Ten years ago, a leading biologist at the University of California at Berkeley and a young chemist-turned-businessman invested $500 apiece to start a genetic engineering company. They named it Genentech.

The fledgling company became best known in the next few years for its success in using gene-splicing to produce human insulin in the laboratory.

On Oct. 14, 1980, Genentech went public and Wall Street went bananas. The stock rocketed from $35 to $89 per share in the first 20 minutes of trading. A company that had never shipped a product sold 1.1 million shares, and by the end of the day its two founders were sitting on holdings worth more than $65 million each.

Wall Street's romance with high-tech bioengineering companies has since cooled, but Genentech's wild coming-out party in 1980 signaled a new, if sometimes uneasy, relationship between academia and big business, between the ivory-tower laboratory and the bottom-line corporation.

Traditionally, universities have been the site of most basic research -- the "pure" scientific work that extends knowledge, often in agonizingly small and serendipitous steps. Applied science has been mainly the province of private industry, which takes scien- tific discoveries and, sometimes decades later, turns them into products.

But in an era when scientists have learned to manipulate computer microchips and human genes, the gap between basic and applied research has narrowed. Much of the cutting-edge research in today's labs has the potential for immediate application in the burgeoning field of biotechnology.

That change, along with cutbacks in the federal government's support of basic research, has spurred a growing number of universities to enter into multimillion dollar, long-term joint ventures with industry.

What universities get out of such deals is, in short, money. What industry gets is prestige and an inside look at the laboratory findings of some of the nation's top researchers -- in time to get a jump on competitors in the race to turn those discoveries into marketable products.

Still at issue is whether these partnerships put researchers in a conflict of interest between the pursuit of knowledge and the pursuit of profits.

Industry support of research and development at universities increased more than four-fold from $84 million in 1973 to $370 million in 1983. Among the biggest recent university-industry partnerships:

In 1980, the Massachusetts Institute of Technology and Exxon entered into a 10-year, $8 million agreement for research into combustion processes. MIT will hold patents emerging from the research and share in royalties from third-party licensing arrangements, while Exxon gets a royalty-free, nonexclusive license.

In 1981, Massachusetts General Hospital and Hoechst A.G., a German chemical company, signed a 10-year, $70 million agreement establishing a new Department of Molecular Biology at the hospital. MGH, an affiliate of Harvard Medical School, holds the patent rights, but Hoechst has exclusive marketing rights to any patented inventions from the work it funded.

In 1982, Washington University in St. Louis and Monsanto Co. signed a five-year, $23.5 million contract for research on proteins and peptides. Under the agreement, which has since been extended, Washington University holds the patents, but Monsanto has the first rights to develop products under an exclusive licensing agreement.

In 1983, Stanford University, with support from 20 high-tech companies, including IBM, Xerox, Hewlett-Packard and Intel, set up the Center for Integrated Systems for research on microelectronics. Each corporate sponsor contributed $750,000 to a building fund, plus $110,000 annually. Patents resulting from research at the center belong to Stanford and the individual scientists, but the corporations gain early access to the discoveries.

Last July, Georgetown University and Fidia S.p.A., an Italian drug company, signed a $62 million contract to create the Fidia-Georgetown Institute for the Neurosciences. Under the contract, Fidia will supply up to $3 million a year for the next 20 years for research, plus $2 million in start-up funds for the institute, which will employ about 50 scientists and be housed in a new $8 million laboratory building. The institute retains first rights to any patentable discovery emerging from its research; Fidia gets the first chance to license any commercial applications.

"All of the funds come to Georgetown and are handled just as if they were support from the National Institutes of Health," said Dr. John Rose, vice chancellor of Georgetown University Medical Center.

Research at the Fidia-Georgetown institute will focus on brain chemistry, including the mechanisms of anxiety, depression, aging and opiate dependence. It will be pursued "without any commercial objectives," Rose said.

Because of the basic nature of the research, he dismissed the prospect of patents as "extremely unlikely."

But Bernard D. Reams Jr., law professor at Washington University in St. Louis and author of a new book on "University-Industry Research Partnerships," said Fidia is interested in more than mere public relations.

"They're not spending $62 million over 20 years for anything but some scientific results that they hope to capitalize on," Reams said. "It's probably a gamble, but they're affiliating with a very prestigious university, and both Georgetown and Fidia have the potential for long-term gains.

"I see this as a good option for both industry and academia."

Because agreements already in place have gone relatively smoothly, Reams said, the "conflict-of-interest question has just sort of died down."

"There's a little more trust between universities and industry now , and a little less concern about the preservation of academic freedom," agreed Georgetown's Rose, "because the industry seems willing to work within the guidelines of the university."

Some critics still worry that university-industry contracts will favor commercially applicable research at the expense of basic knowledge, and secrecy at the expense of immediate publication and free exchange of ideas.

"A disturbing feature of the problem is that the commercialization of biological research has prompted little debate within academe, a community not usually at a loss for words," said science writer Nicholas Wade in a background paper for the Twentieth Century Fund, a New York research foundation that studied the issue in 1984.

"The enemy inside the ivory tower, simply put," Wade said, "is the lure of money: money not only in copious quantities but in novel form, since it attaches as a premium to new ideas before they have proved their value in the marketplace."

Industry-university ties are not entirely new. They go back at least to the founding of MIT in 1861. Stanford, the "brain center" of the Silicon Valley, set up an industrial park next to its campus in the 1950s. The park now includes 90 high-tech companies employing 27,000 people.

But university-industry research agreements have proliferated recently, with the budget crunch and the growing incentive for companies to "buy a window" on the latest in potentially lucrative biomedical research.

Since 1982, when Yale University formed an Office of Cooperative Research to encourage industry interest in on-campus research, yearly company-sponsored research at Yale has soared from $800,000 to $4 million.

"The deepest worry is that what we have seen already is just the tip of the iceberg," warned a report on university-industry alliances presented by Dorothy Nelkin of Cornell University and Richard Nelson of Yale to a National Academy of Sciences conference last fall.

Support from private industry will never replace federal funding, which has been by far the largest source of basic research since World War II. Even at Stanford, less than 10 percent of all research is sponsored by industry.

Of the $7.4 billion that American colleges and universities spent on basic research in 1983, 67 percent was provided by the federal government and only 4 percent by industry. (The rest came from universities themselves, other nonprofit organizations and state and local government.)

The key to protecting academic freedom, patent rights and timely publication, experts say, is a carefully drawn contract.

After a three-day meeting in California in 1982, the leaders of five major universities (Harvard, MIT, Stanford, California Institute of Technology and University of California) and nine major high-tech companies issued guidelines for university-industry agreements. They should be drawn up "in ways that do not promote a secrecy that will harm the progress of science, impair the education of students, interfere with the choice by faculty members of the scientific questions or lines of inquiry they pursue, or divert the energies of faculty members from their primary obligations to teaching and research."

Georgetown's contract with Fidia, Rose said, is a document "probably an inch thick." Article XI of the agreement between Washington University and Monsanto, dealing only with patents and licensing, is 17 pages long.

The Twentieth Century Fund's 1984 report concluded that carefully negotiated university-industry agreements can be a "positive sum game, one in which both sides benefit."

A proposal that Harvard set up its own biotechnology company, partly owned by the university, was dropped in 1980 after faculty members protested that it would stifle free inquiry and compromise the university's tradition of academic independence.

In contrast, the $70 million research agreement between Massachusetts General Hospital and Hoechst was approved the following year.

"As one with doubts when joining the department, I believe academic freedom has held up extremely well," said the deputy director of Mass General's new industry-sponsored department of molecular biology, quoted in Reams' book. "The department has proven to be a completely independent academic unit and has no tinge of corporate control."

As for the corporation's opinion, he said he could only comment that "the money keeps coming in."