclosing Party receives prior written notice of such
                disclosure and that the Receiving Party takes all reasonable and
                lawful actions to obtain confidential treatment for such
                disclosure and, if possible, to minimize the extent of such
                disclosure.

        10.4.   Return of Confidential Information. Upon the termination of this
Agreement, at the request of the Disclosing Party, the Receiving Party shall
destroy or return to the Disclosing Party all originals, copies, and summaries
of documents, materials, and other tangible manifestations of Confidential
Information in the possession or control of the Receiving Party, except that the
Receiving Party may retain one copy of the Confidential Information in the
possession of its Legal Department solely for the purpose of monitoring its
obligations under this Agreement.

        10.5.   Survival of Obligations. The obligations set forth in this
Section shall remain in effect for a period of ***** years after termination of
this Agreement, except that the obligations of the Receiving Party to destroy or
return Confidential Information to the Disclosing Party shall survive until
fulfilled.

    ***** Confidential Treatment has been requested for the marked portion.

                                       22
<PAGE>   23
11.     Proprietary Materials.

        11.1.   Ownership. SB acknowledges and agrees that the ArQule Compounds
and any other Proprietary Materials provided to SB and its Affiliates under this
Agreement are and shall remain the property of ArQule. ArQule acknowledges and
agrees that any SB Compounds and any other Proprietary Materials provided to
ArQule under this Agreement are and shall remain the property of SB. The
foregoing notwithstanding, the parties agree that ownership of any intellectual
property rights in ArQule Analog Compounds and SB Analog Compounds shall be
determined in accordance with Section 6.

        11.2.   Restrictions on Use and Transfer. SB shall use the ArQule
Compounds only for the purposes contemplated by this Agreement, and, except as
permitted under Section 5.2 above, shall not transfer the ArQule Compounds to
any third party without the prior written consent of ArQule. Except as expressly
permitted herein, SB shall not attempt to identify the ArQule Compounds in the
Mapping Array Libraries or Compass Array Libraries. ArQule shall use the SB
Compounds and SB Analog Compounds only for the purposes contemplated by this
Agreement, and shall not transfer the SB Compounds or any SB Analog Compounds to
any third party without the prior written consent of SB. In the case of
Proprietary Materials other than Compounds, the Recipient agrees to use such
Proprietary Materials only for the purposes indicated by the Provider, and shall
not transfer the Proprietary Materials to any third party without the prior
written consent of the Provider. The Recipient further agrees to inform its
employees and consultants about the proprietary nature of the Proprietary
Materials and to take reasonable precautions, at least as stringent as those
observed by the Recipient to protect its own Proprietary Materials, to ensure
that such employees and consultants observe the obligations of the Recipient
under this Article 11.

        11.3.   Disposition of Unused Materials. At the request of the Provider,
the Recipient will return or destroy any unused Proprietary Materials furnished
by the Provider; provided, however, that subject to Section 4.1.6(b), the
disposition of unused ArQule Compounds shall be made in accordance with Section
12.4.

        11.4.   Compliance with Law. The Recipient agrees to comply with all
federal, state, and local laws and regulations applicable to the use, storage,
disposal, and transfer of Proprietary Materials furnished by the provider,
including without limitation the Toxic Substances Control Act (15 USC 2601 et
seq.) and implementing regulations (in particular, 40 CFR 720.36 [Steering and
Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 et seq.)
and implementing regulations, and all Export Administration Regulations of the
Department of Commerce. The Recipient assumes sole responsibility for any
violation of such laws or regulations by the Recipient or any of its Affiliates.

        11.5.   Limitation of Liability. Any Proprietary Materials delivered
pursuant to this Agreement are understood to be experimental in nature and may
have hazardous properties. The Recipient should assume that the materials are
dangerous and should use appropriate precautions. THE PROVIDER MAKES NO
REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE PROPRIETARY MATERIALS FURNISHED TO THE RECIPIENT.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A

                                       23
<PAGE>   24
PARTICULAR PURPOSE. EXCEPT AS SET FORTH IN SECTION 7.6.4, THE PROVIDER DISCLAIMS
ANY WARRANTY, EXPRESS OR IMPLIED, THAT THE USE OF ANY PROPRIETARY MATERIALS WILL
NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY,
AND THE PROVIDER SHALL HAVE NO LIABILITY RELATING THERETO.

                                       24
<PAGE>   25
12.     Term and Termination.

        12.1.   Term. This Agreement shall commence on the Effective Date and
shall remain in effect for a period of five (5) years, subject to extension by
agreement of the parties or pursuant to Subsection 4.2.5 or unless earlier
terminated as provided in this Article 12.

        12.2.   Material Breach. In the event that either party commits a
material breach of any of its obligations under this Agreement and such party
fails (i) to remedy that breach within sixty (60) days after receiving written
notice thereof from the other party or (ii) to commence dispute resolution
pursuant to Article 13, within sixty (60) days after receiving written notice of
that breach from the other party, the other party may immediately terminate this
Agreement upon written notice to the breaching party.

        12.3.   Force Majeure. Neither party will be responsible for delays
resulting from acts beyond the control of such party, provided that the
nonperforming party uses commercially reasonable efforts to avoid or remove such
causes of nonperformance and continues performance hereunder with reasonable
dispatch whenever such causes are removed.

        12.4.   Termination of Activities. In the event that all activities
under Article 4 have been completed or terminated prior to the five-year
expiration of the Agreement set forth in Section 12.1 above, including without
limitation in the event of early termination of all activities pursuant to
Subsection 4.2.6., this Agreement shall automatically terminate.

        12.5.   Effect of Termination. Termination of this Agreement shall not
relieve the parties of any obligation accruing prior to such termination. The
following provisions shall survive the expiration or termination of this
Agreement: Articles 6, 8, 9, 10, 11, 13, 14; Sections 5.2., 7.5., 7.6., 12.5.,
15.8., and 15.10.,. Notwithstanding the foregoing, if ArQule terminates this
Agreement pursuant to Section 12.2., then (i) SB shall have no further right to
screen or optimize ArQule Compounds pursuant to Article 4, or to develop and
commercialize Program Status Compounds and (ii) SB shall immediately return all
unused ArQule Compounds in a manner directed by ArQule.

13.     Dispute Resolution.

        13.1.   Procedures Mandatory. The parties agree that any dispute arising
out of or relating to this Agreement shall be resolved solely by means of the
procedures set forth in this Article 13, and that such procedures constitute
legally binding obligations that are an essential provision of this Agreement;
provided, however, that all procedures and deadlines specified in this Article
13 may be modified by written agreement of the parties. If either party fails to
observe the procedures of this Article 13, as modified by their written
agreement, the other party may bring an action for specific performance in any
court of competent jurisdiction.

                                       25
<PAGE>   26
        13.2.   Dispute Resolution Procedures.

                13.2.1  Negotiation. In the event of any dispute arising out of
or relating to this Agreement, the affected party shall notify the other party,
and the JSC shall attempt in good faith to resolve the matter, subject to the
approval of the senior management of both parties, within ten (10) days after
the date such notice is received by the other party (the "Notice Date"). Any
disputes not resolved by good faith discussions by the JSC shall be referred to
the Chief Executive Officer of ArQule and the Chairman of Research and
Development of SB, who shall meet at a mutually acceptable time and location
within thirty (30) days after the Notice Date and attempt to negotiate a
settlement.

                13.2.2. Mediation. If the matter remains unresolved within sixty
(60) days after the Notice Date, or if the senior executives fail to meet within
thirty (30) days after the Notice Date, either party may initiate mediation upon
written notice to the other party, whereupon both parties shall be obligated to
engage in a mediation proceeding under the then current Center for Public
Resources ("CPR") Model Procedure for Mediation of Business Disputes, except
that specific provisions of this Section shall override inconsistent provisions
of the CPR Model Procedure. The mediator will be selected from the CPR Panels of
Neutrals. If the parties cannot agree upon the selection of a mediator within
ninety (90) days after the Notice Date, then upon the request of either party,
the CPR shall appoint the mediator. The parties shall attempt to resolve the
dispute through mediation until one of the following occurs: (i) the parties
reach a written settlement; (ii) the mediator notifies the parties in writing
that they have reached an impasse; (iii) the parties agree in writing that they
have reached an impasse; or (iv) the parties have not reached a settlement
within one hundred and twenty (120) days after the Notice Date.

                13.2.3. Trial without Jury. If the parties fail to resolve the
dispute through mediation, or if neither party elects to initiate mediation,
each party shall have the right to pursue any other remedies legally available
to resolve the dispute, provided, however, that the parties expressly waive any
right to a jury trial in any legal proceeding under this Article 13.

        13.3.   Preservation of Rights pending Resolution.

                13.3.1. Performance to Continue. Each party shall continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out or relating to this Agreement; provided, however, that a
party may suspend performance of its obligations during any period in which the
other party fails or refuses to perform its obligations.

                13.3.2. Provisional Remedies. Although the procedures specified
in this Section 13 are the sole and exclusive procedures for the resolution of
disputes arising out of relating to this Agreement, either party may seek a
preliminary injunction or other provisional equitable relief if, in its
reasonable judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.

                13.3.4. Statute of Limitations. The parties agree that all
applicable statutes of limitation and time-based defenses (such as estoppel and
laches) shall be tolled while the

                                       26
<PAGE>   27
procedures set forth in Subsections 13.2.1. and 13.2.2. are pending. The parties
shall take any actions necessary to effectuate this result.

14.     Indemnification and Insurance.

        14.1.   Indemnification. SB agrees to defend, indemnify and hold ArQule,
its Affiliates and their respective directors, officers, employees, and agents
(the "Indemnitees") harmless from all costs, judgments, liabilities, and damages
assessed by a court of competent jurisdiction arising from claims asserted by a
third party against ArQule, its Affiliates, or their respective directors,
officers, employees, or agents as a result of any of the following: (i) actual
or asserted violations by SB or its Affiliates, sublicensees, or third party
manufacturers of any applicable law or regulation that relates to the
manufacture, distribution, or sale of any Royalty-Bearing Product, including
without limitation, any alleged or actual claim that such product was
adulterated, misbranded, or mislabeled; (ii) claims for bodily injury, death, or
property damage attributable to the manufacture, distribution, sale, or use by
SB or its Affiliates, sublicensees, or third party manufacturers of any
Royalty-Bearing Product; or (iii) a recall ordered by a governmental agency, or
required by a confirmed failure, of any Royalty-Bearing Product, that is
manufactured, distributed, or sold by SB, its Affiliates, sublicensees, or third
party manufacturers.

        14.2.   Procedure. The Indemnitees agree to provide SB with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. SB agrees, at its own expense,
to provide attorneys reasonably acceptable to ArQule to defend against any such
claim. The Indemnitees shall cooperate fully with SB in such defense and will
permit SB to conduct and control such defense and the disposition of such claim,
suit, or action (including all decisions relative to litigation, appeal, and
settlement); provided, however, that any Indemnitee shall have the right to
retain its own counsel, at the expense of SB, if representation of such
Indemnitee by the counsel retained by SB would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. SB agrees to keep ArQule informed of
the progress in the defense and disposition of such claim and to consult with
ArQule with regard to any proposed settlement.

        14.3.   Insurance. SB shall maintain appropriate product liability
insurance or self-insurance with respect to development, manufacture, and sales
of Royalty-Bearing Product in such amount as SB customarily maintains with
respect to sales of its other products. SB shall each maintain such insurance
for so long as it continues to manufacture or sell such products, and thereafter
for so long as SB maintains insurance for itself covering such manufacture or
sales.

15.     Miscellaneous.

        15.1.   Publicity. Neither party shall reveal the terms of this
Agreement or use the name of the other party in connection with any promotional
statements to the public about the work performed under this Agreement or the
relationship between the parties, whether in a press release, advertisement,
promotional sales literature, or other promotional oral or written statements,
without the prior written approval of the other party, which consent shall not
be

                                       27
<PAGE>   28
unreasonably withheld or delayed, except for restatements of previously-approved
statements and disclosures required by applicable law or regulation.

        15.2.   Relationship of Parties. For the purposes of this Agreement,
each party is an independent contractor and not an agent or employee of the
other party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or otherwise authorized in writing.

        15.3.   Representations and Warranties. Each party represents and
warrants to the other party (i) that it has the legal right, power, and
authority to enter into this Agreement, to extend the rights and licenses
granted to the other party in this Agreement, and to fully perform its
obligations under this Agreement, and (ii) that the performance of such
obligations will not conflict with its charter documents or any agreements,
contracts, or other arrangements to which it is a party. In the event that a
party becomes aware that any of its representations and warranties under this
Section 15.3 become untrue during the term of this Agreement, such party shall
immediately furnish the other party with written notice which describes the
facts in reasonable detail.

        15.4.   Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

        15.5.   Headings. All headings in this Agreement are for convenience
only and shall not affect the meaning of any provision hereof.

        15.6.   Binding Effect. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective lawful successors and permitted
assigns.

        15.7.   Assignment. Neither party may assign this Agreement without the
prior written consent of the other party, except that a party may assign this
Agreement to an Affiliate or to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement.

        15.8.   Notices. All notices, requests, demands and other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:

                                       28
<PAGE>   29
        If to SB:

                      SmithKline Beecham Pharmaceuticals
                      709 Swedeland Road
                      P.O. Box 1539
                      King of Prussia, PA 19406-0939
                      Attn:  Alliance Management
                      Tel:   610-270-4800
                      Fax:   610-270-5964

        with a copy (which shall not constitute notice) to:

                      SmithKline Beecham Corporation
                      One Franklin Plaza
                      P.O. Box 7929
                      Philadelphia, PA  19101
                      Attn:  US General Counsel
                      Tel:   215-7514000
                      Fax:   215-751-3935

        If to ArQule:
                      ArQule, Inc.
                      19 Presidential Way
                      Woburn, MA  01801-5140
                      Attn:  President
                      Tel: (781) 994-0300
                      Fax: (781) 994-0676

        with a copy (which shall not constitute notice) to:

                      ArQule, Inc.
                      19 Presidential Way
                      Woburn, MA  01801-5140
                      Attn:  Legal Department
                      Tel: (781) 994-0300
                      Fax: (781) 994-0676

Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section 15.8.

        15.9.   Amendment and Waiver. This Agreement may be amended,
supplemented, or otherwise modified at any time, but only by means of a written
instrument signed by both parties. Any waiver of any rights or failure to act in
a specific instance shall relate only to such instance and shall not be
construed as an agreement to waive any rights or fail to act in any other
instance, whether or not similar.

                                       29
<PAGE>   30
        15.10.  Governing Law. This Agreement and the legal relations among the
parties shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts irrespective of any conflict of laws principles.

        15.11   Hart-Scott-Rodino Act. If required by law, the parties shall, at
their own expense, prepare and make appropriate filings under Title II of the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules
and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as
soon as reasonably practicable. The parties shall co-operate in the antitrust
clearance process and agree to furnish promptly to the FTC and the Antitrust
Division of the Department of Justice any additional information reasonably
requested by them in connection with such filings.

        15.12.  Severability. In the event that any provision of this Agreement
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.

        15.13.  Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all prior or contemporaneous oral and prior written
agreements and understandings.

                                       30
<PAGE>   31
        IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as a sealed instrument effective as of the date first above
written.

SMITHKLINE BEECHAM CORPORATION

By:    /s/ Donald F. Parman
   -----------------------------------------
Name: Donald F. Parman
Title: Chief Executive Officer

ARQULE, INC.

By:    /s/ Stephen A. Hill, M.D.
   -----------------------------------------
Stephen A. Hill, M.D.
President and Chief Executive Officer

                                       31
<PAGE>   32
                                   Schedule A

                            ARQULE COMPOUND CRITERIA

The JSC shall have authority to modify any of the ArQule Compound criteria set
forth herein.

                                      *****

                                   Schedule B

                            ACTIVITY PROFILE CRITERIA

                               FOR PROGRAM STATUS

Definition of Program Stages:

*****

    ***** Confidential Treatment has been requested for the marked portion.

                                       32
<PAGE>   33
                                   Schedule C

        *****

    ***** Confidential Treatment has been requested for the marked portion.

                                       33

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