10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended September 30, 2002.
	OR
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the transition period from _______________ to _______________

Commission File Number 0-22570

Lynx Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 94-3161073
(I.R.S. Employer
Identification No.)

25861 Industrial Blvd.
Hayward, CA 94545
(Address of principal executive offices)

(510) 670-9300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant, (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

The number of shares of common stock outstanding as of November 1, 2002 was 30,491,073.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS
EXHIBIT 10.7.5
EXHIBIT 10.33
EXHIBIT 10.34
EXHIBIT 99.1

Lynx Therapeutics, Inc.

FORM 10-Q

For the Quarter Ended September 30, 2002

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — September 30, 2002 and December 31, 2001.	3
	Condensed Consolidated Statements of Operations — three and nine months ended September 30, 2002 and 2001.	4
	Condensed Consolidated Statements of Cash Flows — nine months ended September 30, 2002 and 2001.	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 2.	Changes in Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits and Reports on Form 8-K	21
Signatures		22
Certifications		23

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

		September 30,			December 31,
		2002			2001 *
		(Unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	11,234		$	3,199
	Short-term investments		1,450			2,310
	Accounts receivable		1,155			1,152
	Inventory		1,048			1,718
	Other current assets		1,064			897
Total current assets			15,951			9,276
Property and equipment:
	Leasehold improvements		12,240			12,225
	Laboratory and other equipment		21,739			20,284
			33,979			32,509
	Less accumulated depreciation and amortization		(17,607	)		(14,283	)
Net property and equipment			16,372			18,226
Investment in related party			1,947			4,452
Other non-current assets			172			548
		$	34,442		$	32,502
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable	$	970		$	2,037
	Accrued compensation		558			694
	Deferred revenues — current portion		3,759			5,259
	Notes payable — current portion		1,574			1,445
	Other accrued liabilities		182			329
Total current liabilities			7,043			9,764
Deferred revenues			11,650			15,115
Notes payable			639			1,806
Other non-current liabilities			1,153			1,103
Stockholders’ equity:
	Common stock		109,981			87,951
	Notes receivable from stockholders		—			(250	)
	Deferred compensation		(132	)		(744	)
	Accumulated other comprehensive income (loss)		—			1,139
	Accumulated deficit		(95,892	)		(83,382	)
Total stockholders’ equity			13,957			4,714
		$	34,442		$	32,502

* The balance sheet amounts at December 31, 2001 have been derived from audited financial statements at that date but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2002			2001			2002			2001
Revenues:
	Technology access and service fees	$	4,517		$	5,461		$	9,114		$	12,709
	License fees from related party		190			190			570			253
	Collaborative research and other		126			113			3,024			553
Total revenues			4,833			5,764			12,708			13,516
Operating costs and expenses:
	Cost of service fees revenues and other		1,170			1,137			1,905			2,910
	Research and development		4,321			6,670			16,614			18,492
	General and administrative		1,428			1,631			4,570			5,639
	Special charge for workforce reduction		—			—			530			—
Total operating costs and expenses			6,919			9,437			23,619			27,041
Loss from operations			(2,086	)		(3,673	)		(10,911	)		(13,525	)
Equity share of income (loss) of related party			(997	)		—			(2,505	)		—
Interest income (expense), net			(83	)		(17	)		(207	)		(1	)
Other income (expense), net			(6	)		100			905			(338	)
Loss before provision for income taxes			(3,172	)		(3,590	)		(12,718	)		(13,864	)
Income tax provision (benefit)			102			100			(208	)		100
Net loss		$	(3,274	)	$	(3,690	)	$	(12,510	)	$	(13,964	)
Basic and diluted net loss per share		$	(0.11	)	$	(0.27	)	$	(0.57	)	$	(1.12	)
Shares used in per share computation			28,571			13,449			22,040			12,441

See accompanying notes.

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Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

			Nine Months Ended
			September 30,
			2002			2001
Cash flows from operating activities:
Net loss			$	(12,510	)	$	(13,964	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			3,324			3,791
	Amortization of deferred compensation			612			659
	Pro rata share of net loss of related party			2,505			—
	Gain on sale of antisense program			(1,008	)		(566	)
	Loss on writedown of equity investment			—			1,605
	Changes in operating assets and liabilities:
		Accounts receivable		(3	)		661
		Inventory		670			(341	)
		Other current assets		(168	)		(43	)
		Accounts payable		(1,068	)		(950	)
		Accrued liabilities		(283	)		(360	)
		Deferred revenues		(4,965	)		(292	)
		Other non-current liabilities		52			100
Net cash used in operating activities				(12,842	)		(9,700	)
Cash flows from investing activities:
Purchases of short-term investments				(3,261	)		(3,807	)
Maturities of short-term investments				1,811			11,152
Proceeds from sale of equity securities				2,180			—
Leasehold improvements and equipment purchases, net of retirements				(1,470	)		(5,819	)
Notes receivable from officers and employees				626			124
Other non-current assets				—			(4,360	)
Net cash used in investing activities				(114	)		(2,710	)
Cash flows from financing activities:
Repayment of notes payable				(1,039	)		(929	)
Issuance of common stock				22,030			12,235
Net cash provided by financing activities				20,991			11,306
Net increase (decrease) in cash and cash equivalents				8,035			(1,104	)
Cash and cash equivalents at beginning of period				3,199			7,875
Cash and cash equivalents at end of period			$	11,234		$	6,771
Supplemental disclosure of cash flow information:
Interest paid			$	236		$	335

See accompanying notes.

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Lynx Therapeutics, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002

1. Nature of Business

     Lynx Therapeutics, Inc. (“Lynx” or the “Company”) believes that it is a leader in the development and application of novel technologies for the discovery of gene expression patterns important to the pharmaceutical, biotechnology and agricultural industries. These technologies are based on the Megaclone™ technology, Lynx’s unique and proprietary cloning procedure, which transforms a sample containing millions of DNA molecules into one made up of millions of micro-beads, each of which carries approximately 100,000 copies of one of the DNA molecules in the sample. Megaclone™ technology and Massively Parallel Signature Sequencing technology, or MPSS™, together provide comprehensive and quantitative digital gene expression data important to modern systems biology research. Lynx is also developing a proteomics technology, Protein ProFiler™, an automated two-dimensional liquid-based electrophoresis system, which is expected to permit high-resolution analysis of complex mixtures of proteins from cells or tissues.

2. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain prior year amounts have been reclassified to conform to current year presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC rules and regulations; nevertheless, Lynx believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results for the full year.

     The unaudited condensed consolidated financial statements include all accounts of Lynx and its wholly-owned subsidiary, Lynx Therapeutics GmbH (“Lynx GmbH”). Effective September 25, 2002, Lynx transferred all of its shares of Lynx Therapeutics Beteiligungsgesellschaft mbH (“LTBG mbH”), its wholly-owned subsidiary, to Lynx GmbH , making LTBG mbH a wholly-owned subsidiary of Lynx GmbH and an indirect, wholly-owned subsidiary of Lynx. Lynx GmbH and LTBG mbH are both German limited liability companies formed under the laws of the Federal Republic of Germany. All significant intercompany balances and transactions have been eliminated. Subject to shareholder approval of both LTBG mbH and Axaron Bioscience AG (“Axaron”) and due entry and registration with the commercial register, LTBG mbH and Axaron will merge with an economic effective date as of October 1, 2002. The merger agreement contemplates that Axaron will be the surviving entity following the consummation of the transaction. Lynx GmbH will receive all of LTBG mbH’s 4,173,330 shares of, or approximately 42% equity interest in, Axaron as consideration for the merger. LTBG mbH will automatically be dissolved immediately following the entry and registration of the merger between LTBG mbH and Axaron.

     These financial statements should be read in conjunction with Lynx’s audited consolidated financial statements and notes thereto for the year ended December 31, 2001, included in its annual report on Form 10-K, filed with the SEC.

3. Summary of Significant Accounting Policies

Revenue Recognition

     Technology access and license fees have generally resulted from upfront payments from customers, collaborators and licensees who are provided access to Lynx’s technologies for specified periods. The amounts are deferred and recognized as revenue on a straight-line basis over the noncancelable terms of the agreements to which they relate. Lynx receives payments from customers, collaborators and licensees for genomics discovery services performed by Lynx on the biological samples they send to Lynx and/or for the materials provided by Lynx. These amounts are recognized as revenues when earned over the period in which the services are performed and/or materials are delivered, provided no other obligations, refunds or credits to be applied to future work exist. Collaborative research revenues are payments received under various agreements and include such items as the sale of technology assets and milestone payments. Milestone payments are recognized as revenue upon the achievement of specified technology developments, representing the culmination of the earnings process. Other revenues include the proceeds from the sale of reagents and

6

grant revenue. Revenues from the sales of products and reagents, which have been immaterial to date, are recognized upon shipment to the customer.

Investment in Related-Party Equity Securities

     As of September 30, 2002, Lynx held an approximately 42% equity interest in Axaron, a company owned primarily by Lynx and BASF AG. Lynx accounts for its investment in Axaron using the equity method, because its ownership is greater than 20% and Lynx has the ability to exercise significant influence over the operating, investing and financing decisions of Axaron. Under the equity method, Lynx records its pro-rata share of Axaron’s income or losses and adjusts the basis of its investment accordingly. Although Lynx has the ability to exercise significant influence over the operations of Axaron, Lynx may choose not to exercise such influence or may not have influence over certain operating matters. Consequently, Axaron’s operating results could differ significantly from Lynx’s expectations, and Lynx’s pro rata share of Axaron’s income or losses that it records in the future could be material. For the quarter and nine-month period ended September 30, 2002, Lynx’s pro-rata share of Axaron’s losses was $1.0 million and $2.5 million, respectively.

Net Loss Per Share

     Basic earnings per share (“EPS”) is computed by dividing income or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company, to the extent such securities are dilutive. Basic and diluted net losses per share are equivalent for all periods presented herein due to the Company’s net loss in all periods. At September 30, 2002, options to purchase approximately 2,700,000 shares of common stock at a weighted-average exercise price of $10.19 per share and warrants to purchase 707,588 shares of common stock at an exercise price of $5.68 per share, 292,000 shares of common stock at an exercise price of $1.55 per share and 5,840,000 shares of common stock at an exercise price of $1.94 per share were excluded from the calculation of diluted loss per share for 2002 because the effect of inclusion would be antidilutive. The options and warrants will be included in the calculation at such time as the effect is no longer antidilutive, as calculated using the treasury stock method.

Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 establishes new standards for accounting and reporting for business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. Lynx adopted this statement during the first quarter of fiscal 2002, and its adoption did not have a material effect on Lynx’s operating results or financial position.

     In July 2001, the FASB issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which supercedes APB Opinion No. 17, “Intangible Assets.” SFAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. Lynx adopted this statement during the first quarter of fiscal 2002, and its adoption did not have a material effect on Lynx’s operating results or financial position.

     In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS 144 establishes a single accounting model for long-lived assets to be disposed of and is applicable to financial statements issued for fiscal years beginning after December 15, 2001 (January 2002 for calendar year-end companies) with transition provisions for certain matters. Lynx adopted this statement during the first quarter of fiscal 2002, and its adoption did not have a material effect on Lynx’s operating results or financial position.

4. Comprehensive Loss

The following are the components of comprehensive loss: (in thousands)

	Three Months Ended September 30,
	2002			2001
Net loss	$	(3,274	)	$	(3,690	)
Net unrealized gain (loss) on available-for-sale securities		—			(568	)
Comprehensive loss	$	(3,274	)	$	(4,258	)

7

	Nine Months Ended
	September 30,
	2002			2001
Net loss	$	(12,510	)	$	(13,964	)
Net unrealized gain (loss) on available-for-sale securities		(1,139	)		1,639
Comprehensive loss	$	(13,649	)	$	(12,325	)

The components of accumulated other comprehensive income (loss) relate entirely to unrealized gains (losses) on available-for-sale securities and were $0 at September 30, 2002 and $1.1 million at December 31, 2001.

5. Related-Party Transactions

     In 2001, Lynx extended its technology licensing agreement with Axaron. The license extends Axaron’s right to use Lynx’s proprietary MPSS™ and Megasort™ technologies non-exclusively in Axaron’s neuroscience, toxicology and microbiology programs until December 31, 2007. Lynx received from Axaron a $5.0 million technology license fee, which was recorded as deferred revenue and is being recognized on a straight-line basis over the noncancelable term of the agreement. The recorded revenue for the three- and nine-month periods ended September 30, 2002 was approximately $190,000 and $570,000, respectively. The recorded revenue for the three- and nine-month periods ended September 30, 2001 was approximately $190,000 and $253,000, respectively. For the quarter and nine-month period ended September 30, 2002, Lynx’s pro-rata share of Axaron’s losses was approximately $1.0 million and $2.5 million, respectively. For the quarter and nine month period ended September 30, 2001, Lynx’s pro-rata share of Axaron’s losses was immaterial. In 2001, Lynx made a capital investment in Axaron of approximately $4.5 million.

     Effective September 25, 2002, Lynx transferred all of its shares of LTBG mbH, its wholly-owned subsidiary, to its other subsidiary, Lynx GmbH, making LTBG mbH a wholly-owned subsidiary of Lynx GmbH and an indirect, wholly-owned subsidiary of Lynx. Lynx GmbH and LTBG mbH are both German limited liability companies formed under the laws of the Federal Republic of Germany. Subject to shareholder approval of both LTBG mbH and Axaron and due entry and registration with the commercial register, LTBG mbH and Axaron will merge with an economic effective date as of October 1, 2002. The merger agreement contemplates that Axaron will be the surviving entity following the consummation of the transaction. Lynx GmbH will receive all of LTBG mbH’s 4,173,330 shares of, or approximately 42 % equity interest in, Axaron as consideration for the merger. LTBG mbH will automatically be dissolved immediately following the entry and registration of the merger between LTBG mbH and Axaron.

     The Company also subleases certain offices in Germany to Axaron. During the three- and nine-month periods ended September 30, 2002 and 2001, the Company received an immaterial amount of sublease income from Axaron.

6. Sale of Technology Assets

     On March 6, 2002, Lynx sold its intellectual property rights under the N3’-P5’ phosphoramidate patent estate to Geron Corporation (“Geron”) in exchange for $1.0 million in cash and 210,000 shares of Geron common stock. The agreement with Geron covers the sale of a family of patents covering process and compositional matter claims related to oligonucleotides containing phosphoramidate backbone linkages. The Company recognized proceeds of approximately $2.6 million from the sale of this technology to Geron. The Company sold all of the Geron stock in April 2002, realizing a loss upon sale of approximately $64,000.

7. Common Stock

     On April 30, 2002, Lynx completed a $22.6 million private placement of common stock and warrants to purchase common stock (the “financing”) resulting in proceeds of $20.9 million, net of commissions and expenses. The financing included the sale of 14.6 million newly issued shares of common stock at $1.55 per share and the issuance of warrants to purchase approximately 5.8 million shares of common stock at an exercise price of $1.94 per share. In May 2002, Lynx filed with the SEC a resale registration statement on Form S-3 relating to the issued securities. In connection with the financing, the Company issued a warrant to purchase up to an aggregate of 292,000 shares of the Company’s common stock at an exercise price of $1.55 per share to Friedman, Billings, Ramsey & Co., Inc. (“FBR”), as partial consideration, in addition to other customary fees, for services rendered by FBR as sole manager for the private equity financing.

     In connection with the Collaboration Agreement, dated as of October 1, 2000, between Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.) (“Takara”) and the Company, on September 25, 2002, the Company issued and sold 2,040,816 shares of common stock, at a purchase price of $0.49 per share, to Takara in a private placement pursuant to the terms and conditions of a Common Stock Purchase Agreement, dated as of September 25, 2002.

8. Restructuring Charges

8

     On April 18, 2002, Lynx announced a reduction of approximately 30% of its domestic workforce. This reduction in workforce is expected to direct Lynx’s financial and human resources toward the further commercial expansion of Lynx’s genomics technologies — principally MPSS™ — and the development of its Protein ProFiler™ proteomics technology. The Company recorded a workforce reduction charge of $0.5 million related primarily to severance compensation expense for former Lynx employees in the second quarter of 2002.

9. Subsequent Event

     Lynx entered into a loan and security agreement with a financial institution, Comerica Bank-California, effective as October 23, 2002 for an equipment line of credit of up to $2.0 million with a draw-down period of one year. Under the initial advance, Lynx drew down approximately $1.5 million in November 2002 related to the purchase of equipment made in previous periods. Lynx granted Comerica Bank-California a security interest in all items Lynx financed under this agreement. The initial advance under the loan to finance the purchase of equipment made in previous periods has a term of 24 months from the date of advance and bears interest at a rate of 7.25%. Pursuant to the terms of the agreement, Lynx is required to maintain a minimum cash balance of unrestricted cash and cash equivalents in an account at Comerica Bank-California of at least $5.0 million until Comerica Bank-California receives payment in full of all outstanding obligations, and there is a liquidity requirement that Lynx have a balance of unrestricted cash at each month’s end that is greater than Lynx’s net decrease in cash during the preceding four months.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and our 2001 audited financial statements and notes thereto included in our 2001 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of results that may occur in future periods.

     Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. When used herein, the words “believe,” “anticipate,” “expect,” “estimate” and similar expressions are intended to identify such forward-looking statements. There can be no assurance that these statements will prove to be correct. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in our 2001 Annual Report on Form 10-K, as filed with the SEC. Lynx undertakes no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Overview

     We believe that we are a leader in the development and application of novel technologies for the discovery of gene expression patterns important to the pharmaceutical, biotechnology and agricultural industries. These technologies are based on the Megaclone™ technology, Lynx’s unique and proprietary cloning procedure, which transforms a sample containing millions of DNA molecules into one made up of millions of micro-beads, each of which carries approximately 100,000 copies of one of the DNA molecules in the sample. Megaclone™ technology and Massively Parallel Signature Sequencing technology, or MPSS™, together provide comprehensive and quantitative digital gene expression data important to modern systems biology research. We are also developing a proteomics technology, Protein ProFiler™, an automated two-dimensional liquid-based electrophoresis system, which is expected to permit high-resolution analysis of complex mixtures of proteins from cells or tissues.

     We have incurred net losses each year since our inception in 1992. As of September 30, 2002, we had an accumulated deficit of approximately $95.9 million. Future net losses or profits will depend, in part, on the rate of growth, if any, in our revenues and on the level of our expenses.

     To date, we have received a significant portion of our revenues from a small number of customers, collaborators and licensees. For the nine months ended September 30, 2002, revenues from E.I. DuPont de Nemours and Co., Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.), Bayer CropScience GmbH (formerly Aventis CropScience GmbH) and Geron Corporation accounted for 37%, 12%, 14% and 20%, respectively, of our total revenues. For the year ended December 31, 2001, revenues from DuPont, BASF AG, Takara and the Institute of Molecular and Cell Biology accounted for 37%, 24%, 12% and 12%, respectively, of our total revenues. For the year ended December 31, 2000, revenues from DuPont, BASF and Bayer CropScience accounted for 51%, 29% and 11%, respectively, of

9

our total revenues. Revenues for the third quarter and nine-month period ended September 30, 2002 were $4.8 million and $12.7 million, respectively, and revenues for the corresponding third quarter and nine-month period of 2001 were $5.8 million and $13.5 million, respectively. These revenues consist primarily of technology access and service fees from Lynx’s customers, collaborators and licensees.

     Revenues in each quarterly and annual period have in the past, and could in the future, fluctuate due to: the timing and amount of any technology access fees received and the period over which the revenue is recognized; the level of service fees, which is tied to the number and timing of biological samples received from our customers, collaborators and licensees, as well as our performance of the related genomics discovery services on the samples; the timing of achievement of milestones and the amount of related payments to us; and the number, type and timing of new, and the termination of existing, agreements with customers, collaborators and licensees.

     Our operating costs and expenses include cost of service fees, research and development expenses and general and administrative expenses. Cost of services fees includes the costs of direct labor, materials and supplies, outside expenses, equipment and overhead incurred by us in performing our genomics discovery services for our customers, collaborators and licensees. Research and development expenses include the costs of personnel, materials and supplies, outside expenses, equipment and overhead incurred by us in our technology and application development efforts. Research and development expenses may increase due to planned spending for ongoing technology development and implementation, as well as new applications. General and administrative expenses include the costs of personnel, materials and supplies, outside expenses, equipment and overhead incurred by us primarily in our administrative, business development, legal and investor relations activities. General and administrative expenses may increase in support of Lynx’s commercial, business development and research and development activities.

     We account for our investment in Axaron Bioscience AG (“Axaron”) using the equity method. Prior to our cash capital contribution of approximately $4.5 million in 2001, such investment had a carrying value of zero in the financial statements. Since September 1, 2001, we have recognized our share of Axaron’s operating results in the accompanying statements of operations. For the quarter and nine-month period ended September 30, 2002, our pro-rata share of Axaron’s losses was approximately $1.0 million and $2.5 million, respectively.

Results of Operations

Revenues

     Revenues for the quarter and nine-month period ended September 30, 2002 were approximately $4.8 million and $12.7 million, respectively, compared to revenues for the corresponding quarter and nine-month period of 2001 of $5.8 million and $13.5 million, respectively. These revenues consist primarily of technology access and service fees from Lynx’s customers, collaborators and licensees. Revenues for the nine-month period in 2002 included technology access fees and service fees of $9.1 million, license fees from a related party of $0.6 million and other revenues of $3.0 million, primarily from the sale of certain of Lynx’s technology assets to Geron Corporation. Revenues for the nine-month period in 2001 consisted primarily of technology access and service fees.

Operating Costs and Expenses

     Total operating costs and expenses were approximately $6.9 million for the quarter ended September 30, 2002, compared to $9.4 million for the corresponding period of 2001. For the nine-month period ended September 30, 2002, operating costs and expenses were approximately $23.6 million, compared to $27.0 million for the corresponding period of 2001. For the quarter and nine-month period ended September 30, 2002, cost of service fees was approximately $1.2 million and $1.9 million, respectively, compared to $1.1 million and $2.9 million, respectively, for the corresponding quarter and nine-month period of 2001. These amounts reflect the costs of providing our genomics discovery services. Research and development expenses were approximately $4.3 million for the quarter ended September 30, 2002, compared to $6.7 million for the corresponding period of 2001. The decrease in research and development expenses from the 2001 period to the 2002 period reflects lower personnel expenses, primarily resulting from the workforce reduction that occurred during the second quarter of 2002, and a decrease in materials consumed in research and development efforts. For the nine-month period ended September 30, 2002, research and development expenses were approximately $16.6 million, compared to $18.5 million for the corresponding period of 2001. The decrease in research and development expenses in 2002 reflects a decrease in materials consumed in research and development efforts and lower personnel expenses, primarily resulting from the workforce reduction. General and administrative expenses decreased to approximately $1.4 million for the quarter ended September 30, 2002, compared to $1.6 million for the corresponding period of 2001. For the nine-month period ended September 30, 2002, general and administrative expenses decreased to approximately $4.6 million, compared to $5.6 million in the same period of 2001. The decrease in general and administrative expenses from the 2001 periods to the 2002 periods reflects lower personnel

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expenses and lower outside service costs. The special charge of approximately $0.5 million in the nine months ended September 30, 2002, was comprised primarily of severance charges for former Lynx employees who were part of Lynx’s workforce reduction in the second quarter of 2002.

Interest Income (Expense), Net

     Net interest expense was $83,000 and $207,000 for the quarter and nine-month period ended September 30, 2002, respectively, compared to net interest expense of $17,000 and $1,000, respectively, for the corresponding periods of 2001. The 2002 net interest expense reflects primarily a decrease in interest income due to lower average cash, cash equivalents and investment balances and the significant decline in interest rates over the past year as compared to the 2001 period. Interest expense incurred on equipment-related debt is included in both the 2002 and 2001 periods.

Equity Share Of Income (Loss) Of Related Party

     The equity share of income (loss) of related party of approximately $1.0 million for the third quarter and $2.5 million for the nine-month period ended September 30, 2002 was related to Lynx’s pro-rata share of the net loss of Axaron, a related party, for the same periods.

Other Income (Expense), Net

     Other expense was approximately $6,000 in the quarter ended September 30, 2002, compared to other income of $100,000 in the 2001 period. For the nine-month period ended September 30, 2002, other income was approximately $0.9 million, compared to other expense of $0.3 million in the same period of 2001. The 2002 other income was related primarily to the gain on the sale of our equity investment in Inex Pharmaceuticals Corporation. Other expense for the nine-month period in 2001 was related primarily to a $1.6 million writedown for an other-than-temporary decline in the value of Lynx’s equity investment in Inex, net of a $1.1 million gain recorded from the receipt of shares of common stock from Inex in the first quarter of 2001 as part of the proceeds related to the March 1998 sale of Lynx’s former antisense program.

Income Taxes

     The provision for income taxes for the quarter ended September 30, 2002 and 2001 consists entirely of foreign withholding tax on a payment received from one of our customers, collaborators and licensees. For the nine-month period ended September 30, 2002, the income tax benefit was approximately $208,000, compared to income tax expense of $100,000 in the same period of 2001. The income tax benefit relates primarily to a refund receivable for federal alternative minimum taxes paid in prior periods.

Liquidity and Capital Resources

     Net cash used in operating activities was $12.8 million for the nine months ended September 30, 2002, as compared to net cash used in operating activities of $9.7 million for the same period of 2001. The change was primarily due to a decrease in deferred revenues, partially offset by a lower net loss. Net cash used in investing activities of $0.1 million for the nine-month period ended September 30, 2002 related primarily to the net purchase of short-term investments and expenditures on capital equipment, partially offset by proceeds from the sale of equity investments. Net cash provided by financing activities for the nine-month period ended September 30, 2002 related primarily to the issuance of common stock pursuant to a common stock purchase agreement between Lynx and certain investors, partially offset by repayment of principal under an equipment loan arrangement. Cash, cash equivalents and short-term investments were approximately $12.7 million at September 30, 2002.

     On April 30, 2002, Lynx completed a private placement of common stock and warrants to purchase common stock. The financing included the sale of 14.6 million newly issued shares of common stock at a purchase price of $1.55 per share, resulting in gross proceeds of approximately $22.6 million, pursuant to a common stock purchase agreement between Lynx and certain investors. In connection with this transaction, Lynx issued warrants to purchase up to 5.84 million shares of common stock at an exercise price of $1.94 per share. Additionally, Lynx issued a warrant to purchase up to an aggregate of 292,000 shares of common stock at an exercise price of $1.55 per share to Friedman, Billings, Ramsey & Co., Inc. (FBR), as partial consideration, in addition to other customary fees, for services rendered by FBR as sole manager for the private equity financing.

     In connection with the Collaboration Agreement, dated as of October 1, 2000, between Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.) (“Takara”) and Lynx, on September 25, 2002, we issued and sold 2,040,816 shares of common stock, at a purchase price of

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$0.49 per share, to Takara in a private placement pursuant to the terms and conditions of a Common Stock Purchase Agreement, dated as of September 25, 2002.

     Lynx expects to use the net proceeds of approximately $21.0 million from the April 2002 financing and other available funds to support ongoing commercial, business development and research and development activities. Lynx’s efforts will be directed toward the expansion of the commercial applications of its genomics technologies-principally MPSS™-and the continued development of its Protein ProFiler™ proteomics technology.

     Lynx expects capital investments during 2002 will be comprised primarily of equipment purchases required in the normal course of business and expenditures for leasehold improvements. Lynx intends to invest its excess cash in investment-grade, interest-bearing securities.

     Lynx entered into a loan and security agreement with a financial institution, Comerica Bank-California effective as of October 23, 2002, for an equipment line of credit of up to $2.0 million with a draw-down period of one year. Under the initial advance, Lynx drew down approximately $1.5 million in November 2002 related to the purchase of equipment made in previous periods. Lynx granted Comerica Bank-California a security interest in all items Lynx financed under this agreement. The initial advance under the loan to finance the purchase of equipment made in previous periods has a term of 24 months from the date of advance and bears interest at a rate of 7.25%. Pursuant to the terms of the agreement, Lynx is required to maintain a minimum cash balance of unrestricted cash and cash equivalents in an account at Comerica Bank-California of at least $5.0 million until Comerica Bank-California receives payment in full of all outstanding obligations, and there is a liquidity requirement that Lynx have a balance of unrestricted cash at each month’s end that is greater than Lynx’s net decrease in cash during the preceding four months.

     In late 1998, Lynx entered into a financing agreement with a financial institution, Transamerica Business Credit Corporation, under which Lynx drew down $4.8 million during 1999 for the purchase of equipment and certain other capital expenditures. Lynx granted the lender a security interest in all items financed by it under this agreement. Each draw down under the loan has a term of 48 months from the date of the draw down and an interest rate ranging from 10.9% to 11.8%. As of September 30, 2002, the principal balance under loans outstanding under this agreement was approximately $2.2 million. The draw down period under the agreement expired on March 31, 2000.

     Our contractual obligations for the next five years, and thereafter are as follows:

			Principal Payments Due by Period
Contractual
Obligations (1)	Less than 1 year		1-3 Years		4-5 Years		After 5 Years		Total
					(in thousands)
Operating leases	$	2,977	$	5,602	$	5,568	$	2,777	$	16,924
Equipment loans		2,338		1,464		—		—		3,802
Total contractual cash obligations	$	5,315	$	7,066	$	5,568	$	2,777	$	20,726

(1) This table does not include any payment obligations under research license agreements, as the timing and likelihood of such payments are not known.

     Lynx has obtained funding for its operations primarily through sales of preferred and common stock to venture capital investors, institutional investors, licensees and collaborators, payments under contractual arrangements with customers, collaborators and licensees and interest income. The timing and amount of funds required for specific uses by Lynx cannot be precisely determined at this time and will be based upon the progress and the scope of its collaborative and independent research and development projects; payments received under customer, collaborative and license agreements; Lynx’s ability to establish and maintain customer, collaborative and license agreements; costs of protecting intellectual property rights; legal and administrative costs; additional facilities capacity needs; and the availability of alternate methods of financing.

     We anticipate that our current cash and cash equivalents, short-term investments and funding to be received from customers, collaborators and licensees will enable us to maintain our currently planned operations for at least the next 12 months. Changes to our current operating plan may require us to consume available capital resources significantly sooner than we expect. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds. We do not know if we will be able to raise sufficient additional capital on acceptable terms, or at all. If we raise additional capital by issuing equity or convertible

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debt securities, our existing stockholders may experience substantial dilution. If we are unable to obtain adequate funds on reasonable terms, we may have to curtail operations significantly or to obtain funds by entering into financing or collaborative agreements on unattractive terms.

Additional Business Risks

     Lynx’s business faces significant risks. These risks include those described below and may include additional risks of which Lynx is not currently aware or which Lynx currently does not believe are material. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. These risks should be read in conjunction with the other information set forth in this report.

We have a history of net losses, and we may not achieve or maintain profitability.

     We have incurred net losses each year since our inception in 1992, including net losses of approximately $6.7 million in 1999, $13.3 million in 2000 and $16.7 million in 2001. As of September 30, 2002, we had an accumulated deficit of approximately $95.9 million. Future net losses or profits will depend, in part, on the rate of growth, if any, in our revenues and on the level of our expenses. Our research and development expenditures and general and administrative costs have exceeded our revenues to date. Research and development expenses may increase due to planned spending for ongoing technology development and implementation, as well as new applications. As a result, we will need to generate significant additional revenues to achieve profitability. Even if we do increase our revenues and achieve profitability, we may not be able to sustain profitability.

     Our ability to generate revenues and achieve profitability depends on many factors, including:

• our ability to continue existing customer relationships and enter into additional corporate collaborations and agreements;

• our ability to discover genes and targets for drug discovery;

• our ability to expand the scope of our research into new areas of pharmaceutical, biotechnology and agricultural research;

• our collaborators’ ability to develop diagnostic and therapeutic products from our drug discovery targets; and

• the successful clinical testing, regulatory approval and commercialization of such products.

     The time required to reach profitability is highly uncertain. We may not achieve profitability on a sustained basis, if at all.

We will need additional funds in the future, which may not be available to us.

     We have invested significant capital in our scientific and business development activities. Our future capital requirements will be substantial if we expand our operations and will depend on many factors, including:

• the progress and scope of our collaborative and independent research and development projects;

• payments received under agreements with customers, collaborators and licensees;

• our ability to establish and maintain arrangements with customers, collaborators and licensees;

• the progress of the development and commercialization efforts under our collaborations and corporate agreements;

• the costs associated with obtaining access to samples and related information; and

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

     We anticipate that our current cash and cash equivalents, short-term investments and funding to be received from customers, collaborators and licensees will enable us to maintain our currently planned operations for at least the next 12 months. Changes to our current operating plan may require us to consume available capital resources significantly sooner than we expect. If our capital

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resources are insufficient to meet future capital requirements, we will have to raise additional funds. We do not know if we will be able to raise sufficient additional capital on acceptable terms, or at all. If we raise additional capital by issuing equity or convertible debt securities, our existing stockholders may experience substantial dilution. If we fail to obtain adequate funds on reasonable terms, we may have to curtail operations significantly or obtain funds by entering into financing or collaborative agreements on unattractive terms.

Our technologies are new and unproven and may not allow our collaborators or us to identify genes, proteins or targets for drug discovery.

     You must evaluate us in light of the uncertainties and complexities affecting an early stage genomics and proteomics company. Our technologies are new and unproven. The application of these technologies is in too early a stage to determine whether it can be successfully implemented. These technologies assume that information about gene expression, protein expression and gene sequences may enable scientists to better understand complex biological processes. Our technologies also depend on the successful integration of independent technologies, each of which has its own development risks. Relatively few therapeutic products based on gene discoveries have been successfully developed and commercialized. Our technologies may not enable either our collaborators or us to identify genes, proteins or targets for drug discovery. To date, neither our collaborators nor we have identified any targets for drug discovery based on our technologies that have shown commercial viability.

We depend on our collaborations and will need to find additional collaborators in the future to develop and commercialize diagnostic or therapeutic products.

     Our strategy for the development and commercialization of our technologies and potential products includes entering into collaborations, subscription arrangements or licensing arrangements with pharmaceutical, biotechnology and agricultural companies. We do not have the resources to develop or commercialize diagnostic or therapeutic products on our own. If we cannot negotiate additional collaborative arrangements or contracts on acceptable terms, or at all, or such collaborations or relationships are not successful, we may never become profitable.

     We have derived substantially all of our revenues from corporate collaborations and agreements. Revenues from collaborations and related agreements depend upon continuation of the collaborations, the achievement of milestones and royalties derived from future products developed from our research and technologies. To date, we have received a significant portion of our revenues from a small number of customers, collaborators and licensees. For the nine months ended September 30, 2002, revenues from DuPont, Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.), Bayer CropScience (formerly Aventis CropScience) and Geron Corporation accounted for 37%, 12%, 14% and 20%, respectively, of our total revenues. For the year ended December 31, 2001, revenues from DuPont, BASF, Takara and the Institute of Molecular and Cell Biology accounted for 37%, 24%, 12% and 12%, respectively, of our total revenues. For the year ended December 31, 2000, revenues from DuPont, BASF and Bayer CropScience accounted for 51%, 29% and 11%, respectively, of our total revenues. If we fail to successfully achieve milestones or our collaborators fail to develop successful products, we will not earn the revenues contemplated under such collaborative agreements. If our customers, collaborators or licensees do not renew existing agreements, we lose one of these customers, collaborators or licensees and we do not attract new customers, collaborators or licensees or we are unable to enter into new agreements with customers, collaborators or licensees on commercially acceptable terms, our revenues may decrease, and our activities may fail to lead to commercialized products. Our dependence on collaborative arrangements with third parties subjects us to a number of risks. We have limited or no control over the resources that our collaborators may choose to devote to our joint efforts. Our collaborators may breach or terminate their agreements with us or fail to perform their obligations thereunder.

     Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or may fail to devote sufficient resources to the development, manufacture, marketing or sale of such products. While we do not currently compete directly with any of our collaborators, some of our collaborators could become our competitors in the future if they internally develop DNA or protein analysis technologies or if they acquire other genomics or proteomics companies and move into the genomics and proteomics industries. We will not earn the revenues contemplated under our collaborative arrangements if our collaborators:

• do not develop commercially successful products using our technologies;

• develop competing products;

• preclude us from entering into collaborations with their competitors;

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• fail to obtain necessary regulatory approvals; or

• terminate their agreements with us.

We depend on a sole supplier to manufacture flow cells used in our MPSS™ technology.

     Flow cells are glass plates that are micromachined, or fabricated to very precise, small dimensions, to create a grooved chamber for immobilizing microbeads in a planar microarray, which is a two-dimensional, dense ordered array of DNA samples. We use flow cells in our Massively Parallel Signature Sequencing, or MPSS™, technology. We currently purchase the flow cells used in our MPSS™ technology from a single supplier, although the flow cells are potentially available from multiple suppliers. While we believe that alternative suppliers for flow cells exist, identifying and qualifying new suppliers could be an expensive and time-consuming process. Our reliance on outside vendors involves several risks, including:

• the inability to obtain an adequate supply of required components due to manufacturing capacity constraints, a discontinuance of a product by a third-party manufacturer or other supply constraints;

• reduced control over quality and pricing of components; and

• delays and long lead times in receiving materials from vendors.

We operate in an intensely competitive industry with rapidly evolving technologies, and our competitors may develop products and technologies that make ours obsolete.

     The biotechnology industry is highly fragmented and is characterized by rapid technological change. In particular, the area of genomics and proteomics research is a rapidly evolving field. Competition among entities attempting to identify genes and proteins associated with specific diseases and to develop products based on such discoveries is intense. Many of our competitors have substantially greater research and product development capabilities and financial, scientific and marketing resources than we do.

     We face, and will continue to face, competition from pharmaceutical, biotechnology and agricultural companies, as well as academic research institutions, clinical laboratories and government agencies. Some of our competitors, such as Affymetrix, Inc., Celera Genomics Group, Incyte Genomics, Inc., Gene Logic, Inc., Genome Therapeutics Corporation and Hyseq, Inc., may be:

• attempting to identify and patent randomly sequenced genes and gene fragments and proteins;

• pursuing a gene identification, characterization and product development strategy based on positional cloning, which uses disease inheritance patterns to isolate the genes that are linked to the transmission of disease from one generation to the next; and

• using a variety of different gene and protein expression analysis methodologies, including the use of chip-based systems, to attempt to identify disease-related genes and proteins.

     In addition, numerous pharmaceutical, biotechnology and agricultural companies are developing genomics and proteomics research programs, either alone or in partnership with our competitors. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may make our technologies and future products obsolete.

     Any products developed through our technologies will compete in highly competitive markets. Our competitors may be more effective at using their technologies to develop commercial products. Further, our competitors may obtain intellectual property rights that would limit the use of our technologies or the commercialization of diagnostic or therapeutic products using our technologies. As a result, our competitors’ products or technologies may render our technologies and products, and those of our collaborators, obsolete or noncompetitive.

If we fail to adequately protect our proprietary technologies, third parties may be able to use our technology, which could affect us in the market.

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     Our success depends in part on our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting and defending their proprietary rights in foreign jurisdictions. We have applied and will continue to apply for patents covering our technologies, processes and products as and when we deem appropriate. However, third parties may challenge these applications, or these applications may fail to result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patents. In addition, our patents may be challenged or invalidated or fail to provide us with any competitive advantage.

     We also rely on trade secret protection for our confidential and proprietary information. However, trade secrets are difficult to protect. We protect our proprietary information and processes, in part, with confidentiality agreements with employees, collaborators and consultants. However, third parties may breach these agreements, and we may not have adequate remedies for any such breach or our trade secrets may still otherwise become known by our competitors. In addition, our competitors may independently develop substantially equivalent proprietary information.

Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize our technologies and products.

     Our commercial success depends in part on our ability to avoid infringing patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to our technologies. Other parties have filed, and in the future are likely to file, patent applications covering genes, gene fragments, proteins, the analysis of gene expression and protein expression and the manufacture and use of DNA chips or microarrays, which are tiny glass or silicon wafers on which tens of thousands of DNA molecules can be arrayed on the surface for subsequent analysis. We intend to continue to apply for patent protection for methods relating to gene expression and protein expression and for the individual disease genes and proteins and drug discovery targets we discover. If patents covering technologies required by our operations are issued to others, we may have to rely on licenses from third parties, which may not be available on commercially reasonable terms, or at all.

     Third parties may accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that use of such technologies infringes these patents. Regardless of their merit, such claims could require us to incur substantial costs, including the diversion of management and technical personnel, in defending ourselves against any such claims or enforcing our patents. In the event that a successful claim of infringement is brought against us, we may need to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, or at all. Defense of any lawsuit or failure to obtain any of these licenses could adversely affect our ability to develop and commercialize our technologies and products and thus prevent us from achieving profitability.

We have limited experience in sales and marketing and thus may be unable to further commercialize our technologies and products.

     Our ability to achieve profitability depends on attracting customers, collaborators and licensees for our technologies and products. There are a limited number of pharmaceutical, biotechnology and agricultural companies that are potential customers, collaborators and licensees for our technologies and products. To market our technologies and products, we must develop a sales and marketing group with the appropriate technical expertise. We may not successfully build such a sales force. If our sales and marketing efforts fail to be successful, our technologies and products may fail to gain market acceptance.

Our sales cycle is lengthy, and we may spend considerable resources on unsuccessful sales efforts or may not be able to enter into agreements on the schedule we anticipate.

     Our ability to obtain customers, collaborators and licensees for our technologies and products depends in significant part upon the perception that our technologies and products can help accelerate their drug discovery and genomics and proteomics efforts. Our sales cycle is typically lengthy because we need to educate our potential customers, collaborators and licensees and sell the benefits of our products to a variety of constituencies within such companies. In addition, we may be required to negotiate agreements containing terms unique to each customer, collaborator or licensee. We may expend substantial funds and management effort with no assurance

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that we will successfully sell our technologies and products. Actual and proposed consolidations of pharmaceutical companies have negatively affected, and may in the future negatively affect, the timing and progress of our sales efforts.

We may have difficulty managing our growth.

     We may experience significant growth in the number of our employees and the scope of our operations. This growth may place a significant strain on our management and operations. As our operations expand, we expect that we will need to manage additional relationships with various customers, collaborators and licensees, suppliers and other third parties. Our ability to manage our operations and growth effectively requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not successfully implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

The loss of key personnel or the inability to attract and retain additional personnel could impair the growth of our business.

     We are highly dependent on the principal members of our management and scientific staff. The loss of any of these persons’ services might adversely impact the achievement of our objectives and the continuation of existing collaborations and other agreements. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives and employees with technical expertise, and this shortage is likely to continue. As a result, competition for skilled personnel is intense and turnover rates are high. Competition for experienced scientists from numerous companies, academic and other research institutions may limit our ability to attract and retain such personnel. We depend on our President and Chief Executive Officer, Kevin P. Corcoran, the loss of whose services could have a material adverse effect on our business. Although we have an employment agreement with Mr. Corcoran in place, currently we do not maintain key person insurance for him or any other key personnel.

We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

     Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.

Ethical, legal and social issues may limit the public acceptance of, and demand for, our technologies and products.

     Our collaborators and customers may seek to develop diagnostic products based on genes or proteins we discover. The prospect of broadly available gene-based diagnostic tests raises ethical, legal and social issues regarding the appropriate use of gene-based diagnostic testing and the resulting confidential information. It is possible that discrimination by third-party payors, based on the results of such testing, could lead to the increase of premiums by such payors to prohibitive levels, outright cancellation of insurance or unwillingness to provide coverage to individuals showing unfavorable gene expression profiles. Similarly, employers could discriminate against employees with gene expression profiles indicative of the potential for high disease-related costs and lost employment time. Finally, government authorities could, for social or other purposes, limit or prohibit the use of such tests under certain circumstances. These ethical, legal and social concerns about genetic testing and target identification may delay or prevent market acceptance of our technologies and products.

     Although our technology does not depend on genetic engineering, genetic engineering plays a prominent role in our approach to product development. The subject of genetically modified food has received negative publicity, which has aroused public debate. Adverse publicity has resulted in greater regulation internationally and trade restrictions on imports of genetically altered agricultural products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes and prevent genetically engineered products from gaining public acceptance. The commercial success of our future products may depend, in part, on public acceptance of the use of genetically engineered products, including drugs and plant and animal products.

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If we develop products with our collaborators, and if product liability lawsuits are successfully brought against us, we could face substantial liabilities that exceed our resources.

     We may be held liable, if any product we develop with our collaborators causes injury or is otherwise found unsuitable during product testing, manufacturing, marketing or sale. Although we have general liability and product liability insurance, this insurance may become prohibitively expensive or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or to otherwise protect us against potential product liability claims could prevent or inhibit our ability to commercialize products developed with our collaborators.

Healthcare reform and restrictions on reimbursements may limit our returns on diagnostic or therapeutic products that we may develop with our collaborators.

     If we successfully validate targets for drug discovery, products that we develop with our collaborators based on those targets may include diagnostic or therapeutic products. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for the cost of these products will be available from government health administration authorities, private health insurers and other organizations. In the U.S., third-party payors are increasingly challenging the price of medical products and services. The trend towards managed healthcare in the U.S., legislative healthcare reforms and the growth of organizations such as health maintenance organizations that may control or significantly influence the purchase of healthcare products and services, may result in lower prices for any products our collaborators may develop. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. If adequate third-party coverage is not available in the future, our collaborators may fail to maintain price levels sufficient to realize an appropriate return on their investment in research and product development.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operation.

     Our facilities are located near known earthquake fault zones and are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research, development and production activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.

Our stock price may be extremely volatile.

     We believe that the market price of our common stock will remain highly volatile and may fluctuate significantly due to a number of factors. The market prices for securities of many publicly-held, early-stage biotechnology companies have in the past been, and can in the future be expected to be, especially volatile. For example, during the two-year period from September 30, 2000 to September 30, 2002, the closing sales price of our common stock as quoted on the Nasdaq National Market fluctuated from a low of $0.42 to a high of $31.25 per share. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The following factors and events may have a significant and adverse impact on the market price of our common stock:

• fluctuations in our operating results;

• announcements of technological innovations or new commercial products by us or our competitors;

• release of reports by securities analysts;

• failure to maintain the Nasdaq National Market listing requirements;

• developments or disputes concerning patent or proprietary rights;

• developments in our relationships with current or future collaborators or customers; and

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• general market conditions.

     Many of these factors are beyond our control. These factors may cause a decrease in the market price of our common stock, regardless of our operating performance.

If we are unable to maintain our Nasdaq National Market listing, the liquidity of our common stock would be seriously impaired and we would become subject to various statutory requirements, which would likely harm our business.

     On September 12, 2002, we received a letter from Nasdaq advising us that our common stock had not met Nasdaq's minimum bid price requirement for 30 consecutive trading days and that, if we were unable to demonstrate compliance with this requirement during the 90 calendar days ending December 9, 2002, our common stock may be subject to delisting from the Nasdaq National Market. If we are unable to meet the Nasdaq National Market requirements, at the discretion of Nasdaq our common stock may be transferred to the Nasdaq SmallCap Market. Transferring to the Nasdaq SmallCap Market would provide us with an additional grace period to satisfy the minimum bid price requirement; however, we would nevertheless be subject to certain adverse consequences described below. In addition, in such event we would still be required to satisfy various listing maintenance standards for our common stock to be quoted on the Nasdaq SmallCap Market, including the minimum bid price requirement after expiration of any grace periods. If we fail to meet such standards, our common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter bulletin board, commonly referred to as the "pink sheets." Such alternatives are generally considered as less efficient markets and would seriously impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could materially harm our business.

     If we are delisted from the Nasdaq National Market, we will face a variety of legal and other consequences that will likely negatively affect our business including, without limitation, the following:

• we may lose our exemption from the provisions of Section 2115 of the California Corporations Code which imposes aspects of California corporate law on certain non-California corporations operating within California. As a result, (i) our stockholders would be entitled to cumulative voting, and (ii) we would be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters' rights in connection with certain strategic transactions;

• the state securities law exemptions available to us would be more limited and, as a result, future issuances of our securities may require time-consuming and costly registration statements and qualifications;

• due to the application of different securities law exemptions and provisions, we may be required to amend our stock option and stock purchase plans and comply with time-consuming and costly administrative procedures;

• the coverage of Lynx by securities analysts may decrease or cease entirely; and

• we may lose current or potential investors.

Anti-takeover provisions in our charter documents and under Delaware law may make it more difficult to acquire us or to effect a change in our management, even though an acquisition or management change may be beneficial to our stockholders.

     Under our certificate of incorporation, our board of directors has the authority, without further action by the holders of our common stock, to issue 2,000,000 additional shares of preferred stock from time to time in series and with preferences and rights as it may designate. These preferences and rights may be superior to those of the holders of our common stock. For example, the holders of preferred stock may be given a preference in payment upon our liquidation or for the payment or accumulation of dividends before any distributions are made to the holders of common stock.

     Any authorization or issuance of preferred stock, while providing desirable flexibility in connection with financings, possible acquisitions and other corporate purposes, could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock or making it more difficult to remove directors and effect a change in management. The preferred stock may have other rights, including economic rights senior to those of our common stock, and, as a result, an issuance of additional preferred stock could lower the market value of our common stock. Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short-Term Investments

     The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high-quality debt securities. Lynx’s investments in debt securities are subject to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, Lynx invests in short-term securities and maintains an average maturity of less than one year. As a result, we believe that we are not subject to significant interest rate risks.

Foreign Currency Rate Fluctuations

     The functional currency for our German subsidiaries is the Euro. Our German subsidiaries’ accounts are translated from the Euro to the U.S. dollar using the current exchange rate in effect at the balance sheet date, for balance sheet accounts, and using the average exchange rate during the period, for revenues and expense accounts. The effects of translation are recorded as a separate component of stockholders’ equity and, to date, have not been material. Our German subsidiaries conduct their business in local European currencies. Exchange gains and losses arising from these transactions are recorded using the actual exchange differences on the date of the transaction. We have not taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts, with respect to transactions with our German subsidiaries or transactions with our European collaborators and customers.

Item 4. Controls and Procedures

     Our chief executive officer and chief financial officer have concluded that Lynx’s disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-14(c)) are sufficiently effective to ensure that the information required to be disclosed by Lynx in the reports we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness, based on an evaluation of such controls and procedures conducted within 90 days prior to the date hereof.

     There have been no significant changes in Lynx’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in Lynx’s internal controls. Accordingly, no corrective actions were required or undertaken.

     Lynx’s management, including the chief financial officer and chief executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Lynx have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

19

PART II OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 2. Changes in Securities and Use of Proceeds

     On September 25, 2002, Lynx sold 2,040,816 newly issued shares of our common stock at a purchase price of $0.49 per share to Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.) (“Takara”) in a private placement, for an aggregate purchase price of approximately $1.0 million. Lynx issued the shares of common stock in connection with the Collaboration Agreement, dated as of October 1, 2000, with Takara and in reliance upon an exemption from the registration requirements of the Securities Act by virtue of Section 4(2) thereof and Regulation D promulgated thereunder.

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

At Lynx’s 2002 Annual Meeting of Stockholders held on September 25, 2002, Lynx stockholders voted on the following matters:

Proposal I — The following eight directors were each elected for a one-year term expiring at Lynx’s 2003 Annual Meeting of Stockholders:

Nominee	Votes For		Votes Withheld
Craig C. Taylor		20,088,205		488,882
Kevin P. Corcoran		19,605,082		972,005
Sydney Brenner, M.B., D. Phil		20,211,696		365,391
Leroy Hood, M.D., Ph.D.		20,215,191		361,896
James C. Kitch		20,087,798		489,289
Marc D. Kozin		20,391,920		185,167
David C. U’Prichard, Ph.D.		20,212,057		365,030
Richard P. Woychik, Ph.D.		19,600,818		976,269

Proposal II — Approval of Lynx’s 1992 Stock Option Plan, as amended, to increase the aggregate number of shares of common stock available for issuance under such plan by 600,000 shares:

Votes For	Votes Against		Abstentions		Broker Non- Votes
20,045,405		509,006		22,676		0

Proposal III — Ratification of the selection of Ernst & Young LLP as Lynx’s independent auditors for the fiscal year ended December 31, 2002:

Votes For	Votes Against		Abstentions		Broker Non-Votes
20,417,488		148,008		11,591		0

Item 5. Other Information

     None

20

Item 6. Exhibits and Reports on Form 8-K.

a) Exhibits — The following documents are filed as Exhibits to this report:

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to the indicated exhibit of the Company’s Form 10-Q for the period ended June 30, 2000.
3.2	Bylaws of the Company, as amended, incorporated by reference to the indicated exhibit of the Company’s Form 10-Q for the period ended June 30, 2000.
10.7.5*	Fifth Amendment to Technology Development and Services Agreement, dated as of September 30, 2002, by and between the Company and Bayer CropScience GmbH.
10.33	Common Stock Purchase Agreement, dated as of September 25, 2002, by and between the Company and Takara Bio Inc.
10.34	Loan and Security Agreement, dated October 23, 2002, by and between the Company and Comerica Bank-California.
99.1 **	Certification by the Chief Executive Officer and the Chief Financial Officer of Lynx Therapeutics, Inc. as required by Section 906 of the Sarbanes-Oxley Act of 2002, dated November 13, 2002.

*	Confidential treatment requested as to specific portions of this agreement, which portions are omitted and filed separately with the Securities and Exchange Commission.
**	This certification accompanies this Quarterly Report on Form 10-Q and shall not be deemed “filed” by Lynx for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

b) Reports on Form 8-K — No Current Reports on Form 8-K were filed during the quarter ended September 30, 2002.

21

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LYNX THERAPEUTICS, INC.
		/s/ Kevin P. Corcoran
	By:	Kevin P. Corcoran President and Chief Executive Officer
Date: November 13, 2002
		/s/ Edward C. Albini
	By:	Edward C. Albini Chief Financial Officer (Principal Financial and Accounting Officer)
Date: November 13, 2002

22

CERTIFICATIONS

I, Kevin P. Corcoran, Chief Executive Officer of Lynx Therapeutics, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lynx Therapeutics, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ Kevin P. Corcoran

Kevin P. Corcoran
Chief Executive Officer

23

I, Edward C. Albini, Chief Financial Officer of Lynx Therapeutics, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lynx Therapeutics, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002
	/s/ Edward C. Albini
	Edward C. Albini Chief Financial Officer

24

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to the indicated exhibit of the Company’s Form 10-Q for the period ended June 30, 2000.
3.2	Bylaws of the Company, as amended, incorporated by reference to the indicated exhibit of the Company’s Form 10-Q for the period ended June 30, 2000.
10.7.5*	Fifth Amendment to Technology Development and Services Agreement, dated as of September 30, 2002, by and between the Company and Bayer CropScience GmbH.
10.33	Common Stock Purchase Agreement, dated as of September 25, 2002, by and between the Company and Takara Shuzo Co., Ltd.
10.34	Loan and Security Agreement, dated October 23, 2002, by and between the Company and Comerica Bank-California.
99.1 **	Certification by the Chief Executive Officer and the Chief Financial Officer of Lynx Therapeutics, Inc. as required by Section 906 of the Sarbanes-Oxley Act of 2002, dated November 13, 2002.

*	Confidential treatment requested as to specific portions of this agreement, which portions are omitted and filed separately with the Securities and Exchange Commission.
**	This certification accompanies this Quarterly Report on Form 10-Q and shall not be deemed “filed” by Lynx for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

25 EX-10.7.5 3 f85536exv10w7w5.txt EXHIBIT 10.7.5 EXHIBIT 10.7.5 FIFTH AMENDMENT TO TECHNOLOGY DEVELOPMENT AND SERVICES AGREEMENT This Fifth Amendment to Technology Development and Services Agreement (the "FIFTH AMENDMENT") is made and entered into as of September 30, 2002, but shall be effective on July 1, 2002 (the "AMENDMENT EFFECTIVE DATE"), by LYNX THERAPEUTICS, INC., a Delaware corporation, for itself and its majority-owned subsidiaries, including SPECTRAGEN, INC., (collectively, "LYNX"), and BAYER CROPSCIENCE GMBH, a German corporation ("BAYER CropScience"). Lynx and Bayer CropScience are sometimes referred to herein individually as a "PARTY" and collectively as the "PARTIES." RECITALS A. The Parties hereto (or their predecessors) previously entered into the certain Technology Development and Services Agreement dated October 2, 1995 as amended by the First Amendment to Technology Development and Services Agreement dated September 1, 1997, the Amended and Restated First Amendment to Technology Development and Services dated May 1, 1998, the Second Amendment to Technology Development and Services Agreement dated March 1, 1999 (the "SECOND AMENDMENT"), the Third Amendment to Technology Development and Services Agreement dated December 1, 1999, the letter agreement dated March 16, 2001, the letter agreement dated November 8, 2001, the letter agreement dated December 13, 2001, and the Fourth Amendment to Technology Development and Services Agreement dated March 31, 2002 (the "FOURTH AMENDMENT")(collectively, as amended, the "ORIGINAL AGREEMENT"). B. Hoechst Aktiengesellschaft and its subsidiary, Hoechst Marion Roussel, Inc. ("HMRI"), were original parties to the Agreement. Hoechst Aktiengesellschaft subsequently assigned the Agreement to HMRI and HMRI's affiliates. One of HMRI's affiliates, Hoechst Schering AgrEvo GmbH ("AgrEvo"), was added as a party to the Original Agreement under the Second Amendment. As of December 15, 1999, HMRI and AgrEvo changed their names to Aventis Pharmaceuticals, Inc. and Aventis CropScience GmbH, respectively. In June 2002, Bayer AG acquired Aventis CropScience GmbH, and Aventis CropScience GmbH survived such merger as a wholly owned subsidiary of Bayer AG, which subsidiary was renamed Bayer CropScience GmbH. C. Under Section 5.1 of the Original Agreement, the Original Agreement [*] a subscription for Lynx's Analysis services. D. The Parties desire to modify the financial terms applicable to Lynx's performance of genetic analysis services using the [*] Technology for Bayer CropScience, as well as the [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. royalties payable by Lynx to Bayer CropScience on the revenues resulting from the sale of products or services using or incorporating the [*] Technology or the grant of licenses under the [*] Technology to third parties. NOW THEREFORE, in consideration of the foregoing premises and the covenants and promises contained in this Amendment, the Parties hereby agree that the Original Agreement shall be amended, effective as of the Amendment Effective Date, as provided below: 1. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Original Agreement. 2. Each reference in the Original Agreement to "Hoechst Schering AgrEvo GmbH" and "Aventis CropScience GmbH" shall be replaced by "Bayer CropScience GmbH 3. Each reference in the Original Agreement to "AgrEvo" and "CropScience" shall be replaced by "Bayer CropScience". 4. Section 2.3 of the Original Agreement as amended shall be amended as follows: (a) "Aventis CropScience N.V." in the first paragraph is replaced by "Bayer BioScience N.V."; (b) The first sentence of the second paragraph is amended as follows: "In consideration of this license grant, Lynx agrees to pay to Bayer CropScience a royalty of [*] of Net Profits received during the first [*] years after Product Launch, which royalty shall thereafter be decreased to [*] of Net Profits on the [*] of Product Launch, and the royalty rate [*] for the remainder of the term of this Agreement." (c) "Aventis CropScience N.V." in the fourth paragraph is replaced by "Bayer BioScience N.V." 5. Section 2.4 of the Original Agreement shall be deleted in its entirety. Bayer CropScience shall not [*] to Lynx upon Product Launch. 6. Section 3.9 of the Original Agreement as amended shall be deleted in its entirety and replaced with the following: "3.9 CREDITS FOR [*] TECHNOLOGY SERVICES. The Parties acknowledge that Bayer CropScience or its predecessors-in-interest have made payments to Lynx totaling [*] United States Dollars (US [*]) under the Original Agreement, which payments are advance payments for the performance by Lynx of genetic analyses of biological samples provided by Bayer CropScience or its predecessors-in-interest. As of June 30, 2002, Lynx has performed genetic analyses using the [*] Technology ("[*] ANALYSES") and other genetic analyses of biological samples for Bayer CropScience having a total Value of [*] U.S. Dollars, and thus, as of June 30, 2002, Bayer CropScience has a remaining credit of [*] U.S. Dollars to be applied against the Value of future services under the [*] Development Plan ("[*] [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 2 of 4 SERVICES") and [*] Analyses to be performed by Lynx ("CREDIT"). On the first day of each calendar [*] prior to [*], a flat fee of [*] U.S. Dollars shall be charged against the Credit as an advance payment for [*] Services and [*] Analyses to be performed by Lynx during such calendar [*]. The Parties acknowledge and agree that, regardless of the amount of [*] Services and [*] Analyses actually performed by Lynx in such calendar [*], the aggregate Value of such [*] Services and [*] Analyses performed in such calendar [*] shall be deemed to be [*] U.S. Dollars. If Product Launch does not occur by [*], Lynx shall complete the development of the [*] Technology under the [*] Development Plan at its sole cost and expense. As of [*], Bayer CropScience shall have a remaining Credit in the amount of [*] U.S. Dollars, which amount shall be for the performance by Lynx of at least [*] Analyses for Bayer CropScience within [*] years after the date of Product Launch. For the avoidance of doubt, the Parties hereby expressly agree that Bayer CropScience shall never have to pay more than the remaining Credit of [*] U.S. Dollars for these [*] Analyses and that in the event the remaining Credit of [*] U.S. Dollars is not exhausted after such [*] Analyses, the Credit can be further used by Bayer CropScience and its Affiliates for additional [*] Analysis. Lynx shall perform [*] Analyses for Bayer CropScience and its affiliates on such terms and conditions to be agreed upon by the Parties, provided that in no event shall Lynx charge Bayer CropScience and its affiliates more than the lesser of (a) the cost charged by Lynx to third parties for the performance of similar assays, or (b) [*] times Lynx's fully-burdened cost of performing the [*] Analysis." 7. Section 9 of the Fourth Amendment shall be amended as follows: "The term of this Amendment shall be for five (5) years from the first date written above and extendable upon mutual agreement and upon extension of the Original Agreement. However, even after expiration of this Amendment, at first written request of Bayer CropScience, Lynx shall render services with respect to the [*] Technology to CropScience and its affiliates under terms and conditions to be agreed upon by the Parties, provided that in no event shall Lynx charge Bayer CropScience and its affiliates more than the lesser of (a) the costs charged by Lynx to third parties for the performance of similar assays, or (b) [*] times Lynx' fully-burdened cost of performing the [*] Analysis." 8. Except as amended hereby, the Original Agreement shall remain in full force and effect. 9. This Amendment may be executed in one or more counterparts, each of which shall be an original, and all of which shall constitute together the same document. [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3 of 4 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first written above. LYNX THERAPEUTICS, INC. BAYER CROPSCIENCE GMBH By: /s/ Kevin P. Corcoran By: /s/ Volkert Sjut ---------------------------------- ----------------------------------- Printed Name: Kevin P. Corcoran Printed Name: Volkert Sjut ------------------------ ------------------------- Title: President and CEO Title: Managing Director ------------------------------- -------------------------------- By: /s/ Gunther Faldie ----------------------------------- Printed name: Gunther Faldie ------------------------- Title: General Counsel -------------------------------- 4 of 4 EX-10.33 4 f85536exv10w33.txt EXHIBIT 10.33 Exhibit 10.33 ================================================================================ COMMON STOCK PURCHASE AGREEMENT between LYNX THERAPEUTICS, INC., a Delaware corporation and TAKARA SHUZO CO., LTD., a Japanese corporation --------------- Dated as of September 25, 2002 --------------- ================================================================================ SECTION 1. SALE AND ISSUANCE OF SHARES....................................1 1.1 Sale and Issuance of Shares....................................1 1.2 Payment of Purchase Price......................................1 1.3 Transfer Taxes.................................................1 SECTION 2. CLOSING; DELIVERY..............................................2 SECTION 3. REPRESENTATIONS AND WARRANTIES OF COMPANY......................2 3.1 Organization, Good Standing and Qualification..................2 3.2 Authorization..................................................2 3.3 Valid Issuance of Securities...................................2 3.4 Legal Proceedings and Orders...................................2 SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER....................3 4.1 Authorization..................................................3 4.2 Purchase Entirely for Own Account..............................3 4.3 Disclosure of Information......................................3 4.4 Restricted Securities..........................................3 4.5 No Public Market...............................................4 4.6 Legends........................................................4 4.7 Accredited Investor............................................4 SECTION 5. CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER TO CLOSE.......4 5.1 Accuracy of Representations and Warranties.....................4 5.2 Performance....................................................4 5.3 Shares Available...............................................4 SECTION 6. CONDITIONS TO OBLIGATION OF COMPANY TO CLOSE...................4 6.1 Accuracy of Representations and Warranties.....................5 6.2 Performance....................................................5 6.3 No Restraints..................................................5 SECTION 7. MISCELLANEOUS PROVISIONS.......................................5 7.1 Time of Essence................................................5 7.2 Further Actions................................................5 7.3 Publicity......................................................5 7.4 Governing Law..................................................5 7.5 Venue and Jurisdiction.........................................5 7.6 Notices........................................................5 A-1 7.7 Fees and Expenses..............................................6 7.8 Attorneys' Fees................................................6 7.9 Table of Contents and Headings.................................6 7.10 Successors and Assigns.........................................6 7.11 Severability...................................................6 7.12 Entire Agreement...............................................6 7.13 Waiver.........................................................6 7.14 Amendments.....................................................6 7.15 Corporate Securities Law.......................................7 7.16 Confidentiality................................................7 7.17 Interpretation of Agreement....................................7 A-2 COMMON STOCK PURCHASE AGREEMENT THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of September 25, 2002, by and between TAKARA SHUZO CO., LTD., a Japanese corporation having its principal office at SETA 3-4-1, Otsu, Shiga, 520-2193 JAPAN ("Purchaser"), and LYNX THERAPEUTICS, INC., a Delaware corporation, having its principal office at 25861 Industrial Blvd., Hayward, California, USA (the "Company"). RECITALS WHEREAS, Company and Purchaser have entered into that certain Collaboration Agreement effective as of the 1st day of October, 2000 (the "Collaboration Agreement") for the right to use the Company's proprietary technologies to manufacture, distribute and sell microarrays worldwide and to provide Megasort(TM) and MPSS(TM) services to customers in Japan, China and Korea; WHEREAS, the Company has authorized the sale and issuance of up to two million forty thousand eight hundred sixteen (2,040,816) shares of its common stock to purchase in a private placement; and WHEREAS, in connection with the Collaboration Agreement, the Company desires to issue and sell such shares of its common stock to Purchaser, and Purchaser desires to purchase such shares of Company's common stock on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the following mutual promises and covenants, the parties hereto agree as follows: AGREEMENT SECTION 1. SALE AND ISSUANCE OF STOCK 1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and conditions set forth in this Agreement and the Collaboration Agreement, on the Closing Date (as defined below), the Company agrees to sell and issue to Purchaser, and Purchaser agrees to purchase, the number of shares of the Company's common stock (the "Shares") determined by dividing the applicable One Million U.S. Dollars ($1,000,000) ("Purchase Price") by the current market price per share of the Company's common stock. The "current market price per share" shall be the average for ten (10) trading days immediately prior to September 25, 2002 of the average of the daily high and the daily low, as reported on the Nasdaq National Market or other nationally-recognized primary market on which the Company's common stock is traded. 1.2 PAYMENT OF PURCHASE PRICE. The Purchase Price is payable by Purchaser to the Company on the Closing Date by wire transfer of immediately available funds to an account or 1 accounts to be designated by the Company, or by bank certified or cashier's check made payable to the Company. 1.3 TRANSFER TAXES. Any transfer taxes, stamp duties, filing fees, registration fees, recordation expenses, escrow fees or other similar taxes, fees, charges or expenses incurred by the Company, Purchaser or any other party in connection with the purchase or in connection with any of the other transactions contemplated by this Agreement shall be borne and paid exclusively by the party incurring such expenses. SECTION 2. CLOSING; DELIVERY. The consummation of the transaction contemplated by this Agreement (the "Closing") shall be held on the date hereof ("Closing Date"). The Closing shall be held at the offices of Cooley Godward LLP, 3175 Hanover Street, Palo Alto, California 94306-2155 or at such other time or place as Purchaser and the Company may mutually agree. At the Closing, the Company shall cause to be issued to Purchaser a stock certificate, in the name of Purchaser, representing the Shares being purchased against receipt of the payment of the Purchase Price. The Company shall deliver such stock certificate to Purchaser at the Closing or promptly thereafter. SECTION 3. REPRESENTATIONS AND WARRANTIES OF COMPANY. The Company hereby represents, warrants and covenants to Purchaser as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as presently proposed to be conducted. The Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 3.2 AUTHORIZATION. All corporate action on the part of Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of Company hereunder and the authorization, issuance and delivery of the Shares has been taken or will be taken prior to the Closing, and this Agreement, when executed and delivered will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.3 VALID ISSUANCE OF COMMON STOCK. The Shares that are being purchased by Purchaser hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement and applicable state and federal securities laws. 2 3.4 LEGAL PROCEEDINGS AND ORDERS. There is no action, suit, proceeding or investigation ("Legal Proceeding") pending or threatened against the Company that questions the validity of this Agreement or the right of the Company to enter into this Agreement or to consummate the transactions contemplated hereby, nor is the Company aware of any basis for any of the forgoing. The Company is neither a party nor subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that would affect the ability of the Company to enter into this Agreement or to consummate the transactions contemplated hereby. SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents, warrants and covenants to the Company as follows: 4.1 AUTHORIZATION. Purchase has full power and authority to enter into this Agreement, and this Agreement, when executed and delivered, will constitute valid and legally binding obligations of Purchaser, enforceable in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief or other equitable remedies. 4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with Purchaser in reliance upon Purchaser's representation to the Company, which by Purchaser's execution of this Agreement Purchaser hereby confirms, that the Shares to be purchased by Purchaser will be acquired for investment for Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof. Purchaser has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, Purchaser further represents that Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares and Purchaser has not been formed for the specific purpose of acquiring the Shares. 4.3 RECEIPT OF INFORMATION. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs and the terms and conditions of the offering of the Shares with the Company's management and has had an opportunity to review the Company's facilities. Purchaser has also had an opportunity to ask questions of and receive answers from the Company regarding the terms and conditions of its investment. Purchaser understands that such discussions, as well as the written information issued by the Company, were intended to describe the aspects of the Company's business which it believes to be material. 4.4 RESTRICTED SECURITIES. Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed herein. Purchaser understands that the Shares are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, Purchaser must hold the Shares indefinitely unless they are registered with the 3 Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 4.5 LEGENDS. Purchaser understands that the Shares and any securities issued in respect of or exchange for the Shares, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." (b) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 4.6 ACCREDITED INVESTOR. Purchaser is either (a) an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Act or (b) not an accredited investor and neither such Investor nor any beneficiary of any trust or any investment client for whose account such Investor is purchasing is a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including but not limited to any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person"). 4.7 INVESTMENT EXPERIENCE. Purchaser is experienced in evaluating and investing in private placement transactions of securities of companies in a similar stage of development and acknowledges that Purchaser is able to fend for himself, herself or itself, can bear the economic risk of such investment and has such knowledge and experience in financial and business matters that Purchaser is capable of evaluating the merits and risks of the investment in the Shares. 4.8 FURTHER REPRESENTATION BY FOREIGN INVESTORS. If Purchaser is not a U.S. Person, Purchaser hereby represents that Purchaser is satisfied as to the full observance of the laws of Purchaser's jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (i) the legal requirements of Purchaser's jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale or transfer of the Shares. Purchaser's subscription and payment for, and Purchaser's continued beneficial ownership of, the Shares will not violate any applicable securities or other laws of Purchaser's jurisdiction. 4 SECTION 5. CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER TO CLOSE The obligation of Purchaser to purchase the Shares and otherwise consummate the transactions that are contemplated by this Agreement is subject to the satisfaction, as of the Closing Date, of the following conditions (any of which may be waived by Purchaser in whole or in part): 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company set forth in Section 3 shall be accurate and true in all material respects on and as of the Closing Date. 5.2 PERFORMANCE. All of the covenants and obligations that the Company is required to perform or to comply with pursuant to this Agreement, at or prior to the Closing, must have been duly performed and complied with in all material respects. 5.3 SHARES AVAILABLE. The Company shall have available under its Amended and Restated Certificate of Incorporation sufficient authorized shares of capital stock to issue and sell the Shares to Purchaser. SECTION 6. CONDITIONS TO OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to cause the Shares to be sold to Purchaser and otherwise consummate the transactions that are contemplated by this Agreement is subject to the satisfaction, as of the Closing Date, of the following conditions (any of which may be waived by Company in whole or in part): 6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchaser set forth in Section 4 shall be accurate and true in all material respects on and as of the Closing Date. 6.2 PERFORMANCE. All of the covenants and obligations that Purchaser is required to perform or to comply with pursuant to this Agreement, at or prior to the Closing, must have been duly performed and complied with in all material respects. 6.3 NO RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Purchase shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any law, rule, regulation, order, judgment or decree enacted or deemed applicable to the Purchase that makes consummation of the Purchase illegal. 6.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. SECTION 7. MISCELLANEOUS PROVISIONS 7.1 TIME OF ESSENCE. Time is of the essence of this Agreement. 5 7.2 FURTHER ACTIONS. The Company shall execute such agreements and other documents, and shall take such other actions, as Purchaser may reasonably request (prior to, at or after the Closing) for the purpose of ensuring that the transactions contemplated by this Agreement are carried out in full compliance with the provisions of all applicable laws and regulations. 7.3 PUBLICITY. No press release, publicity, disclosure or notice to any Person concerning any of the transactions contemplated by this Agreement shall be issued, given, made or otherwise disseminated at any time (whether prior to, at or after the Closing) without the prior written approval of the other party. 7.4 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely in California. 7.5 VENUE AND JURISDICTION. If any legal proceeding or other legal action relating to this Agreement is brought or otherwise initiated, the venue therefor shall be in California, which shall be deemed to be a convenient forum. Purchaser and the Company hereby expressly and irrevocably consent and submit to the jurisdiction of the courts in California. 7.6 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the addresses set forth on the signature page hereto or at such other address as the Company or Purchaser may designate by ten days advance written notice to the other parties thereto. 7.7 FEES AND EXPENSES. All fees, costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such fees, costs and expenses. 7.8 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 7.9 TABLE OF CONTENTS AND HEADINGS. The table of contents of this Agreement and the Section headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 7.10 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the respective successors, 6 assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.11 SEVERABILITY. In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7.12 ENTIRE AGREEMENT. This Agreement and the Collaboration Agreement referred to herein and therein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. This Agreement and the Collaboration Agreement are intended to define the full extent of the legally enforceable undertakings of the Company and Purchaser, and no promise or representation, whether written or oral, which is not set forth explicitly in this Agreement or the Collaboration Agreement is intended by either party to be legally binding. 7.13 WAIVER. No failure on the part of either party hereto to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of either party hereto in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver thereof; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 7.14 AMENDMENTS. This Agreement may not be amended, modified, altered or supplemented except by means of a written instrument executed on behalf of both Purchaser and the Company. 7.15 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 7.16 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not in any way divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other party to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of the Shares purchased hereunder. The provisions of this Section 7.16 shall be in addition to, and not in 7 substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 7.17 INTERPRETATION OF AGREEMENT. (a) Each party hereto acknowledges that it has participated in the drafting of this Agreement, and any applicable rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in connection with the construction or interpretation of this Agreement. (b) Whenever required by the context hereof, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." (d) References herein to "Sections" and "Schedules" are intended to refer to Sections of and Schedules to this Agreement. 8 IN WITNESS WHEREOF, each of the parties hereto has caused this Common Stock Purchase Agreement to be executed and delivered by its duly authorized officer on the date set forth above. ACCEPTED AND ACKNOWLEDGED BY PURCHASER: TAKARA SHUZO CO., LTD. By: /s/ Ikunoshin Kato -------------------------------------- Printed Name: Ikunoshin Kato ---------------------------- Title: President, Biomedical Group ----------------------------------- Address: SETA 3-4-1 --------------------------------- Otsu, Shiga, 520-2193 --------------------------------- JAPAN --------------------------------- ACCEPTED AND ACKNOWLEDGED BY THE COMPANY: LYNX THERAPEUTICS, INC. By: /s/ Edward C. Albini -------------------------------------- Printed Name: Edward C. Albini ---------------------------- Title: Chief Financial Officer ----------------------------------- Address: 25861 Industrial Boulevard --------------------------------- Hayward, CA 94545 --------------------------------- EX-10.34 5 f85536exv10w34.txt EXHIBIT 10.34 EXHIBIT 10.34 - -------------------------------------------------------------------------------- LYNX THERAPEUTICS, INC. LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- This LOAN AND SECURITY AGREEMENT is entered into as of October 23, 2002, by and between COMERICA BANK-CALIFORNIA ("Bank") and LYNX THERAPEUTICS, INC. ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards, or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other 1 agreement or arrangement designed to protect such Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Equipment Advance, or any other extension of credit by Bank for the benefit of Borrower hereunder. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "Equipment Advance" has the meaning set forth in Section 2.1(a). "Equipment Line" means a credit extension of up to Two Million Dollars ($2,000,000). "Equipment Maturity Date" means October 23, 2005. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Event of Default" has the meaning assigned in Article 8. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property" means all of Borrower's right, title, and interest in and to the following: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; 2 (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents or (iii) the value or priority of Bank's security interests in the Collateral. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. 3 "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness secured by a lien i) upon or in any equipment which was not financed by Bank acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition or (iii) any extensions, refinancings and renewals of items (i) and (ii), provided that (1) the lien is confined solely to the property so acquired and improvements thereon, and (2) such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness; (d) Subordinated Debt; (e) Indebtedness to trade creditors incurred in the ordinary course of Borrower's or a Subsidiary's business; (f) Extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be, and provided that such extension, refinancing, modification, amendment or restatement is permitted by any applicable subordination agreement; (g) Capital leases entered into in the ordinary course of Borrower's or a Subsidiary's business; (h) Indebtedness incurred as a result of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (i) Contingent Obligations of Borrower consisting of guarantees (and other credit support) of the obligations of vendors and suppliers of Borrower in respect of transactions entered into the in ordinary course of business, provided that such guarantees (and other credit support) shall not at any time exceed $100,000 in the aggregate; and (j) Indebtedness of a Subsidiary to Borrower incurred in the ordinary course of business. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank and (iv) Bank's money market accounts; 4 (c) Repurchases of stock from former employees or directors of Borrower under the terms of applicable repurchase agreement approved by Borrower's Board of Directors; (d) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (e) Investments not to exceed $200,000 in the aggregate in any fiscal year consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plan agreements approved by Borrower's Board of Directors; (f) Investments (whether consisting of the purchase of securities, loans, capital contributions or otherwise) by Borrower in Subsidiaries made in the ordinary course of business (provided that in no event, notwithstanding anything to the contrary in this Agreement, shall Borrower transfer any Collateral to a Subsidiary); (g) Investments consisting of notes receivable or, prepaid royalties and other credit extensions to customers and suppliers who are not Affiliates, in the ordinary course of business; (h) Investments in joint ventures or strategic alliances in the ordinary course of Borrower's business; (i) Investments not otherwise permitted under Section 7.7 which do not exceed $100,000 in the aggregate during the term of this Agreement; and (j) Investments permitted by Borrower's investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been approved by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens of materialmen, mechanics, warehousemen, carriers, artisan's or other similar Liens arising in the ordinary course of Borrower's business or by operation of law, which are not past due or which are being contested in good faith by appropriate proceedings and for which reserves have been established in accordance with GAAP; and (d) Leases, subleases, licenses and sublicenses granted to others in the ordinary course of business not interfering in any material respect in the conduct of the business of Borrower, and any interest or title of a lessor, sublessor, licensor or sublicensor or under any lease, sublease, license or sublicense. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. 5 "Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower. "Schedule" means the schedule of exceptions attached hereto and approved by Bank, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation, company or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock or other units of ownership which by the terms thereof has the ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT. 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. (a) Equipment Advances. (i) Subject to and upon the terms and conditions of this Agreement, at any time from the date hereof through October 23, 2003, Bank agrees to make advances (each an "Equipment Advance" and, collectively, the "Equipment Advances") to Borrower in an aggregate amount not to exceed Equipment Line. Each Equipment Advance shall not exceed one hundred percent (100%) of the invoice amount of the Equipment reasonably approved by Bank from time to time (which Borrower shall, in any case, have purchased within 90 days of the date of the corresponding Equipment Advance). Notwithstanding anything to the contrary contained herein, (i) the aggregate amount of all Equipment Advances used for the purchase of computer equipment shall not exceed Three Hundred Thousand Dollars ($300,000) during the term of this Agreement, and (ii) the aggregate amount of all Equipment Advances used to finance sales tax and installations costs shall not exceed Two Hundred Thousand Dollars ($200,000) during the term of this Agreement. On the Closing Date, Bank will finance an initial Equipment Advance for Equipment purchased up to five hundred seventy four (574) days prior to the Closing Date provided that Borrower provides Bank with copies of invoices for such equipment purchases on or prior to the Closing Date. (ii) Interest shall accrue on the initial Equipment Advance from the Closing Date at the rate specified in Section 2.2, and shall be payable monthly on the twenty third (23rd) day of each month so long as any Equipment Advances are outstanding. The initial Equipment Advance shall be payable in twenty-four (24) equal monthly installments of principal, plus all accrued interest, beginning on twenty third (23rd) day of the month immediately following the Closing Date, and continuing on the same day of each month thereafter through the Equipment Maturity Date, at which time all amounts owing under this Section 2.1(a) shall be immediately due and payable. The initial Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay the initial Equipment Advances without penalty or premium 6 (iii) Interest shall accrue from the date of each Equipment Advance at the rate specified in Section 2.2, and shall be payable monthly on the twenty third (23rd) day of each month so long as any Equipment Advances are outstanding. Any Equipment Advances that are outstanding on April 24, 2003, which were not part of the initial Equipment Advance, shall be payable in thirty (30) equal monthly installments of principal, plus all accrued interest, beginning on May 23, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date. Any Equipment Advances that are outstanding on October 24, 2003, which were not part of the initial Equipment Advance and which were not outstanding on April 24, 2003, shall be payable in twenty-four (24) equal monthly installments of principal, plus all accrued interest, beginning on November 23, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date, at which time all amounts owing under this Section 2.1(a) and any other amounts owing under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances without penalty or premium. (iv) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time three (3) Business Days before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit B. The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed. 2.2 Interest Rates, Payments, and Calculations. (a) Interest Rate - Equipment Advances. Except as set forth in Section 2.2(b), the Equipment Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to three percent (3.0%) above the Prime Rate. (b) Late Fee; Default Rate. If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, upon the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on the twenty third (23rd) calendar day of each month during the term hereof. Bank shall, at its option, and with written notice to Borrower in the ordinary course of business charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts maintained with the Bank or against the Equipment Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.3 Crediting Payments. Except when an Event of Default has occurred and is continuing, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. When an Event of Default occurs and is continuing, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the 7 contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.4 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. On the Closing Date, a Facility Fee equal to Ten Thousand Dollars ($10,000), which shall be nonrefundable; and (b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.5 Additional Costs. In case any change after the date hereof in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.6 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS. 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; 8 (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) a UCC financing statement (DE); (d) agreement to provide insurance; (e) payment of the fees and Bank Expenses then due specified in Section 2.4 hereof; (f) current financial statements of Borrower; and (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Subject to Permitted Liens, upon the due filing of appropriately completed financing statements with the applicable governing filing offices, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 Termination of Security Interest. Upon the payment in full of all amounts due under this Agreement and of all other Obligations and upon termination of Bank's obligation to make Credit Extensions to Borrower, Bank shall, at the cost and expense of Borrower, execute and deliver to Borrower all such documents and instruments that shall be necessary to evidence termination of this Agreement and the security interests created hereunder. 4.3 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the reasonable request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue the perfection of Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.4 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrower's Books and to make 9 copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any material agreement to which it is a party or by which it is bound. 5.3 No Prior Encumbrances. Borrower has good and marketable title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Accounts. To the best of Borrower's knowledge, all Accounts are bona fide existing obligations. Borrower has not received notice of actual or imminent Insolvency Proceedings of any material account debtor. 5.5 Merchantable Inventory. To the best of Borrower's knowledge, all Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made. 5.6 Intellectual Property. To the best of Borrower's knowledge, Borrower is the sole owner of the Intellectual Property, except for licenses granted by Borrower to its customers in the ordinary course of business. To the best of Borrower's knowledge, each of the Patents is valid and enforceable, and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property violates the rights of any third party. 5.7 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. All the Collateral is located only at the location set forth in Section 10 hereof. 5.8 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision would reasonably be expected to have a Material Adverse Effect, or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.9 No Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that Bank has received from Borrower fairly present in all material respects Borrower's financial condition as of the date thereof and Borrower's consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.10 Solvency, Payment of Debts. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 10 5.11 Regulatory Compliance. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA, and no event has occurred resulting from Borrower's failure to comply with ERISA that could result in Borrower's incurring any material liability. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which would reasonably be expected to have a Material Adverse Effect. 5.12 Environmental Condition. Except as disclosed in the Schedule, none of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law or where any such noncompliance would not reasonably be expected to have a Material Adverse Effect; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Borrower and each Subsidiary have filed or caused to be filed all material tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP. 5.14 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, the failure to obtain which would reasonably be expected to have a Material Adverse Effect. 5.16 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank under the circumstances when made contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. Bank recognizes that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which it is required under applicable law except where the failure to do so would not reasonably be expected to 11 cause a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which would reasonably be expected to have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver the following to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated balance sheet, income, and cash flow statement covering Borrower's consolidated operations during such period, prepared in accordance with GAAP (absent footnotes and subject to year-end adjustments), consistently applied, in a form reasonably acceptable to Bank and certified by a Responsible Officer; (b) within five (5) days after the filing of Borrower's Form 10-K with the Securities and Exchange Commission at the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission within five (5) days of relevant filing with Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that would reasonably be expected to result in damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrower in the ordinary course of business. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto. 6.4 [Intentionally Omitted.] 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof reasonably satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's business, ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof, and all 12 commercial general liability insurance policies shall show the Bank as an additional insured and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefore. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Accounts. Borrower shall maintain depository and operating accounts with Bank. 6.8 Liquidity. Borrower shall maintain at all times, measured as of the last day of each month, a balance of unrestricted cash which is greater than Borrower's Cash Burn, provided, however, this Section 6.8 shall be automatically deleted if Borrower provides Bank with evidence of Borrower's positive cash flow for six (6) consecutive monthly reporting periods. As used herein, "Cash Burn" shall mean the net change in Borrower's cash during the four months immediately preceding the date of measurement net of changes in debt, stock, paid-in capital and minority interests. 6.9 Minimum Cash Balance. Borrower shall maintain at all times, measured as of the last day of each month, a minimum balance of unrestricted cash and cash equivalents at Bank of at least Five Million Dollars ($5,000,000). 6.10 Protection of Intellectual Property Rights. Borrower shall use commercially reasonable efforts to (i) protect, defend and maintain the validity and enforceability of the material Trademarks, Patents and Copyrights and (ii) detect infringements of the material Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected. 6.11 Equipment Location. All Equipment financed by Bank, must have asset tags in form and substance acceptable to Bank, and shall remain located in the state of California at the address set forth in Section 10 of this Agreement. 6.12 Right of First Refusal. Borrower shall offer Bank a right of first refusal for all of Borrower's borrowing transactions, provided that Bank's terms are equal to or more favorable then other third party's terms. 6.13 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 7.1 Dispositions. Except for the sale of, merger or consolidation of Lynx GmbH with or into any other Person and the merger of Beteiligungsgesellschaft mbH into Axaron, convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or substantially all of its business or property, provided that in no event and notwithstanding anything to the contrary in this Agreement shall Borrower Transfer all or any portion of the Collateral. 7.2 Change in Business or Executive Office. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar, related or ancillary thereto (or incidental thereto); or cease to conduct business in the manner conducted by Borrower as of the Closing Date (other than the merger of Beteiligungsgesellschaft mbH into Axaron or the sale of, merger or consolidation of Lynx GmbH with or into any other Person); or without ten (10) days prior 13 written notification to Bank, relocate its chief executive office or state of incorporation or change its legal name; or without Bank's prior written consent, change the date on which its fiscal year ends. 7.3 Mergers or Acquisitions. Without the prior written consent of Bank, which will not be unreasonably withheld, merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except (A) where (i) the Borrower or Subsidiary, as applicable, is the surviving entity and (ii) no Event of Default has occurred, is continuing or would exist after giving effect to such transactions, (B) for the merger of Beteiligungsgesellschaft mbH into Axaron, or (C) the sale of, merger or consolidation of Lynx GmbH with or into any other Person. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness (and subject to Section 6.12). 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to (collectively, "Encumber") any of the Collateral, except for Permitted Liens; or Encumber its Intellectual Property, except in the ordinary course of Borrower's business. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, or permit any of its Subsidiaries to do so, except that (i) Borrower may repurchase the stock of former employees, consultants, or directors pursuant to stock repurchase agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase, and (ii) Borrower may make distributions payable solely in Borrower's capital stock and may convert any of its convertible securities into other equity securities pursuant to the terms of such convertible securities or otherwise in exchange therefor. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments and as permitted by Section 7.3; or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for (a) a merger or consolidation of Beteiligungsgesellschaft mbH into Axaron or (b) transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend in a manner adverse to the Bank any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 Collateral. Store any Collateral with a bailee, warehouseman, or other third party unless the third party has been notified of Bank's security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Collateral for Bank's benefit or (b) is in pledge possession of the warehouse receipt, where negotiable, covering such Collateral. Store or maintain any Collateral at a location other than the location set forth in Section 10 of this Agreement. 7.11 Compliance. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to 14 occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation would reasonably be expected to have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within fifteen (15) Business Days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) Business Day period or cannot after diligent attempts by Borrower be cured within such (15) Business Day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 Material Adverse Effect. If there occurs any circumstance or circumstances that would reasonably be expected to have a Material Adverse Effect; 8.4 Attachment. If any portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) Business Days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within forty-five (45) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default or other failure to perform in any agreement to which Borrower is a party or by which it is bound resulting in a right by a third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000); or which would reasonably be expected to have a Material Adverse Effect; 8.7 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) in excess of applicable insurance coverage (provided that a claim therefore has been tendered to and accepted by the applicable insurance carrier) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 15 8.8 Misrepresentations. If, as of the date a representation or warranty is made, any material misrepresentation or material misstatement exists now in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5, all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (d) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (e) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (f) Dispose of the Collateral by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (g) Bank may credit bid and purchase at any public sale any of the Collateral; and (h) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) endorse Borrower's name on any checks or other forms of payment or 16 security that may come into Bank's possession; (b) dispose of any Collateral; (c) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance as to Bank's status as loss payee relating to the Collateral or affecting Bank's status as additional insured; and (d) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.3 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions hereunder is terminated. 9.3 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under a loan facility in Section 2.1 as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.4 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices consistent with Section 9207 of the Code, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.5 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.6 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Lynx Therapeutics, Inc. 25861 Industrial Boulevard Hayward, CA 94545 Attn: Edward C. Albini, Chief Financial Officer FAX: (510) 670-9303 17 If to Bank: Comerica Bank-California 333 W. Santa Clara St. San Jose, CA 95113 Attn: Corporate Banking Center with a copy to: Comerica Bank-California 5 Palo Alto Square, Suite 800 3000 El Camino Real Attn: Jonathan Norris FAX: (650) 213-1710 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS. 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys' fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 18 12.5 Amendments in Writing, Integration. Neither this Agreement nor the Loan Documents can be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the Loan Documents, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions to Borrower. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 Confidentiality. In handling any confidential information Bank and all employees and agents of Bank, including but not limited to accountants, shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LYNX THERAPEUTICS, INC. By: /s/ Edward C. Albini -------------------------------- Title: Chief Financial Officer ----------------------------- COMERICA BANK-CALIFORNIA By: /s/ Jonathan Norris -------------------------------- Title: Vice President, Technology & Life Sciences Group ----------------------------- 19 DEBTOR LYNX THERAPEUTICS, INC. SECURED PARTY: COMERICA BANK-CALIFORNIA EXHIBIT A COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT All equipment of Borrower (herein referred to as "Borrower" or "Debtor") financed by Bank, as listed on Appendix I attached hereto, and any additional equipment financed by Bank (which financings shall be supported by a UCC filing including an appendix listing such equipment), wherever located, and including all accessions and additions thereto, and any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001. 20 Appendix I 21 EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM EQUIPMENT ADVANCES: DEADLINE FOR PROCESSING IS 3:00 P.M. PACIFIC TIME THREE (3) BUSINESS DAYS PRIOR TO ADVANCE DATE TO: TECHNOLOGY AND LIFE SCIENCES DIVISION DATE: ----------------- FAX #: 650-846-6840 ATTN: COMPLIANCE TIME: ----------------- - -------------------------------------------------------------------------------- FROM: LYNX THERAPEUTICS, INC. -------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ------------------------------------------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ----------------------------------------------------------- PHONE NUMBER: ------------------------------------------------------------------- FROM ACCOUNT # TO ACCOUNT # -------------------------- --------------------------

REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT - -------------------------- --------------------- $ ----------------------------- PRINCIPAL INCREASE (EQUIPMENT ADVANCE) E PRINCIPAL PAYMENT (ONLY) $ ----------------------------- INTEREST PAYMENT (ONLY) $ ----------------------------- PRINCIPAL AND INTEREST (PAYMENT) $ -----------------------------

OTHER INSTRUCTIONS: ------------------------------------------------------------- - -------------------------------------------------------------------------------- All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for an Equipment Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BANK USE ONLY - -------------------------------------------------------------------------------- TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. - ----------------------------------- ----------------------------------- Authorized Requester Phone # - ----------------------------------- ----------------------------------- Received By (Bank) Phone # --------------------------------------------- 22 Authorized Signature (Bank) - -------------------------------------------------------------------------------- 23 EXHIBIT C COMPLIANCE CERTIFICATE TO: COMERICA BANK-CALIFORNIA FROM: LYNX THERAPEUTICS, INC. The undersigned authorized officer of Lynx Therapeutics, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.

REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- ----------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 5 days of filing with SEC Yes No 10K and 10Q Within 5 days of filing with SEC Yes No Depository and operating accounts maintained with Bank Yes No

FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ ----------- --------- ------------ Maintain at all times, measured monthly: Liquidity * See below $________ Yes No Minimum Cash Balance (maintained with Bank) $5,000,000 $________ Yes No

Liquidity. Borrower shall maintain at all times, measured as of the last day of each month, a balance of unrestricted cash which is greater than Borrower's Cash Burn, provided, however, this Section 6.8 shall be automatically deleted if Borrower provides Bank with evidence of Borrower's positive cash flow for six (6) consecutive monthly reporting periods. As used herein, "Cash Burn" shall mean the net change in Borrower's cash during the four months immediately preceding the date of measurement net of changes in debt, stock, paid-in capital and minority interests. COMMENTS REGARDING EXCEPTIONS: See Attached. Sincerely, - ------------------------------------------------- SIGNATURE - ------------------------------------------------- TITLE - ------------------------------------------------- DATE - -------------------------------------------------------------------------------- BANK USE ONLY Received by: ------------------------------------- AUTHORIZED SIGNER Date: ------------------------------------------- Verified: --------------------------------------- AUTHORIZED SIGNER Date: -------------------------------------------- Compliance Status Yes No - -------------------------------------------------------------------------------- 24 SCHEDULE OF EXCEPTIONS Permitted Indebtedness (Section 1.1) Indebtedness owing to Transamerica Business Credit Corporation pursuant to that certain Master Loan and Security Agreement dated as of October 26, 1998, as amended from time to time. Permitted Investments (Section 1.1) Approximately 40% ownership in Axaron Bioscience AG (f.k.a., BASF-LYNX Bioscience AG), a joint venture company formed with BASF AG, located in Heidelberg, Germany ("Axaron"). 100% ownership in two foreign subsidiaries, (1) Lynx Therapeutics GmbH ("Lynx GmbH") and (2) Lynx Therapeutics Beteiligungsgesellschaft mbH ("Beteiligungsgesellschaft mbH"), both of which are German limited liability companies. Permitted Liens (Section 1.1) None. Prior Names (Section 5.7) None. Litigation (Section 5.8) None. 25 CORPORATE RESOLUTIONS TO BORROW - -------------------------------------------------------------------------------- BORROWER: LYNX THERAPEUTICS, INC. - -------------------------------------------------------------------------------- I, the undersigned Secretary or Assistant Secretary of LYNX THERAPEUTICS, INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation, as amended, and the Restated Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below:

NAMES POSITION ACTUAL SIGNATURES - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- ---------------------

acting for and on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents of the Corporation and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation. EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank that certain Loan and Security Agreement dated as of October 23, 2002 (the "Loan Agreement") and any other agreement entered into between Corporation and Bank in connection with the Loan Agreement, including any amendments, all as amended or extended from time to time (collectively, with the Loan Agreement, the "Loan Documents"), and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for the Loan Documents, or any portion thereof. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Documents, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Documents. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank 1 may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on October 23, 2002 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED AND ATTESTED BY: X ------------------------------ - -------------------------------------------------------------------------------- 2 COMERICA BANK-CALIFORNIA MEMBER FDIC ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS (TERM LOAN) Name(s): LYNX THERAPEUTICS, INC. Date: October 23, 2002 $ credited to deposit account No. ___________ when Equipment Advances are requested by Borrower Amounts paid to others on your behalf: $10,000 to Comerica Bank-California for Loan Fee $ to Comerica Bank-California for Document Fee $ to Bank counsel fees and expenses $ to _______________ $ to _______________ $ TOTAL (AMOUNT FINANCED) Upon consummation of this transaction, this document will also serve as the authorization for Comerica Bank-California to disburse the loan proceeds as stated above. - ---------------------------------- ---------------------------------- Signature Signature AGREEMENT TO PROVIDE INSURANCE TO: COMERICA BANK-CALIFORNIA Date: October 23, 2002 attn: Collateral Operations, M/C 4604 9920 South La Cienega Blvd, 14th Floor Inglewood, CA 90301 Borrower: LYNX THERAPEUTICS, INC. In consideration of a loan in the amount of Two Million Dollars ($2,000,000), secured by equipment financed by Bank. I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan. I/We also agree to advise the below named agent to add Comerica Bank-California as lender's loss payable on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies. I/We understand that the policy must contain: 1. Fire and extended coverage in an amount sufficient to cover: (a) The amount of the loan, OR (b) All existing encumbrances, whichever is greater, But not in excess of the replacement value of the improvements on the real property. 2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Comerica Bank-California, or any other form acceptable to Bank. INSURANCE INFORMATION Insurance Co./Agent Telephone No.: Agent's Address: Signature of Obligor: -------------------------- Signature of Obligor: -------------------------- - -------------------------------------------------------------------------------- FOR BANK USE ONLY INSURANCE VERIFICATION: Date: -------------------------- Person Spoken to: -------------------------------------- Policy Number: ----------------------------------------- Effective From: To: -------------------- ---------------- Verified by: ------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMERICA BANK-CALIFORNIA MEMBER FDIC AUTOMATIC DEBIT AUTHORIZATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To: COMERICA BANK-CALIFORNIA Re: LOAN # ----------------------------------- You are hereby authorized and instructed to charge account No. _________________________ in the name of LYNX THERAPEUTICS, INC. - -------------------------------------------------------------------------------- for principal and interest payments due on above referenced loan as set forth below and credit the loan referenced above. [ X ] Debit each interest payment as it becomes due according to the terms of the note and any renewals or amendments thereof. [ X ] Debit each principal payment as it becomes due according to the terms of the note and any renewals or amendments thereof. This Authorization is to remain in full force and effect until revoked in writing. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Borrower Signature Date - ---------------------------------- ---------------------------------- October 23, 2002 - ---------------------------------- ---------------------------------- - ---------------------------------- ---------------------------------- DEBTOR: LYNX THERAPEUTICS, INC. SECURED PARTY: COMERICA BANK-CALIFORNIA EXHIBIT A COLLATERAL DESCRIPTION ATTACHMENT TO UCC FINANCING STATEMENT All equipment of Borrower (herein referred to as "Borrower" or "Debtor") financed by Bank, as listed on Appendix I attached hereto, and any additional equipment financed by Bank (which financings shall be supported by a UCC filing including an appendix listing such equipment), wherever located, and including all accessions and additions thereto, and any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001. Appendix I EX-99.1 6 f85536exv99w1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), Kevin P. Corcoran, the Chief Executive Officer of Lynx Therapeutics, Inc. (the "Company"), and Edward C. Albini, the Chief Financial Officer of the Company, each hereby certifies that, to Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), Kevin P. Corcoran, the Chief Executive Officer of Lynx Therapeutics, Inc. (the "Company"), and Edward C. Albini, the Chief Financial Officer of the Company, each hereby certifies that, to his knowledge:his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the periods covered by the Periodic Report and the results of operations of the Company for the periods covered by the Periodic Report. This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. In Witness Whereof, the undersigned have set their hands hereto as of the 13th day of November, 2002. /s/ Kevin P. Corcoran /s/ Edward C. Albini - ---------------------------------- ---------------------------------------- Kevin P. Corcoran Edward C. Albini Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.7.5

                                                                  EXHIBIT 10.7.5


                               FIFTH AMENDMENT TO
                  TECHNOLOGY DEVELOPMENT AND SERVICES AGREEMENT


        This Fifth Amendment to Technology Development and Services Agreement
(the "FIFTH AMENDMENT") is made and entered into as of September 30, 2002, but
shall be effective on July 1, 2002 (the "AMENDMENT EFFECTIVE DATE"), by LYNX
THERAPEUTICS, INC., a Delaware corporation, for itself and its majority-owned
subsidiaries, including SPECTRAGEN, INC., (collectively, "LYNX"), and BAYER
CROPSCIENCE GMBH, a German corporation ("BAYER CropScience"). Lynx and Bayer
CropScience are sometimes referred to herein individually as a "PARTY" and
collectively as the "PARTIES."

                                    RECITALS

A.    The Parties hereto (or their predecessors) previously entered into the
      certain Technology Development and Services Agreement dated October 2,
      1995 as amended by the First Amendment to Technology Development and
      Services Agreement dated September 1, 1997, the Amended and Restated First
      Amendment to Technology Development and Services dated May 1, 1998, the
      Second Amendment to Technology Development and Services Agreement dated
      March 1, 1999 (the "SECOND AMENDMENT"), the Third Amendment to Technology
      Development and Services Agreement dated December 1, 1999, the letter
      agreement dated March 16, 2001, the letter agreement dated November 8,
      2001, the letter agreement dated December 13, 2001, and the Fourth
      Amendment to Technology Development and Services Agreement dated March 31,
      2002 (the "FOURTH AMENDMENT")(collectively, as amended, the "ORIGINAL
      AGREEMENT").

B.    Hoechst Aktiengesellschaft and its subsidiary, Hoechst Marion Roussel,
      Inc. ("HMRI"), were original parties to the Agreement. Hoechst
      Aktiengesellschaft subsequently assigned the Agreement to HMRI and HMRI's
      affiliates. One of HMRI's affiliates, Hoechst Schering AgrEvo GmbH
      ("AgrEvo"), was added as a party to the Original Agreement under the
      Second Amendment. As of December 15, 1999, HMRI and AgrEvo changed their
      names to Aventis Pharmaceuticals, Inc. and Aventis CropScience GmbH,
      respectively. In June 2002, Bayer AG acquired Aventis CropScience GmbH,
      and Aventis CropScience GmbH survived such merger as a wholly owned
      subsidiary of Bayer AG, which subsidiary was renamed Bayer CropScience
      GmbH.

C.    Under Section 5.1 of the Original Agreement, the Original Agreement [*] a
      subscription for Lynx's Analysis services.

D.    The Parties desire to modify the financial terms applicable to Lynx's
      performance of genetic analysis services using the [*] Technology for
      Bayer CropScience, as well as the


[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.



      royalties payable by Lynx to Bayer CropScience on the revenues resulting
      from the sale of products or services using or incorporating the [*]
      Technology or the grant of licenses under the [*] Technology to third
      parties.

NOW THEREFORE, in consideration of the foregoing premises and the covenants and
promises contained in this Amendment, the Parties hereby agree that the Original
Agreement shall be amended, effective as of the Amendment Effective Date, as
provided below:

1.  All capitalized terms used but not otherwise defined herein shall have the
    meanings ascribed to such terms in the Original Agreement.

2.  Each reference in the Original Agreement to "Hoechst Schering AgrEvo GmbH"
    and "Aventis CropScience GmbH" shall be replaced by "Bayer CropScience GmbH

3.  Each reference in the Original Agreement to "AgrEvo" and "CropScience" shall
    be replaced by "Bayer CropScience".

4.  Section 2.3 of the Original Agreement as amended shall be amended as
    follows:

    (a) "Aventis CropScience N.V." in the first paragraph is replaced by "Bayer
        BioScience N.V.";

    (b) The first sentence of the second paragraph is amended as follows:

        "In consideration of this license grant, Lynx agrees to pay to Bayer
        CropScience a royalty of [*] of Net Profits received during the first
        [*] years after Product Launch, which royalty shall thereafter be
        decreased to [*] of Net Profits on the [*] of Product Launch, and the
        royalty rate [*] for the remainder of the term of this Agreement."

    (c) "Aventis CropScience N.V." in the fourth paragraph is replaced by "Bayer
        BioScience N.V."


5.  Section 2.4 of the Original Agreement shall be deleted in its entirety.
    Bayer CropScience shall not [*] to Lynx upon Product Launch.

6.  Section 3.9 of the Original Agreement as amended shall be deleted in its
    entirety and replaced with the following:

    "3.9 CREDITS FOR [*] TECHNOLOGY SERVICES. The Parties acknowledge that Bayer
    CropScience or its predecessors-in-interest have made payments to Lynx
    totaling [*] United States Dollars (US [*]) under the Original Agreement,
    which payments are advance payments for the performance by Lynx of genetic
    analyses of biological samples provided by Bayer CropScience or its
    predecessors-in-interest. As of June 30, 2002, Lynx has performed genetic
    analyses using the [*] Technology ("[*] ANALYSES") and other genetic
    analyses of biological samples for Bayer CropScience having a total Value of
    [*] U.S. Dollars, and thus, as of June 30, 2002, Bayer CropScience has a
    remaining credit of [*] U.S. Dollars to be applied against the Value of
    future services under the [*] Development Plan ("[*]

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.


2 of 4

    SERVICES") and [*] Analyses to be performed by Lynx ("CREDIT"). On the first
    day of each calendar [*] prior to [*], a flat fee of [*] U.S. Dollars shall
    be charged against the Credit as an advance payment for [*] Services and [*]
    Analyses to be performed by Lynx during such calendar [*]. The Parties
    acknowledge and agree that, regardless of the amount of [*] Services and [*]
    Analyses actually performed by Lynx in such calendar [*], the aggregate
    Value of such [*] Services and [*] Analyses performed in such calendar [*]
    shall be deemed to be [*] U.S. Dollars. If Product Launch does not occur by
    [*], Lynx shall complete the development of the [*] Technology under the [*]
    Development Plan at its sole cost and expense. As of [*], Bayer CropScience
    shall have a remaining Credit in the amount of [*] U.S. Dollars, which
    amount shall be for the performance by Lynx of at least [*] Analyses for
    Bayer CropScience within [*] years after the date of Product Launch. For the
    avoidance of doubt, the Parties hereby expressly agree that Bayer
    CropScience shall never have to pay more than the remaining Credit of [*]
    U.S. Dollars for these [*] Analyses and that in the event the remaining
    Credit of [*] U.S. Dollars is not exhausted after such [*] Analyses, the
    Credit can be further used by Bayer CropScience and its Affiliates for
    additional [*] Analysis. Lynx shall perform [*] Analyses for Bayer
    CropScience and its affiliates on such terms and conditions to be agreed
    upon by the Parties, provided that in no event shall Lynx charge Bayer
    CropScience and its affiliates more than the lesser of (a) the cost charged
    by Lynx to third parties for the performance of similar assays, or (b) [*]
    times Lynx's fully-burdened cost of performing the [*] Analysis."

7.  Section 9 of the Fourth Amendment shall be amended as follows:

    "The term of this Amendment shall be for five (5) years from the first date
    written above and extendable upon mutual agreement and upon extension of the
    Original Agreement. However, even after expiration of this Amendment, at
    first written request of Bayer CropScience, Lynx shall render services with
    respect to the [*] Technology to CropScience and its affiliates under terms
    and conditions to be agreed upon by the Parties, provided that in no event
    shall Lynx charge Bayer CropScience and its affiliates more than the lesser
    of (a) the costs charged by Lynx to third parties for the performance of
    similar assays, or (b) [*] times Lynx' fully-burdened cost of performing the
    [*] Analysis."

8.  Except as amended hereby, the Original Agreement shall remain in full force
    and effect.

9.  This Amendment may be executed in one or more counterparts, each of which
    shall be an original, and all of which shall constitute together the same
    document.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.


3 of 4


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


LYNX THERAPEUTICS, INC.                   BAYER CROPSCIENCE GMBH




By:  /s/ Kevin P. Corcoran                By:  /s/ Volkert Sjut
   ----------------------------------        -----------------------------------

Printed Name:  Kevin P. Corcoran          Printed Name:  Volkert Sjut
             ------------------------                  -------------------------

Title:  President and CEO                 Title:  Managing Director
      -------------------------------           --------------------------------




                                          By:  /s/ Gunther Faldie
                                             -----------------------------------
                                          Printed name:  Gunther Faldie
                                                       -------------------------
                                          Title:  General Counsel
                                                --------------------------------


4 of 4

EX-10.33

                                                                  Exhibit 10.33
================================================================================



                         COMMON STOCK PURCHASE AGREEMENT

                                     between

                            LYNX THERAPEUTICS, INC.,
                             a Delaware corporation


                                       and



                             TAKARA SHUZO CO., LTD.,
                             a Japanese corporation










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

                         Dated as of September 25, 2002

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




================================================================================


                                                                       
SECTION 1.     SALE AND ISSUANCE OF SHARES....................................1

        1.1    Sale and Issuance of Shares....................................1

        1.2    Payment of Purchase Price......................................1

        1.3    Transfer Taxes.................................................1

SECTION 2.     CLOSING; DELIVERY..............................................2

SECTION 3.     REPRESENTATIONS AND WARRANTIES OF COMPANY......................2

        3.1    Organization, Good Standing and Qualification..................2

        3.2    Authorization..................................................2

        3.3    Valid Issuance of Securities...................................2

        3.4    Legal Proceedings and Orders...................................2

SECTION 4.     REPRESENTATIONS AND WARRANTIES OF PURCHASER....................3

        4.1    Authorization..................................................3

        4.2    Purchase Entirely for Own Account..............................3

        4.3    Disclosure of Information......................................3

        4.4    Restricted Securities..........................................3

        4.5    No Public Market...............................................4

        4.6    Legends........................................................4

        4.7    Accredited Investor............................................4

SECTION 5.     CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER TO CLOSE.......4

        5.1    Accuracy of Representations and Warranties.....................4

        5.2    Performance....................................................4

        5.3    Shares Available...............................................4

SECTION 6.     CONDITIONS TO OBLIGATION OF COMPANY TO CLOSE...................4

        6.1    Accuracy of Representations and Warranties.....................5

        6.2    Performance....................................................5

        6.3    No Restraints..................................................5

SECTION 7.     MISCELLANEOUS PROVISIONS.......................................5

        7.1    Time of Essence................................................5

        7.2    Further Actions................................................5

        7.3    Publicity......................................................5

        7.4    Governing Law..................................................5

        7.5    Venue and Jurisdiction.........................................5

        7.6    Notices........................................................5





                                      A-1


                                                                       
        7.7    Fees and Expenses..............................................6

        7.8    Attorneys' Fees................................................6

        7.9    Table of Contents and Headings.................................6

        7.10   Successors and Assigns.........................................6

        7.11   Severability...................................................6

        7.12   Entire Agreement...............................................6

        7.13   Waiver.........................................................6

        7.14   Amendments.....................................................6

        7.15   Corporate Securities Law.......................................7

        7.16   Confidentiality................................................7

        7.17   Interpretation of Agreement....................................7





                                       A-2


                         COMMON STOCK PURCHASE AGREEMENT


        THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is entered into
as of September 25, 2002, by and between TAKARA SHUZO CO., LTD., a Japanese
corporation having its principal office at SETA 3-4-1, Otsu, Shiga, 520-2193
JAPAN ("Purchaser"), and LYNX THERAPEUTICS, INC., a Delaware corporation, having
its principal office at 25861 Industrial Blvd., Hayward, California, USA (the
"Company").

                                    RECITALS

        WHEREAS, Company and Purchaser have entered into that certain
Collaboration Agreement effective as of the 1st day of October, 2000 (the
"Collaboration Agreement") for the right to use the Company's proprietary
technologies to manufacture, distribute and sell microarrays worldwide and to
provide Megasort(TM) and MPSS(TM) services to customers in Japan, China and
Korea;

        WHEREAS, the Company has authorized the sale and issuance of up to two
million forty thousand eight hundred sixteen (2,040,816) shares of its common
stock to purchase in a private placement; and

        WHEREAS, in connection with the Collaboration Agreement, the Company
desires to issue and sell such shares of its common stock to Purchaser, and
Purchaser desires to purchase such shares of Company's common stock on the terms
and conditions set forth in this Agreement.

        NOW, THEREFORE, in consideration of the foregoing recitals and the
following mutual promises and covenants, the parties hereto agree as follows:

                                    AGREEMENT

SECTION 1. SALE AND ISSUANCE OF STOCK

        1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and
conditions set forth in this Agreement and the Collaboration Agreement, on the
Closing Date (as defined below), the Company agrees to sell and issue to
Purchaser, and Purchaser agrees to purchase, the number of shares of the
Company's common stock (the "Shares") determined by dividing the applicable One
Million U.S. Dollars ($1,000,000) ("Purchase Price") by the current market price
per share of the Company's common stock. The "current market price per share"
shall be the average for ten (10) trading days immediately prior to September
25, 2002 of the average of the daily high and the daily low, as reported on the
Nasdaq National Market or other nationally-recognized primary market on which
the Company's common stock is traded.

        1.2 PAYMENT OF PURCHASE PRICE. The Purchase Price is payable by
Purchaser to the Company on the Closing Date by wire transfer of immediately
available funds to an account or



                                       1


accounts to be designated by the Company, or by bank certified or cashier's
check made payable to the Company.

        1.3 TRANSFER TAXES. Any transfer taxes, stamp duties, filing fees,
registration fees, recordation expenses, escrow fees or other similar taxes,
fees, charges or expenses incurred by the Company, Purchaser or any other party
in connection with the purchase or in connection with any of the other
transactions contemplated by this Agreement shall be borne and paid exclusively
by the party incurring such expenses.

SECTION 2. CLOSING; DELIVERY.

        The consummation of the transaction contemplated by this Agreement (the
"Closing") shall be held on the date hereof ("Closing Date"). The Closing shall
be held at the offices of Cooley Godward LLP, 3175 Hanover Street, Palo Alto,
California 94306-2155 or at such other time or place as Purchaser and the
Company may mutually agree. At the Closing, the Company shall cause to be issued
to Purchaser a stock certificate, in the name of Purchaser, representing the
Shares being purchased against receipt of the payment of the Purchase Price. The
Company shall deliver such stock certificate to Purchaser at the Closing or
promptly thereafter.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF COMPANY.

        The Company hereby represents, warrants and covenants to Purchaser as
follows:

        3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as presently proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing as a foreign corporation in each jurisdiction in which the failure to
so qualify would have a material adverse effect on its business or properties.

        3.2 AUTHORIZATION. All corporate action on the part of Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of Company
hereunder and the authorization, issuance and delivery of the Shares has been
taken or will be taken prior to the Closing, and this Agreement, when executed
and delivered will constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms, except
as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.

        3.3 VALID ISSUANCE OF COMMON STOCK. The Shares that are being purchased
by Purchaser hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
authorized and issued, fully paid and nonassessable and free of restrictions on
transfer other than restrictions on transfer under this Agreement and applicable
state and federal securities laws.



                                       2


        3.4 LEGAL PROCEEDINGS AND ORDERS. There is no action, suit, proceeding
or investigation ("Legal Proceeding") pending or threatened against the Company
that questions the validity of this Agreement or the right of the Company to
enter into this Agreement or to consummate the transactions contemplated hereby,
nor is the Company aware of any basis for any of the forgoing. The Company is
neither a party nor subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality that
would affect the ability of the Company to enter into this Agreement or to
consummate the transactions contemplated hereby.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER

        Purchaser hereby represents, warrants and covenants to the Company as
follows:

        4.1 AUTHORIZATION. Purchase has full power and authority to enter into
this Agreement, and this Agreement, when executed and delivered, will constitute
valid and legally binding obligations of Purchaser, enforceable in accordance
with their terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and any other laws of general
application affecting enforcement of creditors' rights generally, and as limited
by laws relating to the availability of a specific performance, injunctive
relief or other equitable remedies.

        4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
Purchaser in reliance upon Purchaser's representation to the Company, which by
Purchaser's execution of this Agreement Purchaser hereby confirms, that the
Shares to be purchased by Purchaser will be acquired for investment for
Purchaser's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof. Purchaser has no present intention
of selling, granting any participation in or otherwise distributing the same. By
executing this Agreement, Purchaser further represents that Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Shares and Purchaser has not been formed for
the specific purpose of acquiring the Shares.

        4.3 RECEIPT OF INFORMATION. Purchaser has had an opportunity to discuss
the Company's business, management and financial affairs and the terms and
conditions of the offering of the Shares with the Company's management and has
had an opportunity to review the Company's facilities. Purchaser has also had an
opportunity to ask questions of and receive answers from the Company regarding
the terms and conditions of its investment. Purchaser understands that such
discussions, as well as the written information issued by the Company, were
intended to describe the aspects of the Company's business which it believes to
be material.

        4.4 RESTRICTED SECURITIES. Purchaser understands that the Shares have
not been, and will not be, registered under the Securities Act of 1933, as
amended (the "Securities Act"), by reason of a specific exemption from the
registration provisions of the Securities Act, which depends upon, among other
things, the bona fide nature of the investment intent and the accuracy of
Purchaser's representations as expressed herein. Purchaser understands that the
Shares are "restricted securities" under applicable U.S. federal and state
securities laws and that, pursuant to these laws, Purchaser must hold the Shares
indefinitely unless they are registered with the



                                       3


Securities and Exchange Commission and qualified by state authorities, or an
exemption from such registration and qualification requirements is available.
Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Shares, and on requirements relating to the Company which are outside of
Purchaser's control, and which the Company is under no obligation and may not be
able to satisfy.

        4.5 LEGENDS. Purchaser understands that the Shares and any securities
issued in respect of or exchange for the Shares, may bear one or all of the
following legends:

               (a) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR
UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED."

               (b) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.

        4.6 ACCREDITED INVESTOR. Purchaser is either (a) an accredited investor
as defined in Rule 501(a) of Regulation D promulgated under the Act or (b) not
an accredited investor and neither such Investor nor any beneficiary of any
trust or any investment client for whose account such Investor is purchasing is
a citizen or resident of the United States or Canada, or any state, territory or
possession thereof, including but not limited to any estate of any such person,
or any corporation, partnership, trust or other entity created or existing under
the laws thereof, or any entity controlled or owned by any of the foregoing (a
"U.S. Person").

        4.7 INVESTMENT EXPERIENCE. Purchaser is experienced in evaluating and
investing in private placement transactions of securities of companies in a
similar stage of development and acknowledges that Purchaser is able to fend for
himself, herself or itself, can bear the economic risk of such investment and
has such knowledge and experience in financial and business matters that
Purchaser is capable of evaluating the merits and risks of the investment in the
Shares.

        4.8 FURTHER REPRESENTATION BY FOREIGN INVESTORS. If Purchaser is not a
U.S. Person, Purchaser hereby represents that Purchaser is satisfied as to the
full observance of the laws of Purchaser's jurisdiction in connection with any
invitation to subscribe for the Shares or any use of this Agreement, including
(i) the legal requirements of Purchaser's jurisdiction for the purchase of the
Shares, (ii) any foreign exchange restrictions applicable to such purchase,
(iii) any governmental or other consents that may need to be obtained and (iv)
the income tax and other tax consequences, if any, which may be relevant to the
purchase, holding, redemption, sale or transfer of the Shares. Purchaser's
subscription and payment for, and Purchaser's continued beneficial ownership of,
the Shares will not violate any applicable securities or other laws of
Purchaser's jurisdiction.



                                       4


SECTION 5. CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER TO CLOSE

        The obligation of Purchaser to purchase the Shares and otherwise
consummate the transactions that are contemplated by this Agreement is subject
to the satisfaction, as of the Closing Date, of the following conditions (any of
which may be waived by Purchaser in whole or in part):

        5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in Section 3 shall be accurate and true in
all material respects on and as of the Closing Date.

        5.2 PERFORMANCE. All of the covenants and obligations that the Company
is required to perform or to comply with pursuant to this Agreement, at or prior
to the Closing, must have been duly performed and complied with in all material
respects.

        5.3 SHARES AVAILABLE. The Company shall have available under its Amended
and Restated Certificate of Incorporation sufficient authorized shares of
capital stock to issue and sell the Shares to Purchaser.

SECTION 6. CONDITIONS TO OBLIGATION OF THE COMPANY TO CLOSE

        The obligation of the Company to cause the Shares to be sold to
Purchaser and otherwise consummate the transactions that are contemplated by
this Agreement is subject to the satisfaction, as of the Closing Date, of the
following conditions (any of which may be waived by Company in whole or in
part):

        6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser set forth in Section 4 shall be accurate and true in all
material respects on and as of the Closing Date.

        6.2 PERFORMANCE. All of the covenants and obligations that Purchaser is
required to perform or to comply with pursuant to this Agreement, at or prior to
the Closing, must have been duly performed and complied with in all material
respects.

        6.3 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Purchase
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any law, rule, regulation, order, judgment or
decree enacted or deemed applicable to the Purchase that makes consummation of
the Purchase illegal.

        6.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Shares pursuant to this Agreement shall be duly obtained and effective as of the
Closing.

SECTION 7. MISCELLANEOUS PROVISIONS

        7.1 TIME OF ESSENCE. Time is of the essence of this Agreement.



                                       5


        7.2 FURTHER ACTIONS. The Company shall execute such agreements and other
documents, and shall take such other actions, as Purchaser may reasonably
request (prior to, at or after the Closing) for the purpose of ensuring that the
transactions contemplated by this Agreement are carried out in full compliance
with the provisions of all applicable laws and regulations.

        7.3 PUBLICITY. No press release, publicity, disclosure or notice to any
Person concerning any of the transactions contemplated by this Agreement shall
be issued, given, made or otherwise disseminated at any time (whether prior to,
at or after the Closing) without the prior written approval of the other party.

        7.4 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California as such laws are applied to agreements between California
residents entered into and performed entirely in California.

        7.5 VENUE AND JURISDICTION. If any legal proceeding or other legal
action relating to this Agreement is brought or otherwise initiated, the venue
therefor shall be in California, which shall be deemed to be a convenient forum.
Purchaser and the Company hereby expressly and irrevocably consent and submit to
the jurisdiction of the courts in California.

        7.6 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be deemed effectively given: (a) upon personal
delivery to the party to be notified, (b) when sent by confirmed telex or
facsimile if sent during normal business hours, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid or (d) one day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
addresses set forth on the signature page hereto or at such other address as the
Company or Purchaser may designate by ten days advance written notice to the
other parties thereto.

        7.7 FEES AND EXPENSES. All fees, costs and expenses incurred in
connection with the transactions contemplated by this Agreement shall be paid by
the party incurring such fees, costs and expenses.

        7.8 ATTORNEYS' FEES. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

        7.9 TABLE OF CONTENTS AND HEADINGS. The table of contents of this
Agreement and the Section headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.

        7.10 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors,



                                       6


assigns, heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be enforceable by each of the parties hereto.
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.

        7.11 SEVERABILITY. In the event that any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

        7.12 ENTIRE AGREEMENT. This Agreement and the Collaboration Agreement
referred to herein and therein constitute the entire agreement between the
parties hereto pertaining to the subject matter hereof, and any and all other
written or oral agreements existing between the parties hereto are expressly
canceled. This Agreement and the Collaboration Agreement are intended to define
the full extent of the legally enforceable undertakings of the Company and
Purchaser, and no promise or representation, whether written or oral, which is
not set forth explicitly in this Agreement or the Collaboration Agreement is
intended by either party to be legally binding.

        7.13 WAIVER. No failure on the part of either party hereto to exercise
any power, right, privilege or remedy under this Agreement, and no delay on the
part of either party hereto in exercising any power, right, privilege or remedy
under this Agreement, shall operate as a waiver thereof; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.

        7.14 AMENDMENTS. This Agreement may not be amended, modified, altered or
supplemented except by means of a written instrument executed on behalf of both
Purchaser and the Company.

        7.15 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.

        7.16 CONFIDENTIALITY. Each party hereto agrees that, except with the
prior written permission of the other party, it shall at all times keep
confidential and not in any way divulge, furnish or make accessible to anyone
any confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other party to which such party has been or
shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of the Shares purchased hereunder. The provisions of this Section 7.16
shall be in addition to, and not in



                                       7


substitution for, the provisions of any separate nondisclosure agreement
executed by the parties hereto with respect to the transactions contemplated
hereby.

        7.17 INTERPRETATION OF AGREEMENT.

               (a) Each party hereto acknowledges that it has participated in
the drafting of this Agreement, and any applicable rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in connection with the construction or interpretation of this
Agreement.

               (b) Whenever required by the context hereof, the singular number
shall include the plural, and vice versa; the masculine gender shall include the
feminine and neuter genders; and the neuter gender shall include the masculine
and feminine genders.

               (c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, and shall be deemed to be followed by the words "without
limitation."

               (d) References herein to "Sections" and "Schedules" are intended
to refer to Sections of and Schedules to this Agreement.



                                       8


        IN WITNESS WHEREOF, each of the parties hereto has caused this Common
Stock Purchase Agreement to be executed and delivered by its duly authorized
officer on the date set forth above.




                                       ACCEPTED AND ACKNOWLEDGED BY PURCHASER:

                                       TAKARA SHUZO CO., LTD.

                                       By:    /s/ Ikunoshin Kato
                                          --------------------------------------
                                       Printed Name:  Ikunoshin Kato
                                                    ----------------------------
                                       Title:  President, Biomedical Group
                                             -----------------------------------

                                       Address:    SETA 3-4-1
                                               ---------------------------------
                                                   Otsu, Shiga, 520-2193
                                               ---------------------------------
                                                   JAPAN
                                               ---------------------------------



                                       ACCEPTED AND ACKNOWLEDGED BY THE COMPANY:

                                       LYNX THERAPEUTICS, INC.

                                       By:  /s/ Edward C. Albini
                                          --------------------------------------
                                       Printed Name:  Edward C. Albini
                                                    ----------------------------
                                       Title:  Chief Financial Officer
                                             -----------------------------------

                                       Address:  25861 Industrial Boulevard
                                               ---------------------------------
                                                 Hayward, CA  94545
                                               ---------------------------------

EX-10.34

                                                                   EXHIBIT 10.34








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

                             LYNX THERAPEUTICS, INC.

                           LOAN AND SECURITY AGREEMENT

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









        This LOAN AND SECURITY AGREEMENT is entered into as of October 23, 2002,
by and between COMERICA BANK-CALIFORNIA ("Bank") and LYNX THERAPEUTICS, INC.
("Borrower").

                                    RECITALS

        Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.

                                    AGREEMENT

        The parties agree as follows:

        1. DEFINITIONS AND CONSTRUCTION.

               1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:

                      "Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.

                      "Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.

                      "Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.

                      "Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.

                      "Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.

                      "Closing Date" means the date of this Agreement.

                      "Code" means the California Uniform Commercial Code.

                      "Collateral" means the property described on Exhibit A
attached hereto.

                      "Contingent Obligation" means, as applied to any Person,
any direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit, corporate credit cards, or merchant services issued or
provided for the account of that Person; and (iii) all obligations arising under
any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other



                                       1


agreement or arrangement designed to protect such Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.

                      "Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.

                      "Credit Extension" means each Equipment Advance, or any
other extension of credit by Bank for the benefit of Borrower hereunder.

                      "Daily Balance" means the amount of the Obligations owed
at the end of a given day.

                      "Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.

                      "Equipment Advance" has the meaning set forth in Section
2.1(a).

                      "Equipment Line" means a credit extension of up to Two
Million Dollars ($2,000,000).

                      "Equipment Maturity Date" means October 23, 2005.

                      "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended, and the regulations thereunder.

                      "Event of Default" has the meaning assigned in Article 8.

                      "GAAP" means generally accepted accounting principles as
in effect from time to time.

                      "Indebtedness" means (a) all indebtedness for borrowed
money or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

                      "Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.

                      "Intellectual Property" means all of Borrower's right,
title, and interest in and to the following:

                      (a) Copyrights, Trademarks and Patents;

                      (b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;

                      (c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;



                                       2


                      (d) Any and all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;

                      (e) All licenses or other rights to use any of the
Copyrights, Patents or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;

                      (f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and

                      (g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.

                      "Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.

                      "Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.

                      "IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.

                      "Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.

                      "Loan Documents" means, collectively, this Agreement, any
note or notes executed by Borrower, and any other agreement entered into in
connection with this Agreement, all as amended or extended from time to time.

                      "Material Adverse Effect" means a material adverse effect
on (i) the business operations, condition (financial or otherwise) or prospects
of Borrower and its Subsidiaries taken as a whole or (ii) the ability of
Borrower to repay the Obligations or otherwise perform its obligations under the
Loan Documents or (iii) the value or priority of Bank's security interests in
the Collateral.

                      "Negotiable Collateral" means all of Borrower's present
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.

                      "Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.

                      "Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.



                                       3


                      "Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.

                      "Permitted Indebtedness" means:

                      (a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;

                      (b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;

                      (c) Indebtedness secured by a lien i) upon or in any
equipment which was not financed by Bank acquired or held by Borrower or any of
its Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition of such equipment,
or (ii) existing on such equipment at the time of its acquisition or (iii) any
extensions, refinancings and renewals of items (i) and (ii), provided that (1)
the lien is confined solely to the property so acquired and improvements
thereon, and (2) such Indebtedness does not exceed the lesser of the cost or
fair market value of the equipment financed with such Indebtedness;

                      (d)    Subordinated Debt;

                      (e) Indebtedness to trade creditors incurred in the
ordinary course of Borrower's or a Subsidiary's business;

                      (f) Extensions, refinancings, modifications, amendments
and restatements of any items of Permitted Indebtedness, provided that the
principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower or its Subsidiary, as the case may
be, and provided that such extension, refinancing, modification, amendment or
restatement is permitted by any applicable subordination agreement;

                      (g) Capital leases entered into in the ordinary course of
Borrower's or a Subsidiary's business;

                      (h) Indebtedness incurred as a result of the endorsement
of negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business;

                      (i) Contingent Obligations of Borrower consisting of
guarantees (and other credit support) of the obligations of vendors and
suppliers of Borrower in respect of transactions entered into the in ordinary
course of business, provided that such guarantees (and other credit support)
shall not at any time exceed $100,000 in the aggregate; and

                      (j) Indebtedness of a Subsidiary to Borrower incurred in
the ordinary course of business.

                      "Permitted Investment" means:

                      (a) Investments existing on the Closing Date disclosed in
the Schedule;

                      (b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Bank's money market accounts;



                                       4


                      (c) Repurchases of stock from former employees or
directors of Borrower under the terms of applicable repurchase agreement
approved by Borrower's Board of Directors;

                      (d) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business;

                      (e) Investments not to exceed $200,000 in the aggregate in
any fiscal year consisting of (i) travel advances and employee relocation loans
and other employee loans and advances in the ordinary course of business, and
(ii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plan agreements approved by Borrower's Board of Directors;

                      (f) Investments (whether consisting of the purchase of
securities, loans, capital contributions or otherwise) by Borrower in
Subsidiaries made in the ordinary course of business (provided that in no event,
notwithstanding anything to the contrary in this Agreement, shall Borrower
transfer any Collateral to a Subsidiary);

                      (g) Investments consisting of notes receivable or, prepaid
royalties and other credit extensions to customers and suppliers who are not
Affiliates, in the ordinary course of business;

                      (h) Investments in joint ventures or strategic alliances
in the ordinary course of Borrower's business;

                      (i) Investments not otherwise permitted under Section 7.7
which do not exceed $100,000 in the aggregate during the term of this Agreement;
and

                      (j) Investments permitted by Borrower's investment policy,
as amended from time to time, provided that such investment policy (and any such
amendment thereto) has been approved by Bank.

                      "Permitted Liens" means the following:

                      (a) Any Liens existing on the Closing Date and disclosed
in the Schedule or arising under this Agreement or the other Loan Documents;

                      (b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;

                      (c) Liens of materialmen, mechanics, warehousemen,
carriers, artisan's or other similar Liens arising in the ordinary course of
Borrower's business or by operation of law, which are not past due or which are
being contested in good faith by appropriate proceedings and for which reserves
have been established in accordance with GAAP; and

                      (d) Leases, subleases, licenses and sublicenses granted to
others in the ordinary course of business not interfering in any material
respect in the conduct of the business of Borrower, and any interest or title of
a lessor, sublessor, licensor or sublicensor or under any lease, sublease,
license or sublicense.

                      "Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.

                      "Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.



                                       5


                      "Responsible Officer" means each of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer and the
Controller of Borrower.

                      "Schedule" means the schedule of exceptions attached
hereto and approved by Bank, if any.

                      "Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms acceptable
to Bank (and identified as being such by Borrower and Bank).

                      "Subsidiary" means any corporation, company or partnership
in which (i) any general partnership interest or (ii) more than 50% of the stock
or other units of ownership which by the terms thereof has the ordinary voting
power to elect the Board of Directors, managers or trustees of the entity, at
the time as of which any determination is being made, is owned by Borrower,
either directly or through an Affiliate.

                      "Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.

               1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.

        2. LOAN AND TERMS OF PAYMENT.

               2.1 Credit Extensions.

                      Borrower promises to pay to the order of Bank, in lawful
money of the United States of America, the aggregate unpaid principal amount of
all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Credit Extensions at rates
in accordance with the terms hereof.

                      (a) Equipment Advances.

                             (i) Subject to and upon the terms and conditions of
this Agreement, at any time from the date hereof through October 23, 2003, Bank
agrees to make advances (each an "Equipment Advance" and, collectively, the
"Equipment Advances") to Borrower in an aggregate amount not to exceed Equipment
Line. Each Equipment Advance shall not exceed one hundred percent (100%) of the
invoice amount of the Equipment reasonably approved by Bank from time to time
(which Borrower shall, in any case, have purchased within 90 days of the date of
the corresponding Equipment Advance). Notwithstanding anything to the contrary
contained herein, (i) the aggregate amount of all Equipment Advances used for
the purchase of computer equipment shall not exceed Three Hundred Thousand
Dollars ($300,000) during the term of this Agreement, and (ii) the aggregate
amount of all Equipment Advances used to finance sales tax and installations
costs shall not exceed Two Hundred Thousand Dollars ($200,000) during the term
of this Agreement. On the Closing Date, Bank will finance an initial Equipment
Advance for Equipment purchased up to five hundred seventy four (574) days prior
to the Closing Date provided that Borrower provides Bank with copies of invoices
for such equipment purchases on or prior to the Closing Date.

                             (ii) Interest shall accrue on the initial Equipment
Advance from the Closing Date at the rate specified in Section 2.2, and shall be
payable monthly on the twenty third (23rd) day of each month so long as any
Equipment Advances are outstanding. The initial Equipment Advance shall be
payable in twenty-four (24) equal monthly installments of principal, plus all
accrued interest, beginning on twenty third (23rd) day of the month immediately
following the Closing Date, and continuing on the same day of each month
thereafter through the Equipment Maturity Date, at which time all amounts owing
under this Section 2.1(a) shall be immediately due and payable. The initial
Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay the
initial Equipment Advances without penalty or premium



                                       6


                             (iii) Interest shall accrue from the date of each
Equipment Advance at the rate specified in Section 2.2, and shall be payable
monthly on the twenty third (23rd) day of each month so long as any Equipment
Advances are outstanding. Any Equipment Advances that are outstanding on April
24, 2003, which were not part of the initial Equipment Advance, shall be payable
in thirty (30) equal monthly installments of principal, plus all accrued
interest, beginning on May 23, 2003, and continuing on the same day of each
month thereafter through the Equipment Maturity Date. Any Equipment Advances
that are outstanding on October 24, 2003, which were not part of the initial
Equipment Advance and which were not outstanding on April 24, 2003, shall be
payable in twenty-four (24) equal monthly installments of principal, plus all
accrued interest, beginning on November 23, 2003, and continuing on the same day
of each month thereafter through the Equipment Maturity Date, at which time all
amounts owing under this Section 2.1(a) and any other amounts owing under this
Agreement shall be immediately due and payable. Equipment Advances, once repaid,
may not be reborrowed. Borrower may prepay any Equipment Advances without
penalty or premium.

                             (iv) When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time three
(3) Business Days before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of Exhibit B. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice for any Equipment to be financed.

               2.2 Interest Rates, Payments, and Calculations.

                      (a) Interest Rate - Equipment Advances. Except as set
forth in Section 2.2(b), the Equipment Advances shall bear interest, on the
outstanding Daily Balance thereof, at a rate equal to three percent (3.0%) above
the Prime Rate.

                      (b) Late Fee; Default Rate. If any payment is not made
within ten (10) days after the date such payment is due, Borrower shall pay Bank
a late fee equal to the lesser of (i) five percent (5%) of the amount of such
unpaid amount or (ii) the maximum amount permitted to be charged under
applicable law. All Obligations shall bear interest, upon the occurrence and
during the continuance of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.

                      (c) Payments. Interest hereunder shall be due and payable
on the twenty third (23rd) calendar day of each month during the term hereof.
Bank shall, at its option, and with written notice to Borrower in the ordinary
course of business charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts maintained with the Bank or
against the Equipment Line, in which case those amounts shall thereafter accrue
interest at the rate then applicable hereunder. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder. All
payments shall be free and clear of any taxes, withholdings, duties, impositions
or other charges, to the end that Bank will receive the entire amount of any
Obligations payable hereunder, regardless of source of payment.

                      (d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased, effective as of the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.

               2.3 Crediting Payments. Except when an Event of Default has
occurred and is continuing, Bank shall credit a wire transfer of funds, check or
other item of payment to such deposit account or Obligation as Borrower
specifies. When an Event of Default occurs and is continuing, the receipt by
Bank of any wire transfer of funds, check, or other item of payment shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the



                                       7


contrary contained herein, any wire transfer or payment received by Bank after
12:00 noon Pacific time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment shall
instead be due on the next Business Day, and additional fees or interest, as the
case may be, shall accrue and be payable for the period of such extension.

               2.4 Fees. Borrower shall pay to Bank the following:

                      (a) Facility Fee. On the Closing Date, a Facility Fee
equal to Ten Thousand Dollars ($10,000), which shall be nonrefundable; and

                      (b) Bank Expenses. On the Closing Date, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses and, after the Closing Date, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.

               2.5 Additional Costs. In case any change after the date hereof in
any law, regulation, treaty or official directive or the interpretation or
application thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law):

                      (a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);

                      (b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or

                      (c) imposes upon Bank any other condition with respect to
its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to
Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.

               2.6 Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for
so long as any Obligations remain outstanding or Bank has any obligation to make
Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.

        3. CONDITIONS OF LOANS.

               3.1 Conditions Precedent to Initial Credit Extension. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:

                      (a) this Agreement;



                                       8


                      (b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;

                      (c) a UCC financing statement (DE);

                      (d)    agreement to provide insurance;

                      (e) payment of the fees and Bank Expenses then due
specified in Section 2.4 hereof;

                      (f) current financial statements of Borrower; and

                      (g) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.

               3.2 Conditions Precedent to all Credit Extensions. The obligation
of Bank to make each Credit Extension, including the initial Credit Extension,
is further subject to the following conditions:

                      (a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and

                      (b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would exist after giving effect to
such Credit Extension (provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date). The making of each Credit
Extension shall be deemed to be a representation and warranty by Borrower on the
date of such Credit Extension as to the accuracy of the facts referred to in
this Section 3.2.

        4. CREATION OF SECURITY INTEREST.

               4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Subject to Permitted Liens,
upon the due filing of appropriately completed financing statements with the
applicable governing filing offices, such security interest constitutes a valid,
first priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof.

               4.2 Termination of Security Interest. Upon the payment in full of
all amounts due under this Agreement and of all other Obligations and upon
termination of Bank's obligation to make Credit Extensions to Borrower, Bank
shall, at the cost and expense of Borrower, execute and deliver to Borrower all
such documents and instruments that shall be necessary to evidence termination
of this Agreement and the security interests created hereunder.

               4.3 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the reasonable request of
Bank, all Negotiable Collateral, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue the perfection of Bank's security interests in the Collateral and in
order to fully consummate all of the transactions contemplated under the Loan
Documents.

               4.4 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours but no more than twice a
year (unless an Event of Default has occurred and is continuing), to inspect
Borrower's Books and to make



                                       9


copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.

        5. REPRESENTATIONS AND WARRANTIES.

               Borrower represents and warrants as follows:

               5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing under the laws of its state of
incorporation and qualified and licensed to do business in any state in which
the conduct of its business or its ownership of property requires that it be so
qualified, except where the failure to do so would not reasonably be expected to
have a Material Adverse Effect.

               5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any material agreement to which it is a party or by which it is bound.

               5.3 No Prior Encumbrances. Borrower has good and marketable title
to the Collateral, free and clear of Liens, except for Permitted Liens.

               5.4 Bona Fide Accounts. To the best of Borrower's knowledge, all
Accounts are bona fide existing obligations. Borrower has not received notice of
actual or imminent Insolvency Proceedings of any material account debtor.

               5.5 Merchantable Inventory. To the best of Borrower's knowledge,
all Inventory is in all material respects of good and marketable quality, free
from all material defects, except for Inventory for which adequate reserves have
been made.

               5.6 Intellectual Property. To the best of Borrower's knowledge,
Borrower is the sole owner of the Intellectual Property, except for licenses
granted by Borrower to its customers in the ordinary course of business. To the
best of Borrower's knowledge, each of the Patents is valid and enforceable, and
no part of the Intellectual Property has been judged invalid or unenforceable,
in whole or in part, and no claim has been made that any part of the
Intellectual Property violates the rights of any third party.

               5.7 Name; Location of Chief Executive Office. Except as disclosed
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof. All the Collateral is
located only at the location set forth in Section 10 hereof.

               5.8 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision would reasonably
be expected to have a Material Adverse Effect, or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral.

               5.9 No Material Adverse Change in Financial Statements. All
consolidated and consolidating financial statements related to Borrower and any
Subsidiary that Bank has received from Borrower fairly present in all material
respects Borrower's financial condition as of the date thereof and Borrower's
consolidated and consolidating results of operations for the period then ended.
There has not been a material adverse change in the consolidated or the
consolidating financial condition of Borrower since the date of the most recent
of such financial statements submitted to Bank.

               5.10 Solvency, Payment of Debts. Borrower is solvent and able to
pay its debts (including trade debts) as they mature.



                                       10


               5.11 Regulatory Compliance. Borrower and each Subsidiary have met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA, and no event has occurred resulting from Borrower's
failure to comply with ERISA that could result in Borrower's incurring any
material liability. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of the
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations T and U
of the Board of Governors of the Federal Reserve System). Borrower has complied
with all the provisions of the Federal Fair Labor Standards Act. Borrower has
not violated any statutes, laws, ordinances or rules applicable to it, violation
of which would reasonably be expected to have a Material Adverse Effect.

               5.12 Environmental Condition. Except as disclosed in the
Schedule, none of Borrower's or any Subsidiary's properties or assets has ever
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous substance
other than in accordance with applicable law or where any such noncompliance
would not reasonably be expected to have a Material Adverse Effect; to the best
of Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a hazardous waste or hazardous substance disposal site, or a
candidate for closure pursuant to any environmental protection statute; no lien
arising under any environmental protection statute has attached to any revenues
or to any real or personal property owned by Borrower or any Subsidiary; and
neither Borrower nor any Subsidiary has received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal, state
or other governmental agency concerning any action or omission by Borrower or
any Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.

               5.13 Taxes. Borrower and each Subsidiary have filed or caused to
be filed all material tax returns required to be filed, and have paid, or have
made adequate provision for the payment of, all taxes reflected therein except
those being contested in good faith with adequate reserves under GAAP.

               5.14 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.

               5.15 Government Consents. Borrower and each Subsidiary have
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted, the failure to obtain which would reasonably be expected to have a
Material Adverse Effect.

               5.16 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank under the circumstances when made contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained in such certificates or statements not misleading. Bank
recognizes that the projections and forecasts provided by Borrower in good faith
and based upon reasonable assumptions are not to be viewed as facts and that
actual results during the period or periods covered by any such projections and
forecasts may differ from the projected or forecasted results.

        6. AFFIRMATIVE COVENANTS.

               Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:

               6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which it is
required under applicable law except where the failure to do so would not
reasonably be expected to



                                       11


cause a Material Adverse Effect. Borrower shall maintain, and shall cause each
of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which would reasonably be expected to have a Material
Adverse Effect.

               6.2 Government Compliance. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.

               6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver the following to Bank: (a) as soon as available, but in any event within
thirty (30) days after the end of each calendar month, a company prepared
consolidated balance sheet, income, and cash flow statement covering Borrower's
consolidated operations during such period, prepared in accordance with GAAP
(absent footnotes and subject to year-end adjustments), consistently applied, in
a form reasonably acceptable to Bank and certified by a Responsible Officer; (b)
within five (5) days after the filing of Borrower's Form 10-K with the
Securities and Exchange Commission at the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (c) if applicable, copies of all statements, reports and
notices sent or made available generally by Borrower to its security holders or
to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed
with the Securities and Exchange Commission within five (5) days of relevant
filing with Securities and Exchange Commission; (d) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that would reasonably be expected to result in
damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars
($50,000) or more; and (e) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time
generally prepared by Borrower in the ordinary course of business.

        Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit C hereto.

               6.4 [Intentionally Omitted.]

               6.5 Taxes. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
reasonably satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need not
make any payment if the amount or validity of such payment is contested in good
faith by appropriate proceedings and is reserved against (to the extent required
by GAAP) by Borrower.

               6.6 Insurance.

                      (a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's business, ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.

                      (b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as are reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof, and all



                                       12


commercial general liability insurance policies shall show the Bank as an
additional insured and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefore. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.

               6.7 Accounts. Borrower shall maintain depository and operating
accounts with Bank.

               6.8 Liquidity. Borrower shall maintain at all times, measured as
of the last day of each month, a balance of unrestricted cash which is greater
than Borrower's Cash Burn, provided, however, this Section 6.8 shall be
automatically deleted if Borrower provides Bank with evidence of Borrower's
positive cash flow for six (6) consecutive monthly reporting periods. As used
herein, "Cash Burn" shall mean the net change in Borrower's cash during the four
months immediately preceding the date of measurement net of changes in debt,
stock, paid-in capital and minority interests.

               6.9 Minimum Cash Balance. Borrower shall maintain at all times,
measured as of the last day of each month, a minimum balance of unrestricted
cash and cash equivalents at Bank of at least Five Million Dollars ($5,000,000).

               6.10 Protection of Intellectual Property Rights. Borrower shall
use commercially reasonable efforts to (i) protect, defend and maintain the
validity and enforceability of the material Trademarks, Patents and Copyrights
and (ii) detect infringements of the material Trademarks, Patents and Copyrights
and promptly advise Bank in writing of material infringements detected.

               6.11 Equipment Location. All Equipment financed by Bank, must
have asset tags in form and substance acceptable to Bank, and shall remain
located in the state of California at the address set forth in Section 10 of
this Agreement.

               6.12 Right of First Refusal. Borrower shall offer Bank a right of
first refusal for all of Borrower's borrowing transactions, provided that Bank's
terms are equal to or more favorable then other third party's terms.

               6.13 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.

        7. NEGATIVE COVENANTS.

               Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not do any of the following:

               7.1 Dispositions. Except for the sale of, merger or consolidation
of Lynx GmbH with or into any other Person and the merger of
Beteiligungsgesellschaft mbH into Axaron, convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or substantially all of its business or property,
provided that in no event and notwithstanding anything to the contrary in this
Agreement shall Borrower Transfer all or any portion of the Collateral.

               7.2 Change in Business or Executive Office. Engage in any
business, or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar, related or ancillary thereto (or incidental thereto); or
cease to conduct business in the manner conducted by Borrower as of the Closing
Date (other than the merger of Beteiligungsgesellschaft mbH into Axaron or the
sale of, merger or consolidation of Lynx GmbH with or into any other Person); or
without ten (10) days prior



                                       13


written notification to Bank, relocate its chief executive office or state of
incorporation or change its legal name; or without Bank's prior written consent,
change the date on which its fiscal year ends.

               7.3 Mergers or Acquisitions. Without the prior written consent of
Bank, which will not be unreasonably withheld, merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary), or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person except (A)
where (i) the Borrower or Subsidiary, as applicable, is the surviving entity and
(ii) no Event of Default has occurred, is continuing or would exist after giving
effect to such transactions, (B) for the merger of Beteiligungsgesellschaft mbH
into Axaron, or (C) the sale of, merger or consolidation of Lynx GmbH with or
into any other Person.

               7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary to do so, other than
Permitted Indebtedness (and subject to Section 6.12).

               7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to (collectively, "Encumber") any of the Collateral, except
for Permitted Liens; or Encumber its Intellectual Property, except in the
ordinary course of Borrower's business.

               7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, or permit any of its Subsidiaries to do so, except that
(i) Borrower may repurchase the stock of former employees, consultants, or
directors pursuant to stock repurchase agreements as long as an Event of Default
does not exist prior to such repurchase or would not exist after giving effect
to such repurchase, and (ii) Borrower may make distributions payable solely in
Borrower's capital stock and may convert any of its convertible securities into
other equity securities pursuant to the terms of such convertible securities or
otherwise in exchange therefor.

               7.7 Investments. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments and as permitted by Section 7.3; or suffer or
permit any Subsidiary to be a party to, or be bound by, an agreement that
restricts such Subsidiary from paying dividends or otherwise distributing
property to Borrower.

               7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for (a) a merger or consolidation of Beteiligungsgesellschaft mbH into
Axaron or (b) transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a non-affiliated
Person.

               7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend in a
manner adverse to the Bank any provision contained in any documentation relating
to the Subordinated Debt without Bank's prior written consent.

               7.10 Collateral. Store any Collateral with a bailee,
warehouseman, or other third party unless the third party has been notified of
Bank's security interest and Bank (a) has received an acknowledgment from the
third party that it is holding or will hold the Collateral for Bank's benefit or
(b) is in pledge possession of the warehouse receipt, where negotiable, covering
such Collateral. Store or maintain any Collateral at a location other than the
location set forth in Section 10 of this Agreement.

               7.11 Compliance. Become an "investment company" or be controlled
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to



                                       14


occur, fail to comply with the Federal Fair Labor Standards Act or violate any
law or regulation, which violation would reasonably be expected to have a
Material Adverse Effect, or a material adverse effect on the Collateral or the
priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to
do any of the foregoing.

        8. EVENTS OF DEFAULT.

               Any one or more of the following events shall constitute an Event
of Default by Borrower under this Agreement:

               8.1 Payment Default. If Borrower fails to pay, when due, any of
the Obligations;

               8.2 Covenant Default. If Borrower fails to perform any obligation
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between
Borrower and Bank and as to any default under such other term, provision,
condition, covenant or agreement that can be cured, has failed to cure such
default within fifteen (15) Business Days after Borrower receives notice thereof
or any officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the fifteen (15) Business Day
period or cannot after diligent attempts by Borrower be cured within such (15)
Business Day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Credit Extensions will be required
to be made during such cure period);

               8.3 Material Adverse Effect. If there occurs any circumstance or
circumstances that would reasonably be expected to have a Material Adverse
Effect;

               8.4 Attachment. If any portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10)
Business Days after Borrower receives notice thereof, provided that none of the
foregoing shall constitute an Event of Default where such action or event is
stayed or an adequate bond has been posted pending a good faith contest by
Borrower (provided that no Credit Extensions will be required to be made during
such cure period);

               8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within forty-five
(45) days (provided that no Credit Extensions will be made prior to the
dismissal of such Insolvency Proceeding);

               8.6 Other Agreements. If there is a default or other failure to
perform in any agreement to which Borrower is a party or by which it is bound
resulting in a right by a third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of Two
Hundred Fifty Thousand Dollars ($250,000); or which would reasonably be expected
to have a Material Adverse Effect;

               8.7 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand Dollars ($250,000) in excess of applicable insurance coverage
(provided that a claim therefore has been tendered to and accepted by the
applicable insurance carrier) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or



                                       15


               8.8 Misrepresentations. If, as of the date a representation or
warranty is made, any material misrepresentation or material misstatement exists
now in any warranty or representation set forth herein or in any certificate
delivered to Bank by any Responsible Officer pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document.

        9. BANK'S RIGHTS AND REMEDIES.

               9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

                      (a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5, all Obligations shall become immediately due and payable without
any action by Bank);

                      (b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;

                      (c) Make such payments and do such acts as Bank considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank's determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned
premises, Borrower hereby grants Bank a license to enter into possession of such
premises and to occupy the same, without charge, in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;

                      (d) Set off and apply to the Obligations any and all (i)
balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by Bank;

                      (e) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;

                      (f) Dispose of the Collateral by way of one or more
contracts or transactions, for cash or on terms, in such manner and at such
places (including Borrower's premises) as Bank determines is commercially
reasonable, and apply any proceeds to the Obligations in whatever manner or
order Bank deems appropriate;

                      (g) Bank may credit bid and purchase at any public sale
any of the Collateral; and

                      (h) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.

               9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) endorse Borrower's name on any
checks or other forms of payment or



                                       16


security that may come into Bank's possession; (b) dispose of any Collateral;
(c) make, settle, and adjust all claims under and decisions with respect to
Borrower's policies of insurance as to Bank's status as loss payee relating to
the Collateral or affecting Bank's status as additional insured; and (d) to
file, in its sole discretion, one or more financing or continuation statements
and amendments thereto, relative to any of the Collateral; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.3 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide Credit Extensions hereunder is terminated.

               9.3 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following after reasonable notice to Borrower: (a) make payment of the same or
any part thereof; (b) set up such reserves under a loan facility in Section 2.1
as Bank deems necessary to protect Bank from the exposure created by such
failure; or (c) obtain and maintain insurance policies of the type discussed in
Section 6.6 of this Agreement, and take any action with respect to such policies
as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute
Bank Expenses, shall be immediately due and payable, and shall bear interest at
the then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.

               9.4 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices consistent with Section 9207 of the Code, Bank
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other person whomsoever. All risk of loss, damage or destruction of the
Collateral shall be borne by Borrower.

               9.5 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.

               9.6 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.

        10. NOTICES.

               Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:

      If to Borrower:           Lynx Therapeutics, Inc.
                                25861 Industrial Boulevard
                                Hayward, CA 94545
                                Attn: Edward C. Albini, Chief Financial Officer
                                FAX:  (510) 670-9303



                                       17


      If to Bank:               Comerica Bank-California
                                333 W. Santa Clara St.
                                San Jose, CA 95113
                                Attn:  Corporate Banking Center

      with a copy to:           Comerica Bank-California
                                5 Palo Alto Square, Suite 800
                                3000 El Camino Real
                                Attn:  Jonathan Norris
                                FAX:  (650) 213-1710

        The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.

        11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

               This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

        12. GENERAL PROVISIONS.

               12.1 Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.

               12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.

               12.3 Time of Essence. Time is of the essence for the performance
of all obligations set forth in this Agreement.

               12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.



                                       18


               12.5 Amendments in Writing, Integration. Neither this Agreement
nor the Loan Documents can be amended or terminated orally. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement
and the Loan Documents, if any, are merged into this Agreement and the Loan
Documents.

               12.6 Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.

               12.7 Survival. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions to Borrower. The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run.

               12.8 Confidentiality. In handling any confidential information
Bank and all employees and agents of Bank, including but not limited to
accountants, shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain or in the knowledge or possession of Bank
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.

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

                                             LYNX THERAPEUTICS, INC.


                                             By: /s/ Edward C. Albini
                                                --------------------------------
                                             Title: Chief Financial Officer
                                                   -----------------------------

                                             COMERICA BANK-CALIFORNIA


                                             By: /s/ Jonathan Norris
                                                --------------------------------
                                             Title: Vice President, Technology &
                                                    Life Sciences Group
                                                   -----------------------------



                                       19


DEBTOR           LYNX THERAPEUTICS, INC.

SECURED PARTY:   COMERICA BANK-CALIFORNIA

                                    EXHIBIT A

                        COLLATERAL DESCRIPTION ATTACHMENT
                         TO LOAN AND SECURITY AGREEMENT

        All equipment of Borrower (herein referred to as "Borrower" or "Debtor")
financed by Bank, as listed on Appendix I attached hereto, and any additional
equipment financed by Bank (which financings shall be supported by a UCC filing
including an appendix listing such equipment), wherever located, and including
all accessions and additions thereto, and any and all cash proceeds and/or
noncash proceeds of any of the foregoing, including, without limitation,
insurance proceeds, and all supporting obligations and the security therefor or
for any right to payment.

        All terms above have the meanings given to them in the California
Uniform Commercial Code, as amended or supplemented from time to time, including
revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by
Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.



                                       20


                                   Appendix I



                                       21



                                    EXHIBIT B

                   LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM

 EQUIPMENT ADVANCES: DEADLINE FOR PROCESSING IS 3:00 P.M. PACIFIC TIME THREE (3)
                       BUSINESS DAYS PRIOR TO ADVANCE DATE

TO:  TECHNOLOGY AND LIFE SCIENCES DIVISION                DATE:
                                                               -----------------
FAX #:  650-846-6840  ATTN:  COMPLIANCE                   TIME:
                                                               -----------------

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

FROM: LYNX THERAPEUTICS, INC.
      --------------------------------------------------------------------------
                             CLIENT NAME (BORROWER)

REQUESTED BY:
             -------------------------------------------------------------------
                            AUTHORIZED SIGNER'S NAME

AUTHORIZED SIGNATURE:
                     -----------------------------------------------------------

PHONE NUMBER:
             -------------------------------------------------------------------

FROM ACCOUNT #                            TO ACCOUNT #
               --------------------------             --------------------------



REQUESTED TRANSACTION TYPE                        REQUEST DOLLAR AMOUNT
- --------------------------                        ---------------------
                                               
                                                  $
                                                   -----------------------------
PRINCIPAL INCREASE (EQUIPMENT ADVANCE)            E
PRINCIPAL PAYMENT (ONLY)                          $
                                                   -----------------------------
INTEREST PAYMENT (ONLY)                           $
                                                   -----------------------------
PRINCIPAL AND INTEREST (PAYMENT)                  $
                                                   -----------------------------


OTHER INSTRUCTIONS:
                   -------------------------------------------------------------

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


        All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for an Equipment Advance confirmed by this
Borrowing Certificate; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
- --------------------------------------------------------------------------------


- --------------------------------------------------------------------------------
                                  BANK USE ONLY
- --------------------------------------------------------------------------------

TELEPHONE REQUEST:

The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.


- -----------------------------------          -----------------------------------
     Authorized Requester                                 Phone #


- -----------------------------------          -----------------------------------
      Received By (Bank)                                  Phone #


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



                                       22


                           Authorized Signature (Bank)
- --------------------------------------------------------------------------------


                                       23


                                    EXHIBIT C
                             COMPLIANCE CERTIFICATE

TO:       COMERICA BANK-CALIFORNIA

FROM:     LYNX THERAPEUTICS, INC.

        The undersigned authorized officer of Lynx Therapeutics, Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending _______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct as of the date hereof.
Attached herewith are the required documents supporting the above certification.
The Officer further certifies that these are prepared in accordance with
Generally Accepted Accounting Principles (GAAP) and are consistently applied
from one period to the next except as explained in an accompanying letter or
footnotes.

               PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER
"COMPLIES" COLUMN.



   REPORTING COVENANT                                 REQUIRED                                       COMPLIES
   ------------------                                 --------                                      -----------
                                                                                                    
   Monthly financial statements                       Monthly within 30 days                        Yes      No
   Annual (CPA Audited)                               FYE within 5 days of filing with SEC          Yes      No
   10K and 10Q                                        Within 5 days of filing with SEC              Yes      No
   Depository and operating accounts maintained
   with  Bank                                                                                       Yes      No





   FINANCIAL COVENANT                                   REQUIRED            ACTUAL          COMPLIES
   ------------------                                  -----------         ---------        ------------
                                                                                   
   Maintain at all times, measured monthly:
     Liquidity                                         * See below         $________        Yes      No
     Minimum Cash Balance (maintained with Bank)       $5,000,000          $________        Yes      No


        Liquidity. Borrower shall maintain at all times, measured as of the last
        day of each month, a balance of unrestricted cash which is greater than
        Borrower's Cash Burn, provided, however, this Section 6.8 shall be
        automatically deleted if Borrower provides Bank with evidence of
        Borrower's positive cash flow for six (6) consecutive monthly reporting
        periods. As used herein, "Cash Burn" shall mean the net change in
        Borrower's cash during the four months immediately preceding the date of
        measurement net of changes in debt, stock, paid-in capital and minority
        interests.


COMMENTS REGARDING EXCEPTIONS:  See Attached.



Sincerely,



- -------------------------------------------------
SIGNATURE


- -------------------------------------------------
TITLE


- -------------------------------------------------
DATE


- --------------------------------------------------------------------------------
BANK USE ONLY


Received by:
            -------------------------------------
                     AUTHORIZED SIGNER


Date:
      -------------------------------------------


Verified:
          ---------------------------------------
                     AUTHORIZED SIGNER


Date:
     --------------------------------------------


Compliance Status                 Yes          No
- --------------------------------------------------------------------------------


                                       24


                             SCHEDULE OF EXCEPTIONS

Permitted Indebtedness  (Section 1.1)

Indebtedness owing to Transamerica Business Credit Corporation pursuant to that
certain Master Loan and Security Agreement dated as of October 26, 1998, as
amended from time to time.

Permitted Investments (Section 1.1)

Approximately 40% ownership in Axaron Bioscience AG (f.k.a., BASF-LYNX
Bioscience AG), a joint venture company formed with BASF AG, located in
Heidelberg, Germany ("Axaron").

100% ownership in two foreign subsidiaries, (1) Lynx Therapeutics GmbH ("Lynx
GmbH") and (2) Lynx Therapeutics Beteiligungsgesellschaft mbH
("Beteiligungsgesellschaft mbH"), both of which are German limited liability
companies.

Permitted Liens (Section 1.1)

None.

Prior Names (Section 5.7)

None.

Litigation (Section 5.8)

None.



                                       25


                         CORPORATE RESOLUTIONS TO BORROW

- --------------------------------------------------------------------------------
BORROWER:      LYNX THERAPEUTICS, INC.
- --------------------------------------------------------------------------------

        I, the undersigned Secretary or Assistant Secretary of LYNX
THERAPEUTICS, INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Delaware.

        I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation, as amended, and the
Restated Bylaws of the Corporation, each of which is in full force and effect on
the date hereof.

        I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.

        BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:



       NAMES                          POSITION             ACTUAL SIGNATURES
- ---------------------          ---------------------       ---------------------
                                                     

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

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

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

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


acting for and on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:

        BORROW MONEY. To borrow from time to time from Comerica Bank-California
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents of the Corporation and Bank, such sum or sums of money as in their
judgment should be borrowed, without limitation.

        EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank that certain Loan
and Security Agreement dated as of October 23, 2002 (the "Loan Agreement") and
any other agreement entered into between Corporation and Bank in connection with
the Loan Agreement, including any amendments, all as amended or extended from
time to time (collectively, with the Loan Agreement, the "Loan Documents"), and
also to execute and deliver to Bank one or more renewals, extensions,
modifications, refinancings, consolidations, or substitutions for the Loan
Documents, or any portion thereof.

        GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Documents, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Documents.

        NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.

        FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.

        BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank



                                       1


may rely on these Resolutions until written notice of their revocation shall
have been delivered to and received by Bank. Any such notice shall not affect
any of the Corporation's agreements or commitments in effect at the time notice
is given.

        I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.

        IN WITNESS WHEREOF, I have hereunto set my hand on October 23, 2002 and
attest that the signatures set opposite the names listed above are their genuine
signatures.

                                                 CERTIFIED AND ATTESTED BY:

                                                 X
                                                  ------------------------------
- --------------------------------------------------------------------------------


                                       2



                            COMERICA BANK-CALIFORNIA
                                   MEMBER FDIC

                         ITEMIZATION OF AMOUNT FINANCED
                            DISBURSEMENT INSTRUCTIONS
                                   (TERM LOAN)


Name(s):  LYNX THERAPEUTICS, INC.                        Date:  October 23, 2002

    $           credited to deposit account No. ___________ when Equipment
                Advances are requested by Borrower

Amounts paid to others on your behalf:
    $10,000     to Comerica Bank-California for Loan Fee
    $           to Comerica Bank-California for Document Fee
    $           to Bank counsel fees and expenses
    $           to _______________
    $           to _______________
    $           TOTAL (AMOUNT FINANCED)

Upon consummation of this transaction, this document will also serve as the
authorization for Comerica Bank-California to disburse the loan proceeds as
stated above.


- ----------------------------------            ----------------------------------
          Signature                                       Signature





                         AGREEMENT TO PROVIDE INSURANCE

TO:  COMERICA BANK-CALIFORNIA                  Date: October 23, 2002
     attn:  Collateral Operations, M/C 4604
     9920 South La Cienega Blvd, 14th Floor
     Inglewood, CA  90301                      Borrower: LYNX THERAPEUTICS, INC.

        In consideration of a loan in the amount of Two Million Dollars
($2,000,000), secured by equipment financed by Bank.

        I/We agree to obtain adequate insurance coverage to remain in force
during the term of the loan.

        I/We also agree to advise the below named agent to add Comerica
Bank-California as lender's loss payable on the new or existing insurance
policy, and to furnish Bank at above address with a copy of said
policy/endorsements and any subsequent renewal policies.

        I/We understand that the policy must contain:

        1. Fire and extended coverage in an amount sufficient to cover:

               (a)    The amount of the loan, OR

               (b)    All existing encumbrances, whichever is greater,

        But not in excess of the replacement value of the improvements on the
real property.

        2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Comerica
Bank-California, or any other form acceptable to Bank.

                              INSURANCE INFORMATION

Insurance Co./Agent                                Telephone No.:

Agent's Address:

                 Signature of Obligor:
                                      --------------------------
                 Signature of Obligor:
                                      --------------------------


- --------------------------------------------------------------------------------
FOR BANK USE ONLY

INSURANCE VERIFICATION: Date:
                             --------------------------

Person Spoken to:
                 --------------------------------------

Policy Number:
              -----------------------------------------

Effective From:                    To:
              --------------------     ----------------

Verified by:
            -------------------------------------------
- --------------------------------------------------------------------------------





- --------------------------------------------------------------------------------
COMERICA BANK-CALIFORNIA
      MEMBER FDIC                             AUTOMATIC DEBIT AUTHORIZATION
- --------------------------------------------------------------------------------


- --------------------------------------------------------------------------------
To:  COMERICA BANK-CALIFORNIA

Re:  LOAN #
            -----------------------------------

You are hereby authorized and instructed to charge account No.
_________________________ in the name of LYNX THERAPEUTICS, INC.
- --------------------------------------------------------------------------------
for principal and interest payments due on above referenced loan as set forth
below and credit the loan referenced above.

               [ X ] Debit each interest payment as it becomes due according to
               the terms of the note and any renewals or amendments thereof.

               [ X ] Debit each principal payment as it becomes due according to
               the terms of the note and any renewals or amendments thereof.

This Authorization is to remain in full force and effect until revoked in
writing.

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

- --------------------------------------------------------------------------------
       Borrower Signature                                   Date
- ----------------------------------            ----------------------------------

                                                     October 23, 2002
- ----------------------------------            ----------------------------------


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





DEBTOR:            LYNX THERAPEUTICS, INC.

SECURED PARTY:     COMERICA BANK-CALIFORNIA

                                    EXHIBIT A

                        COLLATERAL DESCRIPTION ATTACHMENT
                           TO UCC FINANCING STATEMENT

        All equipment of Borrower (herein referred to as "Borrower" or "Debtor")
financed by Bank, as listed on Appendix I attached hereto, and any additional
equipment financed by Bank (which financings shall be supported by a UCC filing
including an appendix listing such equipment), wherever located, and including
all accessions and additions thereto, and any and all cash proceeds and/or
noncash proceeds of any of the foregoing, including, without limitation,
insurance proceeds, and all supporting obligations and the security therefor or
for any right to payment.

        All terms above have the meanings given to them in the California
Uniform Commercial Code, as amended or supplemented from time to time, including
revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by
Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.





                                   Appendix I

EX-99.1

                                                                    Exhibit 99.1

                                  CERTIFICATION

        Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350, as adopted), Kevin P. Corcoran, the Chief Executive Officer of
Lynx Therapeutics, Inc. (the "Company"), and Edward C. Albini, the Chief
Financial Officer of the Company, each hereby certifies that, to Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as
adopted), Kevin P. Corcoran, the Chief Executive Officer of Lynx Therapeutics,
Inc. (the "Company"), and Edward C. Albini, the Chief Financial Officer of the
Company, each hereby certifies that, to his knowledge:his knowledge:

1. The Company's Quarterly Report on Form 10-Q for the period ended September
30, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic
Report"), fully complies with the requirements of Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
periods covered by the Periodic Report and the results of operations of the
Company for the periods covered by the Periodic Report.

        This certification accompanies the Periodic Report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.

        In Witness Whereof, the undersigned have set their hands hereto as of
the 13th day of November, 2002.



/s/ Kevin P. Corcoran                   /s/ Edward C. Albini
- ----------------------------------      ----------------------------------------
Kevin P. Corcoran                       Edward C. Albini
Chief Executive Officer                 Chief Financial Officer