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 March 31, 2003.

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	94-3161073
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of common stock outstanding as of May 9, 2003 was 4,654,245.

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 10.36
EXHIBIT 10.37
EXHIBIT 99.1

Lynx Therapeutics, Inc.

FORM 10-Q
For the Quarter Ended March 31, 2003

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — March 31, 2003 and December 31, 2002.		3
	Condensed Consolidated Statements of Operations — three months ended March 31, 2003 and 2002.		4
	Condensed Consolidated Statements of Cash Flows — three months ended March 31, 2003 and 2002.		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		23
Item 2.	Changes in Securities and Use of Proceeds		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits and Reports on Form 8-K		23
Signatures			24
Certifications			24

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Lynx Therapeutics, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

			March 31,			December 31,
			2003			2002
			(unaudited)			(*)
Assets
Current assets:
	Cash and cash equivalents		$	7,383			11,735
	Accounts receivable			514			836
	Inventory			1,276			1,030
	Other current assets			576			714
		Total current assets		9,749			14,315
Property and equipment:
	Leasehold improvements			12,236			12,238
	Laboratory and other equipment			23,097			22,972
				35,333			35,210
	Less accumulated depreciation and amortization			(20,643	)		(19,640	)
Net property and equipment				14,690			15,570
Investment in related party				1,106			1,930
Other non-current assets				172			172
			$	25,717		$	31,987
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	1,249		$	962
	Accrued compensation			547			516
	Deferred revenues			3,926			2,926
	Equipment loans — current portion			2,083			2,250
	Other accrued liabilities			415			604
		Total current liabilities		8,220			7,258
Deferred revenues				7,769			10,634
Equipment loans, less current portion				686			1,093
Other non-current liabilities				935			946
Stockholders’ equity:
	Common stock			110,992			110,978
	Deferred compensation			—			(9	)
	Accumulated deficit			(102,885	)		(98,913	)
		Total stockholders’ equity		8,107			12,056
			$	25,717		$	31,987

*The balance sheet amounts at December 31, 2002 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
			March 31,
			2003			2002
Revenues:
	Technology access and services fees		$	3,000		$	2,154
	License fee from related party			190			190
	Collaborative research and other			74			2,678
		Total revenues		3,264			5,022
Operating costs and expenses:
	Cost of services fees and other			724			299
	Research and development			3,565			6,887
	General and administrative			1,785			1,734
	Restructuring charge for workforce reduction			292			—
		Total operating costs and expenses		6,366			8,920
Loss from operations				(3,102	)		(3,898	)
Equity share of loss of related party				(825	)		(787	)
Interest income (expense), net				(44	)		(100	)
Other income				—			987
Loss before provision for income taxes				(3,971	)		(3,798	)
Income tax provision (benefit)				1			(39	)
Net loss			$	(3,972	)	$	(3,759	)
Basic and diluted net loss per share			$	(0.85	)	$	(1.91	)
Shares used in per share computation				4,652			1,970

See accompanying notes.

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Lynx Therapeutics, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

			Three Months Ended
			March 31,
			2003			2002
Cash flows from operating activities:
Net loss			$	(3,972	)	$	(3,759	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization of fixed assets and leasehold improvements			1,002			1,183
	Amortization of deferred compensation			9			97
	Pro rata share of net loss of related party			825			787
	Gain on sale of antisense program			—			(1,008	)
	Non-cash portion of gain from the sale of technology assets			—			(1,586	)
	Changes in operating assets and liabilities:
		Accounts receivable		322			216
		Inventory		(246	)		220
		Other current assets		138			360
		Accounts payable		287			803
		Accrued liabilities		(158	)		(51	)
		Deferred revenues		(1,865	)		(1,086	)
		Other non-current liabilities		(11	)		17
Net cash used in operating activities				(3,669	)		(3,807	)
Cash flows from investing activities:
Proceeds from sale of equity securities				—			2,180
Leasehold improvements and equipment purchases, net of retirements				(123	)		(833	)
Notes receivable from officers and employees				—			51
Net cash provided by (used in) investing activities				(123	)		1,398
Cash flows from financing activities:
Repayment of equipment loan				(574	)		(450	)
Issuance of common stock, net				14			(3	)
Net cash used in financing activities				(560	)		(453	)
Net increase (decrease) in cash and cash equivalents				(4,352	)		(2,862	)
Cash and cash equivalents at beginning of period				11,735			3,199
Cash and cash equivalents at end of period			$	7,383		$	337
Supplemental disclosure of cash flow information:
Interest paid			$	74		$	115

See accompanying notes.

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Lynx Therapeutics, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

1. Nature of Business

     We believe that Lynx Therapeutics, Inc. (“Lynx” or the “Company”) is a leader in the development and application of novel genomics analysis solutions that provide comprehensive and quantitative digital gene expression information important to modern systems biology research in the pharmaceutical, biotechnology and agricultural industries. These solutions are based on Megaclone and Massively Parallel Signature Sequencing, or MPSS, Lynx’s unique and proprietary cloning and sequencing technologies. Gene expression refers to the number of genes and the extent a cell or tissue expresses those genes, and represents a way to move beyond DNA sequence data to understand the function of genes, the proteins that they encode and the role they play in health and disease. Systems biology is an approach in which researchers seek to gain a complete molecular understanding of biological systems in health and disease.

2. Basis of Presentation

     In January 2003, we received stockholder approval for, and effected, a reverse stock split of our common stock at a ratio of 1-for-7 (the “reverse stock split”). As a result of the reverse stock split, each outstanding share of common stock automatically converted into one-seventh of a share of common stock, with the par value of each share of common stock remaining at one cent ($.01) per share. Accordingly, common stock share and per share amounts for all periods presented have been adjusted to reflect the impact of the reverse stock split.

     The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Lynx 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 months ended March 31, 2003 are not necessarily indicative of the results for the full year.

     Our unaudited condensed consolidated financial statements have been presented on a basis that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced operating losses since our inception of $102.9 million, including a net loss of $4.0 million for the quarter ended March 31, 2003. Net losses may continue as we proceed with the commercialization and additional development of our technologies. Our cash and cash equivalents were $7.4 million at March 31, 2003. We believe that our current cash and cash equivalents and funding anticipated to be received from customers, collaborators and licensees will enable us to maintain our operations through at least December 31, 2003. 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 may seek additional financing, as needed, through arrangements with customers, collaborators and licensees and equity or debt offerings. 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 are unable to secure additional financing on reasonable terms, or are unable to generate sufficient new sources of revenue through arrangements with customers, collaborators and licensees, management may be forced to take substantial restructuring actions, which may include significantly reducing Lynx’s anticipated level of expenditures, the sale of some or all of our assets, or obtaining funds by entering into financing or collaborative agreements on unattractive terms, or we will not be able to fund operations.

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     The unaudited condensed consolidated financial statements include all accounts of Lynx and our wholly-owned subsidiary, Lynx Therapeutics GmbH (“Lynx GmbH”), formed under the laws of the Federal Republic of Germany. All significant intercompany balances and transactions have been eliminated. Certain amounts in prior periods have been reclassified to conform to the current year presentation.

     These financial statements should be read in conjunction with Lynx’s audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in Lynx’s annual report on Form 10-K, filed with the SEC.

3. Summary of Significant Accounting Policies

Revenue Recognition

     Technology access fees have generally resulted from upfront payments from collaborators, customers and licensees who are provided access to our technologies for specified periods. We receive service fees from collaborators and customers for genomics discovery services performed by us on the biological samples they send to us. Collaborative research revenues are payments received under various agreements and include such items as milestone payments. Milestone payments are recognized as revenue pursuant to collaborative agreements upon the achievement of specified technology developments, representing the culmination of the earnings process. Other revenues include the proceeds from the sale of technology assets, the sale of proprietary instruments and reagents, and grant revenue.

     Technology access and license fees are deferred and recognized as revenue on a straight-line basis over the noncancelable term of the agreement to which they relate. Payments for services and/or materials provided by Lynx are recognized as revenues when earned over the period in which the services are performed and/or materials are delivered, provided that no other obligations, refunds or credits to be applied to future work exist. Revenues from the sale of technology assets are recognized upon the transfer of the assets to the purchaser. Revenues from the sales of instruments and reagents are recognized upon shipment to the customer.

Inventory

     Inventory is stated at the lower of standard cost (which approximates first-in, first out cost) or market. The balances at March 31, 2003 and December 31, 2002 were classified as raw materials and consisted primarily of reagents and other chemicals utilized while performing genomics discovery services. Inventory is charged to cost of services fees and other as consumed.

Net Loss Per Share

     Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Basic and diluted net loss per share amounts are the same in each year as we have incurred a net loss for all periods presented. Had we been in a net income position, diluted earnings per share would have included the dilutive impact of outstanding options and warrants to purchase common stock. At March 31, 2003, options to purchase approximately 556,776 shares of common stock at a weighted-average exercise price of $42.81 per share and warrants to purchase 101,082 shares of common stock at an exercise price of $39.76 per share, 41,714 shares of common stock at an exercise price of $10.85 per share and 834,272 shares of common stock at an exercise price of $13.58 per share were excluded from the calculation of diluted loss per share for 2003 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. At March 31, 2002, options to purchase approximately 377,815 shares of common stock at a weighted-average exercise price of $90.72 per share and warrants to purchase 62,399 shares of common stock at an exercise price of $64.41 per share were excluded from the calculation of diluted loss per share for 2002 because of the effect of inclusion would be antidilutive.

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Stock-Based Compensation

     We grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. We account for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations. Under APB 25, when the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

     All stock option awards to non-employees are accounted for at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model, in accordance with Accounting for Stock-based Compensation (SFAS 123) and Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The option arrangements are subject to periodic remeasurement over their vesting terms. Pro forma information regarding net loss and net loss per share required by SFAS 123, as amended by Accounting for Stock-Based Compensation — Transition and Disclosure (SFAS 148), is presented below and has been determined as if we had accounted for awards under our stock option and employee stock purchase plans using the fair value method:

	Three Months Ended March 31,
	2003			2002
	(in thousands, except per share amounts)
Net loss, as reported	$	(3,972	)	$	(3,759	)
Stock-based employee compensation, net of taxes, as reported		9			97
Stock based employee compensation, net of taxes, as if fair value method applied to all awards		(399	)		(1,396	)
Net loss, pro forma as if fair value method applied to all awards	$	(4,362	)	$	(5,058	)
Basic and diluted net loss per share, as reported	$	(0.85	)	$	(1.91	)
Basic and diluted net loss per share, pro forma as if fair value method applied to all awards	$	(0.94	)	$	(2.57	)

Recent Accounting Pronouncements

     In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 is effective for exit and disposal activities initiated after December 31, 2002. We adopted this statement during the first quarter of fiscal 2003, and the adoption did not have a material effect on our operating results or financial position.

     In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor’s Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others. FIN No. 45 clarifies the guarantor’s requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees and requires the guarantor to recognize at the inception of a guarantee a liability for the fair value of the guarantee obligation. The provisions for the initial recognition and measurement of guarantees are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The accounting profession and regulatory agencies continue to discuss various provisions of this pronouncement with the objective of providing additional guidance on its application. These discussions and the issuance of any new interpretations, once finalized, could lead to an unanticipated impact on our future financial results. Therefore, although we currently do not believe these provisions

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will have a material effect on our operating results or financial position, we will continue to evaluate the impact of FIN 45.

     In December 2002, the FASB issued Statement of Financial Accounting Standards Board No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123 (SFAS 148). SFAS 148 amends SFAS 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require expanded and more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since we account for our stock-based compensation under APB 25, and have no current plans to switch to SFAS 123, the impact of SFAS 148 will be limited to the interim reporting of the effects on net loss and loss per share if we accounted for stock-based compensation under SFAS 123. SFAS 148 is effective for fiscal years ending after December 15, 2002.

4. Comprehensive Loss

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

	Three Months Ended
	March 31,
	2003			2002
Net loss	$	(3,972	)	$	(3,759	)
Net unrealized gain (loss) on available-for-sale securities		—			(118	)
Reclassification adjustment for realized gains included in net income, net of tax		—			(1,008	)
Comprehensive loss	$	(3,972	)	$	(4,885	)

     The components of accumulated other comprehensive income (loss) relate entirely to unrealized gains (losses) on available-for-sale securities and were $0 at both March 31, 2003 and December 31, 2002.

5. Related-Party Transactions

Axaron Bioscience AG

     We hold an equity investment in Axaron Bioscience AG. As of March 31, 2003, Lynx held approximately a 40% ownership interest in Axaron and had the ability to exercise significant influence over Axaron’s operating and accounting policies. Lynx has accounted for the investment under the equity method in accordance with APB Opinion No. 18. Under the equity method, we record our pro-rata share of the income or losses of Axaron. Axaron is engaged in employing Lynx’s technologies in its neuroscience, toxicology and microbiology research programs.

     In 2001, we extended our technology licensing agreement with Axaron. The license extends Axaron’s right to use our proprietary MPSS and Megasort technologies non-exclusively in Axaron’s neuroscience, toxicology and microbiology programs until December 31, 2007. In 2001, we made a capital investment in Axaron of approximately $4.5 million. Also in 2001, we 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 period from June 1, 2001 to December 31, 2007. The recorded revenue for each three-month period ended March 31, 2003 and 2002 was approximately $190,000. Our pro-rata share of Axaron’s losses was approximately $0.8 million for each of the quarters ended March 31, 2003 and March 31, 2002.

     We also sublease certain offices in Germany to Axaron. During the three-month period ended March 31, 2003, we received an immaterial amount of sublease income from Axaron.

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Other Transactions with Related Parties

     For legal services, Lynx paid approximately $103,000 during the quarter ended March 31, 2003 to Cooley Godward LLP, Lynx’s counsel, of which a director of Lynx is a partner.

6. Restructuring Charges

     In January 2003, we implemented a reduction of approximately 25% of our workforce, or 32 people. The groups affected primarily by this action included research and development personnel based at Lynx Therapeutics GmbH in Germany and those working in our proteomics group in California. The workforce reduction is intended to further focus our financial and human resources on expanding the commercial use of MPSS. We recorded a workforce reduction charge of $0.3 million in the quarter ended March 31, 2003 related primarily to severance compensation expense for our former employees, which amounts had been paid entirely as of April 30, 2003.

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 2002 audited financial statements and notes thereto included in our 2002 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2003 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 2002 Annual Report on Form 10-K, as filed with the SEC. We undertake no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Overview

     We believe that Lynx Therapeutics, Inc. is a leader in the development and application of novel genomics analysis solutions that provide comprehensive and quantitative digital gene expression information important to modern systems biology research in the pharmaceutical, biotechnology and agricultural industries. These solutions are based on Megaclone and Massively Parallel Signature Sequencing, or MPSS, Lynx’s unique and proprietary cloning and sequencing technologies. Gene expression refers to the number of genes and the extent a cell or tissue expresses those genes, and represents a way to move beyond DNA sequence data to understand the function of genes, the proteins that they encode and the role they play in health and disease. Systems biology is an approach in which researchers seek to gain a complete molecular understanding of biological systems in health and disease.

     We have incurred net losses each year since our inception in 1992. As of March 31, 2003, we had an accumulated deficit of approximately $102.9 million. Net losses may continue for at least the next several years. The size of these losses will depend on the rate of growth, if any, in our revenues and on the level of our expenses.

     To date, we have received, and expect to continue to receive in the future, a significant portion of our revenues from a small number of collaborators, customers and licensees. For the three months ended March 31, 2003, revenues from E.I. DuPont de Nemours and Company (DuPont), Bayer CropScience, Takara Bio Inc. (Takara) and BASF AG (BASF) accounted for 34%, 23%, 19% and 17%, respectively, of our total revenues. For the three months ended March 31, 2002, revenues from Geron Corporation, DuPont, BASF and Takara accounted for 51%, 10%, 10% and 10%, respectively, of our total revenues. For the year ended December 31, 2002, revenues from DuPont, Takara, Geron Corporation, Bayer CropScience and BASF accounted for 32%, 16%, 15%, 14% and 11%, respectively, of our total revenues. 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 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

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our collaborators and customers, 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 collaborators, customers 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 collaborators, customers 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 and process improvement efforts. Research and development expenses may increase due to spending for ongoing technology development and implementation, as well as new applications, primarily for MPSS. 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 our research and development, commercial and business development efforts.

     We account for our investment in Axaron Bioscience AG, a company owned primarily by BASF AG and us, using the equity method. For each of the three months ended March 31, 2003 and 2002, our pro-rata share of Axaron’s losses was approximately $0.8 million.

     As of March 31, 2003, we employed 96 full-time employees, of which 76 were engaged in production and research and development activities. In January 2003, we implemented a reduction of approximately 25% of our total workforce, or 32 people. The groups affected primarily by this action included research and development personnel based at Lynx GmbH in Germany and our proteomics group in California. The workforce reduction was intended to further focus our financial and human resources on expanding the commercial use of MPSS.

Results of Operations

Revenues

     Revenues for the three-month period ended March 31, 2003 were approximately $3.3 million, compared to revenues of $5.0 million for the corresponding three-month period of 2002. Revenues for the three-month period in 2003 included technology access fees and service fees of $3.0 million, license fees from Axaron, a related party, of $190,000 and other revenues of $74,000. Revenues for the three-month period in 2002 included technology access fees and service fees of $2.2 million, license fees from Axaron, a related party, of $190,000 and other revenues of $2.7 million, including $2.6 million from the sale of certain of our technology assets. Our revenues have historically fluctuated from quarter to quarter and year to year and may continue to fluctuate in future periods due primarily to our service fees, which are impacted principally by the timing and number of biological samples received from existing customers and collaborators, as well as our performance of related services on these samples. Additionally, the number, type and timing of new collaborations and agreements and the related demand for, and delivery of, our services or products will impact the level of future revenues.

Operating Costs and Expenses

     Total operating costs and expenses were approximately $6.4 million for the three-month period ended March 31, 2003, compared to approximately $8.9 million for the three-month period ended March 31, 2002. For the three-month period in 2003, cost of services fees was $0.7 million, compared to $0.3 million for the corresponding period in 2002, and reflects the costs of providing our genomics discovery services. Research and development expenses were approximately $3.6 million for the three-month period ended March 31, 2003, compared to approximately $6.9 million for the corresponding period in 2002. The decrease in research and development expenses in 2003 reflects a decrease in materials consumed in research and development efforts and lower personnel expenses, primarily resulting from the workforce reductions that occurred in the first quarter of 2003 and the second quarter of 2002. Research and development expenses may increase due to planned spending for ongoing technology development and implementation, as well as new applications, primarily for MPSS.

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     General and administrative expenses were $1.8 million for the three-month period ended March 31, 2003, compared to $1.7 million for the corresponding period in 2002. General and administrative expenses may increase in support of Lynx’s commercial, business development and research and development activities.

     In January 2003, we implemented a reduction of approximately 25% of our workforce, or 32 people. The groups affected primarily by this action included research and development personnel based at Lynx Therapeutics GmbH in Germany and in our proteomics group in California. The workforce reduction is intended to further focus our financial and human resources on expanding the commercial use of MPSS. We recorded a workforce reduction charge of $0.3 million in the quarter ended March 31, 2003 related primarily to severance compensation expense for our former employees, which amounts had been paid entirely as of April 30, 2003. In terms of compensation, benefits and employer taxes that would have been paid to, and on behalf of, such former employees had they remained employed by Lynx, we anticipate annualized cost savings of approximately $2.0 million.

Equity Share of Loss of Related Party

     The equity share of loss of related party of $0.8 million in each of the three months ended March 31, 2003 and March 31, 2002, reflects Lynx’s pro-rata share of the net loss of Axaron, a joint venture investee.

Interest Income (Expense), Net

     Net interest expense was $44,000 for the quarter ended March 31, 2003, compared to net interest expense of $100,000 for the corresponding period of 2002. The decrease in net interest expense from 2002 to 2003 reflects primarily decreased interest expense in 2003 incurred on equipment-related debt outstanding during both the 2003 and 2002 periods and an increase in interest income due to higher average cash, cash equivalents and investment balances in the first quarter of 2003.

Other Income

     Other income was $0 in the quarter ended March 31, 2003, compared to other income of $1.0 million in the 2002 period. The 2002 other income was related primarily to the gain on the sale of our equity investment in Inex Pharmaceuticals Corporation.

Income Tax Provision (Benefit)

     The provision for income tax of approximately $1,000 in 2003 consisted entirely of foreign withholding tax on a payment received from our licensee, Takara. The income tax benefit for 2002 relates to a refund of state income taxes.

Liquidity and Capital Resources

     Cash and cash equivalents at March 31, 2003 totaled $7.4 million. Net cash used in operating activities was $3.7 million for the quarter ended March 31, 2003, as compared to $3.8 million for the same period in 2002. The change was due primarily to a higher net loss in 2002, as adjusted for the impact of non-cash gains in 2002 that are not in 2003, partially offset by a higher decrease in deferred revenues and accounts payable, an increase in inventory, a higher net loss and lower depreciation and amortization expenses during 2003 as compared to 2002. The amount of net cash used in operating activities differed from the 2003 net loss due primarily to depreciation and amortization expenses, the impact of our pro rata share of the net loss of Axaron and a decrease in accounts receivable, offset partially by a decrease in deferred revenues. The amount of net cash used in operating activities differed from the 2002 net loss due primarily to depreciation and amortization expenses, the impact of our pro rata share of the net loss of Axaron, an increase in accounts payable decreases in other current assets, inventory and accounts receivable, offset partially by the impact of non-cash gains and a decrease in deferred revenues.

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     Net cash used in investing activities of $0.1 million for the first quarter of 2003 was due to expenditures for capital equipment. Net cash provided by investing activities of $1.4 million for the first quarter of 2002 was due primarily to proceeds from the sale of equity securities, offset partially by expenditures for capital equipment.

     Net cash used in financing activities of $0.6 million in the first quarter of 2003 and $0.5 million in the first quarter of 2002 was due primarily to the repayment of principal under equipment-related debt outstanding during both the 2003 and 2002 periods.

     In October 2002, we entered into a loan and security agreement with a financial institution, Comerica Bank-California, for an equipment line of credit of up to $2.0 million with a draw-down period of one year. Under the initial advance, we drew down $1.6 million in November 2002 related to the purchase of equipment made in previous periods. We granted Comerica Bank-California a security interest in all items we 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%. In May 2003, we renegotiated the terms of the agreement, which now require that we maintain a minimum cash balance of restricted cash and cash equivalents in an account at Comerica Bank-California of at least 110% of the principal balance under loans outstanding under this agreement until Comerica Bank-California receives payment in full of all outstanding obligations. Previously, we were 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 meet a liquidity requirement that we have a balance of unrestricted cash at each month’s end that is greater than our net decrease in cash during the preceding four months. As of March 31, 2003, the principal balance under loans outstanding under this agreement was $1.3 million. We believe that we are in compliance with all terms of the agreement.

     In late 1998, we entered into a financing agreement with a financial institution, Transamerica Business Credit Corporation, under which we drew down $4.8 million during 1999 for the purchase of equipment and certain other capital expenditures. We 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. As of March 31, 2003, the principal balance under loans outstanding under this agreement was $1.5 million. The draw down period under the agreement expired on March 31, 2000.

     We plan to use available funds for ongoing commercial and research and development activities, working capital and other general corporate purposes and capital expenditures. We expect capital investments during 2003 will be less than $1.0 million and will be comprised primarily of expenditures for capital equipment required in the normal course of business. We intend to invest our excess cash in investment-grade, interest-bearing securities.

     We have obtained funding for our operations primarily through sales of preferred and common stock, payments received under contractual arrangements with customers, collaborators and licensees and interest income. Consequently, investors in our equity securities and our customers, collaborators and licensees are significant sources of liquidity for us. Therefore, our ability to maintain liquidity is dependent upon a number of uncertain factors, including but not limited to the following: our ability to advance and commercialize further our technologies; our ability to generate revenues through expanding existing collaborations, customer and licensee arrangements and obtaining significant new customers, collaborators and licensees; and the receptivity of capital markets toward our equity or debt securities. The cost, timing and amount of funds required for specific uses by us cannot be precisely determined at this time and will be based upon the progress and the scope of our commercial and research and development activities; payments received under customer, collaborative and license agreements; our 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 have experienced operating losses since our inception of $102.9 million, including a net loss of $4.0 million for the quarter ended March 31, 2003. Net losses may continue as we proceed with the commercialization and additional development of our technologies. Our cash and cash equivalents were $7.4 million at March 31, 2003. We believe that our current cash and cash equivalents and funding anticipated to be received from customers, collaborators and licensees will enable us to maintain our operations through at least December 31, 2003. 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

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funds. We may seek additional financing, as needed, through arrangements with customers, collaborators and licensees and equity or debt offerings. 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 are unable to secure additional financing on reasonable terms, or are unable to generate sufficient new sources of revenue through arrangements with customers, collaborators and licensees, management may be forced to take substantial restructuring actions, which may include significantly reducing Lynx’s anticipated level of expenditures, the sale of some or all of our assets, or obtaining funds by entering into financing or collaborative agreements on unattractive terms, or we will not be able to fund operations.

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. We expect to continue to incur 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 $15.5 million in 2002, $16.7 million in 2001 and $13.3 million in 2000. As of March 31, 2003, we had an accumulated deficit of approximately $102.9 million. Net losses may continue for at least the next several years. The presence and size of these potential net losses 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 spending for ongoing technology development and implementation, as well as new applications. 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 expand the scope of our products and services into new areas of pharmaceutical, biotechnology and agricultural research;

• our customers’ and collaborators’ abilities to develop diagnostic, therapeutic and other commercial products from the application of our technologies; and

• the successful clinical testing, regulatory approval and commercialization of such products by our customers and collaborators.

     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 as we conduct our operations, and will depend on many factors including:

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

• payments received under our customer, license and collaborative agreements;

• our ability to establish and maintain customer, license and collaborative arrangements;

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• the progress of the development and commercialization efforts under our customer, license and collaborative agreements;

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

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

     We believe that our current cash and cash equivalents and funding anticipated to be received from customers, collaborators and licensees will enable us to maintain our operations through at least December 31, 2003. 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 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, if such funds are at all available, by entering into financing or collaborative agreements on unattractive terms, or we will not be able to fund our operations.

Our technologies are new and unproven and may not allow our customers, 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 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 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 our customers, collaborators or us to identify genes, proteins or targets for drug discovery. To date, neither our customers nor we have identified any targets for drug discovery based on our technologies.

We are dependent on our customers and collaborators and will need to find additional customers and 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, customer agreements or licensing arrangements with pharmaceutical, biotechnology and agricultural companies and research institutes. 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, customer agreements and licensing arrangements. Revenues from such agreements depend upon continuation of the related relationships, our performance of genomics discovery services, 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 collaborators, customers and licensees. For the three months ended March 31, 2003, revenues from DuPont, Bayer CropScience, Takara, and BASF accounted for 34%, 23%, 19% and 17%, respectively, of our total revenues. For the three months ended March 31, 2002, revenues from Geron Corporation, DuPont, BASF and Takara accounted for 51%, 10%, 10% and 10%, respectively, of our total revenues. For the year ended December 31, 2002, revenues from DuPont, Takara, Geron Corporation, Bayer CropScience and BASF accounted for 32%, 16%, 15%, 14% and 11%, 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. If we fail to perform genomics discovery services or successfully achieve milestones or our collaborators fail to develop successful products, we will not earn the revenues contemplated under such agreements. If our collaborators, customers or licensees do not renew existing agreements, we lose one of these collaborators, customers or licensees, we do not attract new collaborators,

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customers or licensees or we are unable to enter into new collaborative, customer or license agreements on commercially acceptable terms, our revenues may decrease, and our activities may fail to lead to commercialized products.

     Our dependence on collaborations 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 customers and collaborators, some of our customers and collaborators could become our competitors in the future if they internally develop DNA analysis technologies or if they acquire other genomics companies and move into the genomics industry. We will not earn the revenues contemplated under our customer and collaborative arrangements, if our customers and collaborators:

• do not develop commercially successful products using our technologies;

• develop competing products;

• preclude us from entering into collaborations with their competitors;

• fail to obtain necessary regulatory approvals; or

• terminate their agreements with us.

We depend on a single 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 micro-beads in a planar microarray, which is a two-dimensional, dense ordered array of DNA samples. We use flow cells in our 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 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 reference 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;

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• 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 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 technologies, which could prevent us from competing in the market.

     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, 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.

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     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 collaborators and customers for our technologies and products. There are a limited number of pharmaceutical, biotechnology and agricultural companies and research institutes that are potential collaborators and customers 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 collaborators and customers 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 efforts. Our sales cycle is typically lengthy because we need to educate our potential collaborators and customers 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 collaborator or customer. We may expend substantial funds and management effort without any assurance 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.

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 customer, collaborative and license 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. 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. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.

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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. 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 or protein expression profiles. Similarly, employers could discriminate against employees with gene or protein 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.

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 operations.

     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 activities could cause

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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 April 2, 2001 to March 31, 2003, the closing sales price of our common stock as quoted on the Nasdaq National Market fluctuated from a low of $1.61 to a high of $59.69 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;

• developments or disputes concerning patent or proprietary rights;

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

• 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 $1.00 closing bid price requirement for 30 consecutive trading days and that, if we were unable to demonstrate compliance with this requirement during the 90-calendar day grace period ending December 9, 2002, our common stock may be subject to delisting from the Nasdaq National Market. We failed to regain compliance with the minimum bid price requirement during the 90-day grace period, and subsequently received a delisting letter from Nasdaq on December 13, 2002. On December 20, 2002, we requested an oral hearing before a Nasdaq Listing Qualifications Panel to appeal our potential delisting. At the oral hearing on January 23, 2003, we informed Nasdaq that we believed we had regained compliance with the Nasdaq National Market continued listing requirements following a 1-for-7 reverse split of our common stock effected on January 15, 2003.

     On February 21, 2003, we received a letter from Nasdaq advising us that the Nasdaq Listing Qualifications Panel acknowledged that we had regained compliance with the requirements for continued listing on the Nasdaq National Market. The Nasdaq Listing Qualifications Panel determined to continue the listing of our securities on the Nasdaq National Market provided that we file our annual report on Form 10-K for the fiscal year ended December 31, 2002 with the Securities and Exchange Commission and Nasdaq evidencing shareholders’ equity of at least $10,000,000 and that we demonstrate compliance with all requirements for continued listing on the Nasdaq National Market at that time. At December 31, 2002, we had total stockholders’ equity of $12,056,000. On April 10, 2003, we received a letter from Nasdaq advising us that the Nasdaq Listing Qualifications Panel acknowledged that we had evidenced compliance with the requirements for continued listing on the Nasdaq National Market based on the filing on March 28, 2003 of our annual report on Form 10-K for the fiscal year ended December 31, 2002 with the Securities and Exchange Commission and Nasdaq that evidenced shareholders’ equity of at least $10,000,000. The Nasdaq Listing Qualifications Panel determined to continue the listing of our securities on the Nasdaq National Market provided that we file our quarterly report on Form 10-Q for the quarterly period ended March 31, 2003 with the Securities and Exchange Commission and Nasdaq evidencing shareholders’ equity of at least $10,000,000 and that we demonstrate compliance with all requirements for continued listing on the Nasdaq National Market at that

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time. At March 31, 2003, we had total stockholders’ equity of $8,107,000, which does not satisfy the Nasdaq Listing Qualifications Panel’s requirement of $10,000,000 of shareholders’ equity for continuted listing. Thus, the Nasdaq Listing Qualifications Panel may terminate our Nasdaq National Market listing. In the event that the Nasdaq Listing Qualification Panel determines to terminate our Nasdaq National Market listing, our securities may be transferred to the Nasdaq SmallCap Market, provided we are able to demonstrate compliance with all applicable maintenance criteria and an ability to sustain long-term compliance. In the event we are unable to do so, our securities will be delisted from the Nasdaq Stock Market.

     Transferring to the Nasdaq SmallCap Market would make us subject to certain adverse consequences as described below. In addition, 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. 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 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 would 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.

21

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. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, we invest in short-term securities and maintain an average maturity of less than 90 days. As a result, we do not believe we are subject to significant interest rate risk.

Foreign Currency Rate Fluctuations

     The functional currency for our German subsidiary is the Euro. Our German subsidiary’s 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 subsidiary conducts its business primarily in Euros. 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 subsidiary 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 Rules 13a-14(c) and 15d-14(c)) are sufficiently effective to ensure that the information required to be disclosed by Lynx in the reports that 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 a company 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults Upon Senior Securities

     None

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

     None

Item 5. Other Information

     None

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

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

Exhibit Number	Description
10.36	Employment Agreement, dated as of March 20, 2003, by and between the Company and Edward C. Albini.
10.37	Employment Agreement, dated as of March 20, 2003, by and between the Company and Kathy A. San Roman.
99.1 *	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     b) Reports on Form 8-K — No Current Reports on Form 8-K were filed during the quarter ended March 31, 2003.

* This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Lynx Therapeutics, Inc. under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

23

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: May 15, 2003
		/s/ Edward C. Albini
	By:	Edward C. Albini
		Chief Financial Officer
		(Principal Financial and Accounting Officer)
Date: May 15, 2003

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 function):

24

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: May 15, 2003

/s/ Kevin P. Corcoran

Kevin P. Corcoran

Chief Executive Officer

25

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 function):

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: May 15, 2003

/s/ Edward C. Albini

Edward C. Albini

Chief Financial Officer

26

INDEX TO EXHIBITS

Exhibit Number	Description
10.36	Employment Agreement, dated as of March 20, 2003, by and between the Company and Edward C. Albini.
10.37	Employment Agreement, dated as of March 20, 2003, by and between the Company and Kathy A. San Roman.
99.1 *	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Lynx Therapeutics, Inc. under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

27 EX-10.36 3 f90137exv10w36.txt EXHIBIT 10.36 EXHIBIT 10.36 LYNX THERAPEUTICS, INC. EMPLOYEE AGREEMENT FOR EDWARD C. ALBINI This Employment Agreement ("Agreement") by and between EDWARD C. ALBINI ("Executive") and LYNX THERAPEUTICS, INC., a Delaware corporation (the "Company"), is entered into and is effective as of March 20, 2003 (the "Effective Date"). WHEREAS, the Company desires that Executive continue to provide personal services to the Company, and wishes to provide Executive with the compensation and benefits set forth below in return for such services; and WHEREAS, Executive wishes to continue to provide personal services to the Company in return for the compensation and benefits set forth below; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 Subject to the terms set forth herein, Executive shall be employed in the position of Chief Financial Officer and Secretary, reporting to the President and Chief Executive Officer of the Company. Executive agrees to devote his best efforts and substantially all of his business time and attention (except for vacation periods permitted by the Company's general employment policies, reasonable periods of illness or other incapacities permitted by the Company's general employment policies, and as otherwise provided herein) to the business of the Company. 1.2 Executive shall serve in an executive capacity and shall perform such duties as are customarily associated with his then current title. 1.3 The employment relationship between the parties is "at will," which means that either party may terminate the relationship at any time, with or without cause and with or without advance notice. The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or practices, this Agreement shall control. 2. COMPENSATION. 2.1 SALARY. As of the Effective Date, Executive shall receive for services to be rendered hereunder an annualized base salary of Two Hundred Fifty Thousand U.S. Dollars ($250,000), payable on the Company's normal payroll schedule, and subject to standard payroll deductions and withholdings. 2.2 STOCK OPTION. The Board granted Executive a nonstatutory stock option (the "Option") to purchase Thirty Thousand (30,000) shares of the common stock of the Company (the "Common Stock") pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), as amended. In addition, as part of Executive's employment by the Company before the Effective Date of this Agreement, Executive has been granted, on one or more occasion, an Option to purchase shares of the common stock of the Company pursuant to the Company's 1992 Plan. Any such Option(s) will continue to be subject to the terms of the Plan and Executive's corresponding Stock Option Grant Notices and Stock Option Agreements. 2.3 INCENTIVE COMPENSATION. The Company does not currently have an incentive compensation plan or program in place, and therefore the Company cannot offer Executive incentive compensation at this time. It is the 1 Company's intention, however, to implement such a plan or program and to cause Executive to be eligible for such plan or program. 2.4 STANDARD COMPANY BENEFITS. Executive shall continue to be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits and compensation practices that may be in effect from time to time and provided by the Company to its employees generally, including but not limited to health benefit plans. Executive also shall continue to be eligible to participate in the Company's 401(k) Plan, including eligibility for a monthly matching contribution by the Company on Executive's behalf, in an amount equal to that contributed by Executive up to a maximum annual matching contribution of Seven Hundred Fifty Dollars ($750). 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to abide by the executed Employee Invention Agreement attached hereto as Exhibit A. 3.2 REMEDIES. Executive's duties under the Employee Invention Agreement shall survive termination of his employment with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by him of the provisions of the Employee Invention Agreement would be inadequate, and he therefore agrees that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach. 4. OUTSIDE ACTIVITIES. 4.1 Except with the prior written consent of the President and Chief Executive Officer, Executive will not during the term of this Agreement undertake or engage in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor. Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of his duties hereunder. 4.2 Except as permitted by Section 4.3, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by him to be adverse or antagonistic to the Company, its business or prospects, financial or otherwise. 4.3 During the term of his employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever which were known by him to compete directly with the Company, throughout the world, in any line of business engaged in (or planned to be engaged in) by the Company; provided, however, that anything above to the contrary notwithstanding, he may own, as a passive investor, securities of any competitor corporation, so long as his direct holdings in any one such corporation shall not in the aggregate constitute more than One Percent (1%) of the voting stock of such corporation. 5. TERMINATION OF EMPLOYMENT. 5.1 TERMINATION WITHOUT CAUSE (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause or advance notice. (b) In the event Executive's employment is terminated without Cause (as defined in section 5.2) by the Company, or by any successor or acquiring entity upon or after an Asset Sale, Merger, Consolidation, or Reverse Merger (as defined in the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended), Executive shall be eligible to receive severance compensation, calculated as specified herein, provided that, Executive executes a general release of any and all claims he may have against the Company, which general release shall be in a form acceptable to the Company. The amount of severance compensation that Executive shall receive is equal to three (3) months of his base salary, subject to standard payroll deductions and withholdings, and paid in a lump sum. ("Severance"). The 2 Severance shall be the only severance, benefit, or cash compensation, other than accrued wages, to which the Executive shall be entitled from the Company in the event of a termination without Cause. In the event, however, that a successor or acquiring entity is obligated to pay Severance to Executive, such Severance shall be in addition to any equity compensation or benefits for which the Executive may be eligible under the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended. 5.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for Cause. (b) "Cause" for termination shall mean: (a) indictment or conviction of any felony or of any crime involving dishonesty; (b) participation in any fraud or act of dishonesty against the Company; (c) Executive's failure to perform his duties to the Company in a satisfactory manner; (d) intentional damage to any property of the Company; or (e) conduct by Executive which in the good faith and reasonable determination of the President and Chief Executive Officer demonstrates lack of fitness to serve. (c) In the event Executive's employment is terminated at any time for Cause, Executive will not be entitled to Severance or any other compensation or benefit other than accrued wages. 5.3 VOLUNTARY OF MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, he will not be entitled to Severance or any other such compensation or benefit, other than accrued wages. 6. NONINTERFERENCE. While employed by the Company, and for two (2) years immediately following the termination of his employment, Executive agrees not to interfere with the business of the Company by soliciting, attempting to solicit, inducing, or otherwise causing any employee of the Company to terminate his or her employment in order to become an employee, consultant or independent contractor to or for any competitor of the Company. 7. COOPERATION WITH COMPANY. 7.1 COOPERATION OBLIGATION. During and after Executive's employment, Executive will cooperate with the Company in responding to the reasonable requests of the Company's President and Chief Executive Officer or General Counsel, in connection with any and all existing or future litigation, arbitrations, mediations or investigations brought by or against the Company or its affiliates, agents, officers, directors or employees, whether administrative, civil or criminal in nature, in which the Company reasonably deems Executive's cooperation necessary or desirable. In such matters, Executive agrees to provide the Company with reasonable advice, assistance and information, including offering and explaining evidence, providing sworn statements, and participating in discovery and trial preparation and testimony. Executive also agrees to promptly send the Company copies of all correspondence (for example, but not limited to, subpoenas) received by Executive in connection with any such legal proceedings, unless Executive is expressly prohibited by law from so doing. The failure by Executive to cooperate fully with the Company in accordance with this Section 7 will be a material breach of the terms of this Agreement which will result in all commitments of the Company to pay Severance to Executive under Section 5.1 (b) becoming null and void. 7.2 EXPENSES AND FEES. The Company will reimburse Executive for reasonable out-of-pocket expenses incurred by Executive as a result of his cooperation with the obligations described in Section 7.1, within thirty (30) days of the presentation of appropriate documentation thereof, in accordance with the Company's standard reimbursement policies and procedures. After termination of Executive's employment, the Company will also pay Executive a reasonable fee in the amount of $200 per hour for the time Executive devotes to matters as requested by 3 the Company under Section 7.1 ("the Fees"). The Company will not deduct or withhold any amount from the Fees for taxes, social security, or other payroll deductions, but will instead issue an IRS Form 1099 with respect to the Fees. Executive acknowledges that in cooperating in the manner described in Section 7.1, he will be serving as an independent contractor, not a Company employee, and he will be entirely responsible for the payment of all income taxes and any other taxes due and owing as a result of the payment of Fees. Executive hereby indemnifies the Company and its officers, directors, agents, attorneys, employees, shareholders, subsidiaries, and affiliates and holds them harmless from any liability for any taxes, penalties, and interest that may be assessed by any taxing authority with respect to the Fees, with the exception of the employer's share of employment taxes subsequently determined to be applicable, if any. 8. GENERAL PROVISIONS. 8.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at his address as listed on the Company payroll. 8.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction in order to most closely effectuate the parties' intentions. 8.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 8.4 COMPLETE AGREEMENT. This Agreement and its Exhibit constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in writing signed by a member of the Company's Board. 8.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 8.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 8.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 8.8 ATTORNEY'S FEES. If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys' fees and costs incurred in connection with such action. 8.9 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California. Executive hereby expressly consents to the personal jurisdiction of the state and federal courts located in Alameda County, California for any lawsuit filed there against Executive by the Company arising from or related to this Agreement. 4 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year written below. LYNX THERAPEUTICS, INC. By: /s/ Kevin P. Corcoran ----------------------------- Kevin P. Corcoran Chief Executive Officer Date: March 20, 2003 Accepted and agreed this 20th day of March 2003. /s/ Edward C. Albini - ----------------------------- Edward C. Albini 5 EXHIBIT A LYNX THERAPEUTICS INC. EMPLOYEE INVENTION AGREEMENT 1. As an employee of Lynx Therapeutics Incorporated (the "Company"), and in consideration of the compensation now and hereafter paid to me, I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use or to disclose to any person, firm or corporation, without express authorization of an officer of the Company, any information, manufacturing technique, processes, formulas, development or experimental work, work in process, trade secrets or any other proprietary or confidential matter relating to the products, sales or business of the Company. 2. I further agree that I will promptly make full disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and will assign all my right, title and interest to, any and all inventions, discoveries, developments, improvements or trade secrets which I may solely or jointly conceive, develop or reduce to practice, or cause to be conceived, developed or reduced to practice, during the period of time I am in the employ of the Company, except any invention, discovery, development, improvement or trade secret as to which I can prove that: a) it was developed entirely on my own time; and b) no equipment, supplies, facility or trade secret of the Company was used in its development; and c) (i) it does not relate to the business or actual or demonstrably anticipated research or development of the Company, or (ii) it does not result from any work performed by me for the Company. Notwithstanding the foregoing, I also assign to or as directed by the Company all my right, title and interest in and to any and all inventions, discoveries, developments, improvements or trade secrets, full title to which is required to be in the United States by a contract between the Company and the United States or any of its agencies. 3. I agree to execute any proper oath or verify any proper document in connection with carrying out the terms of this agreement. In the event the Company is unable (because of my mental or physical incapacity or for any other reason whatsoever) to secure my signature to apply for, or to pursue any application for any United States or foreign letters patent, covering inventions assigned to the Company as stated above, I hereby irrevocably designate and appoint the Company and its duly authorized officer and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute and file 1 any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent thereon with the same legal force and effect as if executed by me. I have attached hereto a list describing all inventions made by me prior to my employment with the Company belonging to me, relating to the Company's proposed business and products and not assigned to the Company, or, if no such list is attached, I represent that there are no such inventions. I hereby waive and quitclaim to the Company any and all claims of any nature whatsoever which I now or may hereafter have for infringement of any patent or patents resulting from any such applications for letters patent assigned hereunder to the Company. 4. I recognize that the Company may receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree that I owe the Company and such third parties during the term of my employment and thereafter a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out my work for the Company consistent with the Company's agreement with such third party) or use it for the benefit of anyone other than for the Company or such third party consistent with the Company's agreement with such third party without the express authorization of an officer of the Company. 5. I further agree that at the time of leaving the employ of the Company, I will deliver to the Company and will not keep in my possession, nor deliver to anyone else, any and all drawings, blueprints, notes, memoranda, specifications, devices, documents, or any other material containing or disclosing any of the matters referred to herein. 6. I agree that I will not during my employment at the Company improperly use or disclose any proprietary information or trade secrets of my former or concurrent employers or companies, if any, and that I shall not bring onto the premises of the Company any unpublished document or any property belonging to my former or concurrent employers or companies, if any, unless consented to in writing by said employers or companies. 7. The provisions of this agreement requiring assignment to the Company do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. I will advise the company promptly in writing of any inventions, discoveries, developments, improvement or trade secrets that I believe meet the criteria in subparagraphs 2 a, b, and c above; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. I understand that the Company will keep in confidence and will not disclose to third parties without my consent any confidential information disclosed in writing to the company relating to inventions which qualify fully under the provision of Section 2870 of the California Labor Code. 2 IN WITNESS WHEREOF, I have subscribed my name hereunto this 14th day of April, 1997 /s/ Edward C. Albini --------------------------------- Signature /s/ Edward C. Albini --------------------------------- Print Name /s/ Kathy San Roman - ---------------------------- Witness 3 EX-10.37 4 f90137exv10w37.txt EXHIBIT 10.37 EXHIBIT 10.37 LYNX THERAPEUTICS, INC. EMPLOYEE AGREEMENT FOR KATHY A. SAN ROMAN This Employment Agreement ("Agreement") by and between KATHY A. SAN ROMAN ("Executive") and LYNX THERAPEUTICS, INC., a Delaware corporation (the "Company"), is entered into and is effective as of March 20, 2003 (the "Effective Date"). WHEREAS, the Company desires that Executive continue to provide personal services to the Company, and wishes to provide Executive with the compensation and benefits set forth below in return for such services; and WHEREAS, Executive wishes to continue to provide personal services to the Company in return for the compensation and benefits set forth below; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 Subject to the terms set forth herein, Executive shall be employed in the position of Vice President, Human Resources and Administration, reporting to the Chief Financial Officer of the Company. Executive agrees to devote her best efforts and substantially all of her business time and attention (except for vacation periods permitted by the Company's general employment policies, reasonable periods of illness or other incapacities permitted by the Company's general employment policies, and as otherwise provided herein) to the business of the Company. 1.2 Executive shall serve in an executive capacity and shall perform such duties as are customarily associated with her then current title. 1.3 The employment relationship between the parties is "at will," which means that either party may terminate the relationship at any time, with or without cause and with or without advance notice. The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or practices, this Agreement shall control. 2. COMPENSATION. 2.1 SALARY. As of the Effective Date, Executive shall receive for services to be rendered hereunder an annualized base salary of One Hundred Sixty Thousand U.S. Dollars ($160,000), payable on the Company's normal payroll schedule, and subject to standard payroll deductions and withholdings. 2.2 STOCK OPTION. The Board granted Executive a nonstatutory stock option (the "Option") to purchase Twenty-five Thousand (25,000) shares of the common stock of the Company (the "Common Stock") pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), as amended. In addition, as part of Executive's employment by the Company before the Effective Date of this Agreement, Executive has been granted, on one or more occasion, an Option to purchase shares of the common stock of the Company pursuant to the Company's 1992 Plan. Any such Option(s) will continue to be subject to the terms of the Plan and Executive's corresponding Stock Option Grant Notices and Stock Option Agreements. 1 2.3 INCENTIVE COMPENSATION. The Company does not currently have an incentive compensation plan or program in place, and therefore the Company cannot offer Executive incentive compensation at this time. It is the Company's intention, however, to implement such a plan or program and to cause Executive to be eligible for such plan or program. 2.4 STANDARD COMPANY BENEFITS. Executive shall continue to be entitled to all rights and benefits for which she is eligible under the terms and conditions of the standard Company benefits and compensation practices that may be in effect from time to time and provided by the Company to its employees generally, including but not limited to health benefit plans. Executive also shall continue to be eligible to participate in the Company's 401(k) Plan, including eligibility for a monthly matching contribution by the Company on Executive's behalf, in an amount equal to that contributed by Executive up to a maximum annual matching contribution of Seven Hundred Fifty Dollars ($750). 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to abide by the executed Employee Invention Agreement attached hereto as Exhibit A. 3.2 REMEDIES. Executive's duties under the Employee Invention Agreement shall survive termination of her employment with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by him of the provisions of the Employee Invention Agreement would be inadequate, and she therefore agrees that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach. 4. OUTSIDE ACTIVITIES. 4.1 Except with the prior written consent of the President and Chief Executive Officer, Executive will not during the term of this Agreement undertake or engage in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor. Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of her duties hereunder. 4.2 Except as permitted by Section 4.3, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by him to be adverse or antagonistic to the Company, its business or prospects, financial or otherwise. 4.3 During the term of her employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever which were known by him to compete directly with the Company, throughout the world, in any line of business engaged in (or planned to be engaged in) by the Company; provided, however, that anything above to the contrary notwithstanding, she may own, as a passive investor, securities of any competitor corporation, so long as her direct holdings in any one such corporation shall not in the aggregate constitute more than One Percent (1%) of the voting stock of such corporation. 5. TERMINATION OF EMPLOYMENT. 5.1 TERMINATION WITHOUT CAUSE (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause or advance notice. (b) In the event Executive's employment is terminated without Cause (as defined in section 5.2) by the Company, or by any successor or acquiring entity upon or after an Asset Sale, Merger, Consolidation, or Reverse Merger (as defined in the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended), Executive shall be eligible to receive severance compensation, calculated as specified herein, provided that, Executive executes a general release of any and all claims she may have against the Company, which general release shall be in a form acceptable 2 to the Company. The amount of severance compensation that Executive shall receive is equal to three (3) months of her base salary, subject to standard payroll deductions and withholdings, and paid in a lump sum. ("Severance"). The Severance shall be the only severance, benefit, or cash compensation, other than accrued wages, to which the Executive shall be entitled from the Company in the event of a termination without Cause. In the event, however, that a successor or acquiring entity is obligated to pay Severance to Executive, such Severance shall be in addition to any equity compensation or benefits for which the Executive may be eligible under the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended. 5.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for Cause. (b) "Cause" for termination shall mean: (a) indictment or conviction of any felony or of any crime involving dishonesty; (b) participation in any fraud or act of dishonesty against the Company; (c) Executive's failure to perform her duties to the Company in a satisfactory manner; (d) intentional damage to any property of the Company; or (e) conduct by Executive which in the good faith and reasonable determination of the President and Chief Executive Officer demonstrates lack of fitness to serve. (c) In the event Executive's employment is terminated at any time for Cause, Executive will not be entitled to Severance or any other compensation or benefit other than accrued wages. 5.3 VOLUNTARY OF MUTUAL TERMINATION. (a) Executive may voluntarily terminate her employment with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates her employment, she will not be entitled to Severance or any other such compensation or benefit, other than accrued wages. 6. NONINTERFERENCE. While employed by the Company, and for two (2) years immediately following the termination of her employment, Executive agrees not to interfere with the business of the Company by soliciting, attempting to solicit, inducing, or otherwise causing any employee of the Company to terminate her or her employment in order to become an employee, consultant or independent contractor to or for any competitor of the Company. 7. COOPERATION WITH COMPANY. 7.1 COOPERATION OBLIGATION. During and after Executive's employment, Executive will cooperate with the Company in responding to the reasonable requests of the Company's President and Chief Executive Officer or General Counsel, in connection with any and all existing or future litigation, arbitrations, mediations or investigations brought by or against the Company or its affiliates, agents, officers, directors or employees, whether administrative, civil or criminal in nature, in which the Company reasonably deems Executive's cooperation necessary or desirable. In such matters, Executive agrees to provide the Company with reasonable advice, assistance and information, including offering and explaining evidence, providing sworn statements, and participating in discovery and trial preparation and testimony. Executive also agrees to promptly send the Company copies of all correspondence (for example, but not limited to, subpoenas) received by Executive in connection with any such legal proceedings, unless Executive is expressly prohibited by law from so doing. The failure by Executive to cooperate fully with the Company in accordance with this Section 7 will be a material breach of the terms of this Agreement which will result in all commitments of the Company to pay Severance to Executive under Section 5.1 (b) becoming null and void. 3 7.2 EXPENSES AND FEES. The Company will reimburse Executive for reasonable out-of-pocket expenses incurred by Executive as a result of her cooperation with the obligations described in Section 7.1, within thirty (30) days of the presentation of appropriate documentation thereof, in accordance with the Company's standard reimbursement policies and procedures. After termination of Executive's employment, the Company will also pay Executive a reasonable fee in the amount of $200 per hour for the time Executive devotes to matters as requested by the Company under Section 7.1 ("the Fees"). The Company will not deduct or withhold any amount from the Fees for taxes, social security, or other payroll deductions, but will instead issue an IRS Form 1099 with respect to the Fees. Executive acknowledges that in cooperating in the manner described in Section 7.1, she will be serving as an independent contractor, not a Company employee, and she will be entirely responsible for the payment of all income taxes and any other taxes due and owing as a result of the payment of Fees. Executive hereby indemnifies the Company and its officers, directors, agents, attorneys, employees, shareholders, subsidiaries, and affiliates and holds them harmless from any liability for any taxes, penalties, and interest that may be assessed by any taxing authority with respect to the Fees, with the exception of the employer's share of employment taxes subsequently determined to be applicable, if any. 8. GENERAL PROVISIONS. 8.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at her address as listed on the Company payroll. 8.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction in order to most closely effectuate the parties' intentions. 8.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, she or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 8.4 COMPLETE AGREEMENT. This Agreement and its Exhibit constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in writing signed by a member of the Company's Board. 8.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 8.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 8.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of her duties hereunder and she may not assign any of her rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 8.8 ATTORNEY'S FEES. If either party hereto brings any action to enforce her or its rights hereunder, the prevailing party in any such action shall be entitled to recover her or its reasonable attorneys' fees and costs incurred in connection with such action. 8.9 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California. Executive hereby expressly consents to the personal 4 jurisdiction of the state and federal courts located in Alameda County, California for any lawsuit filed there against Executive by the Company arising from or related to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year written below. LYNX THERAPEUTICS, INC. By: /s/ Kevin P. Corcoran --------------------------- Kevin P. Corcoran Chief Executive Officer Date: March 20, 2003 Accepted and agreed this 20th day of March 2003. /s/ Kathy A. San Roman - ----------------------------- Kathy A. San Roman 5 EXHIBIT A LYNX THERAPEUTICS INC. EMPLOYEE INVENTION AGREEMENT 1. As an employee of Lynx Therapeutics Incorporated (the "Company"), and in consideration of the compensation now and hereafter paid to me, I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use or to disclose to any person, firm or corporation, without express authorization of an officer of the Company, any information, manufacturing technique, processes, formulas, development or experimental work, work in process, trade secrets or any other proprietary or confidential matter relating to the products, sales or business of the Company. 2. I further agree that I will promptly make full disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and will assign all my right, title and interest to, any and all inventions, discoveries, developments, improvements or trade secrets which I may solely or jointly conceive, develop or reduce to practice, or cause to be conceived, developed or reduced to practice, during the period of time I am in the employ of the Company, except any invention, discovery, development, improvement or trade secret as to which I can prove that: a) it was developed entirely on my own time; and b) no equipment, supplies, facility or trade secret of the Company was used in its development; and c) (i) it does not relate to the business or actual or demonstrably anticipated research or development of the Company, or (ii) it does not result from any work performed by me for the Company. Notwithstanding the foregoing, I also assign to or as directed by the Company all my right, title and interest in and to any and all inventions, discoveries, developments, improvements or trade secrets, full title to which is required to be in the United States by a contract between the Company and the United States or any of its agencies. 3. I agree to execute any proper oath or verify any proper document in connection with carrying out the terms of this agreement. In the event the Company is unable (because of my mental or physical incapacity or for any other reason whatsoever) to secure my signature to apply for, or to pursue any application for any United States or foreign letters patent, covering inventions assigned to the Company as stated above, I hereby irrevocably designate and appoint the Company and its duly authorized officer and agents 1 as my agent and attorney in fact, to act for and in my behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent thereon with the same legal force and effect as if executed by me. I have attached hereto a list describing all inventions made by me prior to my employment with the Company belonging to me, relating to the Company's proposed business and products and not assigned to the Company, or, if no such list is attached, I represent that there are no such inventions. I hereby waive and quitclaim to the Company any and all claims of any nature whatsoever which I now or may hereafter have for infringement of any patent or patents resulting from any such applications for letters patent assigned hereunder to the Company. 4. I recognize that the Company may receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree that I owe the Company and such third parties during the term of my employment and thereafter a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out my work for the Company consistent with the Company's agreement with such third party) or use it for the benefit of anyone other than for the Company or such third party consistent with the Company's agreement with such third party without the express authorization of an officer of the Company. 5. I further agree that at the time of leaving the employ of the Company, I will deliver to the Company and will not keep in my possession, nor deliver to anyone else, any and all drawings, blueprints, notes, memoranda, specifications, devices, documents, or any other material containing or disclosing any of the matters referred to herein. 6. I agree that I will not during my employment at the Company improperly use or disclose any proprietary information or trade secrets of my former or concurrent employers or companies, if any, and that I shall not bring onto the premises of the Company any unpublished document or any property belonging to my former or concurrent employers or companies, if any, unless consented to in writing by said employers or companies. 7. The provisions of this agreement requiring assignment to the Company do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. I will advise the company promptly in writing of any inventions, discoveries, developments, improvement or trade secrets that I believe meet the criteria in subparagraphs 2 a, b, and c above; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. I understand that the Company will keep in confidence and will not disclose to third parties without my consent any confidential information disclosed in writing to the company relating to inventions which qualify fully under the provision of Section 2870 of the California Labor Code. 2 IN WITNESS WHEREOF, I have subscribed my name hereunto this 13th day of November, 1992. /s/ Kathy A. San Roman ---------------------------------- Signature /s/ Kathy A. San Roman ---------------------------------- Print Name /s/ Tracey J. Rivas - ---------------------------------- Witness 3 EX-99.1 5 f90137exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION (1) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), Kevin P. Corcoran, Chief Executive Officer of Lynx Therapeutics, Inc. (the "Company"), and Edward C. Albini, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003, 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. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of May 15, 2003. /s/ Kevin P. Corcoran ---------------------------------- Kevin P. Corcoran Chief Executive Officer /s/ Edward C. Albini ---------------------------------- Edward C. Albini Chief Financial Officer - ---------------------------- (1) This certification "accompanies" the Quarterly Report on Form 10-Q to which it relates, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Lynx Therapeutics, Inc. under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 has been provided to Lynx Therapeutics, Inc. and will be retained by Lynx Therapeutics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 1 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.36

                                                                   EXHIBIT 10.36

                             LYNX THERAPEUTICS, INC.

                               EMPLOYEE AGREEMENT
                                       FOR
                                EDWARD C. ALBINI

         This Employment Agreement ("Agreement") by and between EDWARD C. ALBINI
("Executive") and LYNX THERAPEUTICS, INC., a Delaware corporation (the
"Company"), is entered into and is effective as of March 20, 2003 (the
"Effective Date").

                  WHEREAS, the Company desires that Executive continue to
         provide personal services to the Company, and wishes to provide
         Executive with the compensation and benefits set forth below in return
         for such services; and

                  WHEREAS, Executive wishes to continue to provide personal
         services to the Company in return for the compensation and benefits set
         forth below;

                  NOW, THEREFORE, in consideration of the mutual promises and
         covenants contained herein, it is hereby agreed by and between the
         parties hereto as follows:

    1. EMPLOYMENT BY THE COMPANY.

         1.1 Subject to the terms set forth herein, Executive shall be employed
in the position of Chief Financial Officer and Secretary, reporting to the
President and Chief Executive Officer of the Company. Executive agrees to devote
his best efforts and substantially all of his business time and attention
(except for vacation periods permitted by the Company's general employment
policies, reasonable periods of illness or other incapacities permitted by the
Company's general employment policies, and as otherwise provided herein) to the
business of the Company.

         1.2 Executive shall serve in an executive capacity and shall perform
such duties as are customarily associated with his then current title.

         1.3 The employment relationship between the parties is "at will," which
means that either party may terminate the relationship at any time, with or
without cause and with or without advance notice. The employment relationship
between the parties shall also be governed by the general employment policies
and practices of the Company, including those relating to protection of
confidential information and assignment of inventions, except that when the
terms of this Agreement differ from or are in conflict with the Company's
general employment policies or practices, this Agreement shall control.

    2. COMPENSATION.

         2.1 SALARY. As of the Effective Date, Executive shall receive for
services to be rendered hereunder an annualized base salary of Two Hundred Fifty
Thousand U.S. Dollars ($250,000), payable on the Company's normal payroll
schedule, and subject to standard payroll deductions and withholdings.

         2.2 STOCK OPTION. The Board granted Executive a nonstatutory stock
option (the "Option") to purchase Thirty Thousand (30,000) shares of the common
stock of the Company (the "Common Stock") pursuant to the Company's 1992 Stock
Option Plan (the "1992 Plan"), as amended. In addition, as part of Executive's
employment by the Company before the Effective Date of this Agreement, Executive
has been granted, on one or more occasion, an Option to purchase shares of the
common stock of the Company pursuant to the Company's 1992 Plan. Any such
Option(s) will continue to be subject to the terms of the Plan and Executive's
corresponding Stock Option Grant Notices and Stock Option Agreements.

         2.3 INCENTIVE COMPENSATION. The Company does not currently have an
incentive compensation plan or program in place, and therefore the Company
cannot offer Executive incentive compensation at this time. It is the

                                        1



Company's intention, however, to implement such a plan or program and to cause
Executive to be eligible for such plan or program.

         2.4 STANDARD COMPANY BENEFITS. Executive shall continue to be entitled
to all rights and benefits for which he is eligible under the terms and
conditions of the standard Company benefits and compensation practices that may
be in effect from time to time and provided by the Company to its employees
generally, including but not limited to health benefit plans. Executive also
shall continue to be eligible to participate in the Company's 401(k) Plan,
including eligibility for a monthly matching contribution by the Company on
Executive's behalf, in an amount equal to that contributed by Executive up to a
maximum annual matching contribution of Seven Hundred Fifty Dollars ($750).

    3. PROPRIETARY INFORMATION OBLIGATIONS.

         3.1 AGREEMENT. Executive agrees to abide by the executed Employee
Invention Agreement attached hereto as Exhibit A.

         3.2 REMEDIES. Executive's duties under the Employee Invention Agreement
shall survive termination of his employment with the Company. Executive
acknowledges that a remedy at law for any breach or threatened breach by him of
the provisions of the Employee Invention Agreement would be inadequate, and he
therefore agrees that the Company shall be entitled to injunctive relief in case
of any such breach or threatened breach.

    4. OUTSIDE ACTIVITIES.

         4.1 Except with the prior written consent of the President and Chief
Executive Officer, Executive will not during the term of this Agreement
undertake or engage in any other employment, occupation or business enterprise,
other than ones in which Executive is a passive investor. Executive may engage
in civic and not-for-profit activities so long as such activities do not
materially interfere with the performance of his duties hereunder.

         4.2 Except as permitted by Section 4.3, Executive agrees not to
acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by him to be adverse or antagonistic to the
Company, its business or prospects, financial or otherwise.

         4.3 During the term of his employment by the Company, except on behalf
of the Company, Executive will not directly or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever which were
known by him to compete directly with the Company, throughout the world, in any
line of business engaged in (or planned to be engaged in) by the Company;
provided, however, that anything above to the contrary notwithstanding, he may
own, as a passive investor, securities of any competitor corporation, so long as
his direct holdings in any one such corporation shall not in the aggregate
constitute more than One Percent (1%) of the voting stock of such corporation.

    5. TERMINATION OF EMPLOYMENT.

         5.1 TERMINATION WITHOUT CAUSE

             (a) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause or advance notice.

             (b) In the event Executive's employment is terminated without Cause
(as defined in section 5.2) by the Company, or by any successor or acquiring
entity upon or after an Asset Sale, Merger, Consolidation, or Reverse Merger (as
defined in the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended),
Executive shall be eligible to receive severance compensation, calculated as
specified herein, provided that, Executive executes a general release of any and
all claims he may have against the Company, which general release shall be in a
form acceptable to the Company. The amount of severance compensation that
Executive shall receive is equal to three (3) months of his base salary, subject
to standard payroll deductions and withholdings, and paid in a lump sum.
("Severance"). The

                                        2



Severance shall be the only severance, benefit, or cash compensation, other than
accrued wages, to which the Executive shall be entitled from the Company in the
event of a termination without Cause. In the event, however, that a successor or
acquiring entity is obligated to pay Severance to Executive, such Severance
shall be in addition to any equity compensation or benefits for which the
Executive may be eligible under the Lynx Therapeutics, Inc. 1992 Stock Option
Plan, as amended.

         5.2 TERMINATION FOR CAUSE.

             (a) The Company shall have the right to terminate Executive's
employment with the Company at any time for Cause.

             (b) "Cause" for termination shall mean: (a) indictment or
conviction of any felony or of any crime involving dishonesty; (b) participation
in any fraud or act of dishonesty against the Company; (c) Executive's failure
to perform his duties to the Company in a satisfactory manner; (d) intentional
damage to any property of the Company; or (e) conduct by Executive which in the
good faith and reasonable determination of the President and Chief Executive
Officer demonstrates lack of fitness to serve.

             (c) In the event Executive's employment is terminated at any time
for Cause, Executive will not be entitled to Severance or any other compensation
or benefit other than accrued wages.

         5.3 VOLUNTARY OF MUTUAL TERMINATION.

             (a) Executive may voluntarily terminate his employment with the
Company at any time, after which no further compensation will be paid to
Executive.

             (b) In the event Executive voluntarily terminates his employment,
he will not be entitled to Severance or any other such compensation or benefit,
other than accrued wages.

    6.   NONINTERFERENCE.

    While employed by the Company, and for two (2) years immediately following
the termination of his employment, Executive agrees not to interfere with the
business of the Company by soliciting, attempting to solicit, inducing, or
otherwise causing any employee of the Company to terminate his or her employment
in order to become an employee, consultant or independent contractor to or for
any competitor of the Company.

    7. COOPERATION WITH COMPANY.

         7.1 COOPERATION OBLIGATION. During and after Executive's employment,
Executive will cooperate with the Company in responding to the reasonable
requests of the Company's President and Chief Executive Officer or General
Counsel, in connection with any and all existing or future litigation,
arbitrations, mediations or investigations brought by or against the Company or
its affiliates, agents, officers, directors or employees, whether
administrative, civil or criminal in nature, in which the Company reasonably
deems Executive's cooperation necessary or desirable. In such matters, Executive
agrees to provide the Company with reasonable advice, assistance and
information, including offering and explaining evidence, providing sworn
statements, and participating in discovery and trial preparation and testimony.
Executive also agrees to promptly send the Company copies of all correspondence
(for example, but not limited to, subpoenas) received by Executive in connection
with any such legal proceedings, unless Executive is expressly prohibited by law
from so doing. The failure by Executive to cooperate fully with the Company in
accordance with this Section 7 will be a material breach of the terms of this
Agreement which will result in all commitments of the Company to pay Severance
to Executive under Section 5.1 (b) becoming null and void.

         7.2 EXPENSES AND FEES. The Company will reimburse Executive for
reasonable out-of-pocket expenses incurred by Executive as a result of his
cooperation with the obligations described in Section 7.1, within thirty (30)
days of the presentation of appropriate documentation thereof, in accordance
with the Company's standard reimbursement policies and procedures. After
termination of Executive's employment, the Company will also pay Executive a
reasonable fee in the amount of $200 per hour for the time Executive devotes to
matters as requested by

                                        3



the Company under Section 7.1 ("the Fees"). The Company will not deduct or
withhold any amount from the Fees for taxes, social security, or other payroll
deductions, but will instead issue an IRS Form 1099 with respect to the Fees.
Executive acknowledges that in cooperating in the manner described in Section
7.1, he will be serving as an independent contractor, not a Company employee,
and he will be entirely responsible for the payment of all income taxes and any
other taxes due and owing as a result of the payment of Fees. Executive hereby
indemnifies the Company and its officers, directors, agents, attorneys,
employees, shareholders, subsidiaries, and affiliates and holds them harmless
from any liability for any taxes, penalties, and interest that may be assessed
by any taxing authority with respect to the Fees, with the exception of the
employer's share of employment taxes subsequently determined to be applicable,
if any.

    8. GENERAL PROVISIONS.

         8.1 NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by facsimile) or the third day after mailing by first class
mail, to the Company at its primary office location and to Executive at his
address as listed on the Company payroll.

         8.2 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction in order to most closely
effectuate the parties' intentions.

         8.3 WAIVER. If either party should waive any breach of any provisions
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.

         8.4 COMPLETE AGREEMENT. This Agreement and its Exhibit constitute the
entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to this subject
matter. It is entered into without reliance on any promise or representation
other than those expressly contained herein, and it cannot be modified or
amended except in writing signed by a member of the Company's Board.

         8.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.

         8.6 HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.

         8.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which shall not be withheld unreasonably.

         8.8 ATTORNEY'S FEES. If either party hereto brings any action to
enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys' fees and costs
incurred in connection with such action.

         8.9 GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the law of the State of
California. Executive hereby expressly consents to the personal jurisdiction of
the state and federal courts located in Alameda County, California for any
lawsuit filed there against Executive by the Company arising from or related to
this Agreement.

                                        4



         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written below.

                                              LYNX THERAPEUTICS, INC.

                                              By: /s/ Kevin P. Corcoran
                                                  -----------------------------
                                                  Kevin P. Corcoran
                                                  Chief Executive Officer

                                                  Date: March 20, 2003

Accepted and agreed this 20th day of March 2003.

/s/ Edward C. Albini
- -----------------------------
Edward C. Albini

                                        5



                                                                       EXHIBIT A

                             LYNX THERAPEUTICS INC.

                          EMPLOYEE INVENTION AGREEMENT

1.       As an employee of Lynx Therapeutics Incorporated (the "Company"), and
         in consideration of the compensation now and hereafter paid to me, I
         agree at all times during the term of my employment and thereafter, to
         hold in strictest confidence, and not to use or to disclose to any
         person, firm or corporation, without express authorization of an
         officer of the Company, any information, manufacturing technique,
         processes, formulas, development or experimental work, work in process,
         trade secrets or any other proprietary or confidential matter relating
         to the products, sales or business of the Company.

2.       I further agree that I will promptly make full disclosure to the
         Company, will hold in trust for the sole right and benefit of the
         Company, and will assign all my right, title and interest to, any and
         all inventions, discoveries, developments, improvements or trade
         secrets which I may solely or jointly conceive, develop or reduce to
         practice, or cause to be conceived, developed or reduced to practice,
         during the period of time I am in the employ of the Company, except any
         invention, discovery, development, improvement or trade secret as to
         which I can prove that:

         a)       it was developed entirely on my own time; and

         b)       no equipment, supplies, facility or trade secret of the
                  Company was used in its development; and

         c)       (i) it does not relate to the business or actual or
                  demonstrably anticipated research or development of the
                  Company, or (ii) it does not result from any work performed by
                  me for the Company.

         Notwithstanding the foregoing, I also assign to or as directed by the
         Company all my right, title and interest in and to any and all
         inventions, discoveries, developments, improvements or trade secrets,
         full title to which is required to be in the United States by a
         contract between the Company and the United States or any of its
         agencies.

3.       I agree to execute any proper oath or verify any proper document in
         connection with carrying out the terms of this agreement. In the event
         the Company is unable (because of my mental or physical incapacity or
         for any other reason whatsoever) to secure my signature to apply for,
         or to pursue any application for any United States or foreign letters
         patent, covering inventions assigned to the Company as stated above, I
         hereby irrevocably designate and appoint the Company and its duly
         authorized officer and agents as my agent and attorney in fact, to act
         for and in my behalf and stead to execute and file

                                        1



         any such applications and to do all other lawfully permitted acts to
         further the prosecution and issuance of letters patent thereon with the
         same legal force and effect as if executed by me. I have attached
         hereto a list describing all inventions made by me prior to my
         employment with the Company belonging to me, relating to the Company's
         proposed business and products and not assigned to the Company, or, if
         no such list is attached, I represent that there are no such
         inventions. I hereby waive and quitclaim to the Company any and all
         claims of any nature whatsoever which I now or may hereafter have for
         infringement of any patent or patents resulting from any such
         applications for letters patent assigned hereunder to the Company.

4.       I recognize that the Company may receive from third parties their
         confidential or proprietary information subject to a duty on the
         Company's part to maintain the confidentiality of such information and
         to use it only for certain limited purposes. I agree that I owe the
         Company and such third parties during the term of my employment and
         thereafter a duty to hold all such confidential or proprietary
         information in the strictest confidence and not to disclose it to any
         person, firm or corporation (except as necessary in carrying out my
         work for the Company consistent with the Company's agreement with such
         third party) or use it for the benefit of anyone other than for the
         Company or such third party consistent with the Company's agreement
         with such third party without the express authorization of an officer
         of the Company.

5.       I further agree that at the time of leaving the employ of the Company,
         I will deliver to the Company and will not keep in my possession, nor
         deliver to anyone else, any and all drawings, blueprints, notes,
         memoranda, specifications, devices, documents, or any other material
         containing or disclosing any of the matters referred to herein.

6.       I agree that I will not during my employment at the Company improperly
         use or disclose any proprietary information or trade secrets of my
         former or concurrent employers or companies, if any, and that I shall
         not bring onto the premises of the Company any unpublished document or
         any property belonging to my former or concurrent employers or
         companies, if any, unless consented to in writing by said employers or
         companies.

7.       The provisions of this agreement requiring assignment to the Company do
         not apply to any invention which qualifies fully under the provisions
         of Section 2870 of the California Labor Code. I will advise the company
         promptly in writing of any inventions, discoveries, developments,
         improvement or trade secrets that I believe meet the criteria in
         subparagraphs 2 a, b, and c above; and I will at that time provide to
         the Company in writing all evidence necessary to substantiate that
         belief. I understand that the Company will keep in confidence and will
         not disclose to third parties without my consent any confidential
         information disclosed in writing to the company relating to inventions
         which qualify fully under the provision of Section 2870 of the
         California Labor Code.

                                        2



IN WITNESS WHEREOF, I have subscribed my name hereunto this

14th day of April, 1997

                                        /s/ Edward C. Albini
                                        ---------------------------------
                                                    Signature

                                        /s/ Edward C. Albini
                                        ---------------------------------
                                                    Print Name

/s/ Kathy San Roman
- ----------------------------
          Witness

                                        3

EX-10.37

                                                                   EXHIBIT 10.37

                             LYNX THERAPEUTICS, INC.

                               EMPLOYEE AGREEMENT
                                      FOR
                               KATHY A. SAN ROMAN

         This Employment Agreement ("Agreement") by and between KATHY A. SAN
ROMAN ("Executive") and LYNX THERAPEUTICS, INC., a Delaware corporation (the
"Company"), is entered into and is effective as of March 20, 2003 (the
"Effective Date").

                  WHEREAS, the Company desires that Executive continue to
         provide personal services to the Company, and wishes to provide
         Executive with the compensation and benefits set forth below in return
         for such services; and

                  WHEREAS, Executive wishes to continue to provide personal
         services to the Company in return for the compensation and benefits set
         forth below;

                  NOW, THEREFORE, in consideration of the mutual promises and
         covenants contained herein, it is hereby agreed by and between the
         parties hereto as follows:

    1. EMPLOYMENT BY THE COMPANY.

         1.1 Subject to the terms set forth herein, Executive shall be employed
in the position of Vice President, Human Resources and Administration, reporting
to the Chief Financial Officer of the Company. Executive agrees to devote her
best efforts and substantially all of her business time and attention (except
for vacation periods permitted by the Company's general employment policies,
reasonable periods of illness or other incapacities permitted by the Company's
general employment policies, and as otherwise provided herein) to the business
of the Company.

         1.2 Executive shall serve in an executive capacity and shall perform
such duties as are customarily associated with her then current title.

         1.3 The employment relationship between the parties is "at will," which
means that either party may terminate the relationship at any time, with or
without cause and with or without advance notice. The employment relationship
between the parties shall also be governed by the general employment policies
and practices of the Company, including those relating to protection of
confidential information and assignment of inventions, except that when the
terms of this Agreement differ from or are in conflict with the Company's
general employment policies or practices, this Agreement shall control.

    2. COMPENSATION.

         2.1 SALARY. As of the Effective Date, Executive shall receive for
services to be rendered hereunder an annualized base salary of One Hundred Sixty
Thousand U.S. Dollars ($160,000), payable on the Company's normal payroll
schedule, and subject to standard payroll deductions and withholdings.

         2.2 STOCK OPTION. The Board granted Executive a nonstatutory stock
option (the "Option") to purchase Twenty-five Thousand (25,000) shares of the
common stock of the Company (the "Common Stock") pursuant to the Company's 1992
Stock Option Plan (the "1992 Plan"), as amended. In addition, as part of
Executive's employment by the Company before the Effective Date of this
Agreement, Executive has been granted, on one or more occasion, an Option to
purchase shares of the common stock of the Company pursuant to the Company's
1992 Plan. Any such Option(s) will continue to be subject to the terms of the
Plan and Executive's corresponding Stock Option Grant Notices and Stock Option
Agreements.

                                        1



         2.3 INCENTIVE COMPENSATION. The Company does not currently have an
incentive compensation plan or program in place, and therefore the Company
cannot offer Executive incentive compensation at this time. It is the Company's
intention, however, to implement such a plan or program and to cause Executive
to be eligible for such plan or program.

         2.4 STANDARD COMPANY BENEFITS. Executive shall continue to be entitled
to all rights and benefits for which she is eligible under the terms and
conditions of the standard Company benefits and compensation practices that may
be in effect from time to time and provided by the Company to its employees
generally, including but not limited to health benefit plans. Executive also
shall continue to be eligible to participate in the Company's 401(k) Plan,
including eligibility for a monthly matching contribution by the Company on
Executive's behalf, in an amount equal to that contributed by Executive up to a
maximum annual matching contribution of Seven Hundred Fifty Dollars ($750).

    3. PROPRIETARY INFORMATION OBLIGATIONS.

         3.1 AGREEMENT. Executive agrees to abide by the executed Employee
Invention Agreement attached hereto as Exhibit A.

         3.2 REMEDIES. Executive's duties under the Employee Invention Agreement
shall survive termination of her employment with the Company. Executive
acknowledges that a remedy at law for any breach or threatened breach by him of
the provisions of the Employee Invention Agreement would be inadequate, and she
therefore agrees that the Company shall be entitled to injunctive relief in case
of any such breach or threatened breach.

    4. OUTSIDE ACTIVITIES.

         4.1 Except with the prior written consent of the President and Chief
Executive Officer, Executive will not during the term of this Agreement
undertake or engage in any other employment, occupation or business enterprise,
other than ones in which Executive is a passive investor. Executive may engage
in civic and not-for-profit activities so long as such activities do not
materially interfere with the performance of her duties hereunder.

         4.2 Except as permitted by Section 4.3, Executive agrees not to
acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by him to be adverse or antagonistic to the
Company, its business or prospects, financial or otherwise.

         4.3 During the term of her employment by the Company, except on behalf
of the Company, Executive will not directly or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever which were
known by him to compete directly with the Company, throughout the world, in any
line of business engaged in (or planned to be engaged in) by the Company;
provided, however, that anything above to the contrary notwithstanding, she may
own, as a passive investor, securities of any competitor corporation, so long as
her direct holdings in any one such corporation shall not in the aggregate
constitute more than One Percent (1%) of the voting stock of such corporation.

    5. TERMINATION OF EMPLOYMENT.

         5.1 TERMINATION WITHOUT CAUSE

             (a) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause or advance notice.

             (b) In the event Executive's employment is terminated without Cause
(as defined in section 5.2) by the Company, or by any successor or acquiring
entity upon or after an Asset Sale, Merger, Consolidation, or Reverse Merger (as
defined in the Lynx Therapeutics, Inc. 1992 Stock Option Plan, as amended),
Executive shall be eligible to receive severance compensation, calculated as
specified herein, provided that, Executive executes a general release of any and
all claims she may have against the Company, which general release shall be in a
form acceptable

                                        2



to the Company. The amount of severance compensation that Executive shall
receive is equal to three (3) months of her base salary, subject to standard
payroll deductions and withholdings, and paid in a lump sum. ("Severance"). The
Severance shall be the only severance, benefit, or cash compensation, other than
accrued wages, to which the Executive shall be entitled from the Company in the
event of a termination without Cause. In the event, however, that a successor or
acquiring entity is obligated to pay Severance to Executive, such Severance
shall be in addition to any equity compensation or benefits for which the
Executive may be eligible under the Lynx Therapeutics, Inc. 1992 Stock Option
Plan, as amended.

         5.2 TERMINATION FOR CAUSE.

             (a) The Company shall have the right to terminate Executive's
employment with the Company at any time for Cause.

             (b) "Cause" for termination shall mean: (a) indictment or
conviction of any felony or of any crime involving dishonesty; (b) participation
in any fraud or act of dishonesty against the Company; (c) Executive's failure
to perform her duties to the Company in a satisfactory manner; (d) intentional
damage to any property of the Company; or (e) conduct by Executive which in the
good faith and reasonable determination of the President and Chief Executive
Officer demonstrates lack of fitness to serve.

             (c) In the event Executive's employment is terminated at any time
for Cause, Executive will not be entitled to Severance or any other compensation
or benefit other than accrued wages.

         5.3 VOLUNTARY OF MUTUAL TERMINATION.

             (a) Executive may voluntarily terminate her employment with the
Company at any time, after which no further compensation will be paid to
Executive.

             (b) In the event Executive voluntarily terminates her employment,
she will not be entitled to Severance or any other such compensation or benefit,
other than accrued wages.

    6. NONINTERFERENCE.

    While employed by the Company, and for two (2) years immediately following
the termination of her employment, Executive agrees not to interfere with the
business of the Company by soliciting, attempting to solicit, inducing, or
otherwise causing any employee of the Company to terminate her or her employment
in order to become an employee, consultant or independent contractor to or for
any competitor of the Company.

    7. COOPERATION WITH COMPANY.

         7.1 COOPERATION OBLIGATION. During and after Executive's employment,
Executive will cooperate with the Company in responding to the reasonable
requests of the Company's President and Chief Executive Officer or General
Counsel, in connection with any and all existing or future litigation,
arbitrations, mediations or investigations brought by or against the Company or
its affiliates, agents, officers, directors or employees, whether
administrative, civil or criminal in nature, in which the Company reasonably
deems Executive's cooperation necessary or desirable. In such matters, Executive
agrees to provide the Company with reasonable advice, assistance and
information, including offering and explaining evidence, providing sworn
statements, and participating in discovery and trial preparation and testimony.
Executive also agrees to promptly send the Company copies of all correspondence
(for example, but not limited to, subpoenas) received by Executive in connection
with any such legal proceedings, unless Executive is expressly prohibited by law
from so doing. The failure by Executive to cooperate fully with the Company in
accordance with this Section 7 will be a material breach of the terms of this
Agreement which will result in all commitments of the Company to pay Severance
to Executive under Section 5.1 (b) becoming null and void.

                                        3



         7.2 EXPENSES AND FEES.

         The Company will reimburse Executive for reasonable out-of-pocket
expenses incurred by Executive as a result of her cooperation with the
obligations described in Section 7.1, within thirty (30) days of the
presentation of appropriate documentation thereof, in accordance with the
Company's standard reimbursement policies and procedures. After termination of
Executive's employment, the Company will also pay Executive a reasonable fee in
the amount of $200 per hour for the time Executive devotes to matters as
requested by the Company under Section 7.1 ("the Fees"). The Company will not
deduct or withhold any amount from the Fees for taxes, social security, or other
payroll deductions, but will instead issue an IRS Form 1099 with respect to the
Fees. Executive acknowledges that in cooperating in the manner described in
Section 7.1, she will be serving as an independent contractor, not a Company
employee, and she will be entirely responsible for the payment of all income
taxes and any other taxes due and owing as a result of the payment of Fees.
Executive hereby indemnifies the Company and its officers, directors, agents,
attorneys, employees, shareholders, subsidiaries, and affiliates and holds them
harmless from any liability for any taxes, penalties, and interest that may be
assessed by any taxing authority with respect to the Fees, with the exception of
the employer's share of employment taxes subsequently determined to be
applicable, if any.

    8. GENERAL PROVISIONS.

         8.1 NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by facsimile) or the third day after mailing by first class
mail, to the Company at its primary office location and to Executive at her
address as listed on the Company payroll.

         8.2 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction in order to most closely
effectuate the parties' intentions.

         8.3 WAIVER. If either party should waive any breach of any provisions
of this Agreement, she or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.

         8.4 COMPLETE AGREEMENT. This Agreement and its Exhibit constitute the
entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to this subject
matter. It is entered into without reliance on any promise or representation
other than those expressly contained herein, and it cannot be modified or
amended except in writing signed by a member of the Company's Board.

         8.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.

         8.6 HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.

         8.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of her duties hereunder and she may not
assign any of her rights hereunder without the written consent of the Company,
which shall not be withheld unreasonably.

         8.8 ATTORNEY'S FEES. If either party hereto brings any action to
enforce her or its rights hereunder, the prevailing party in any such action
shall be entitled to recover her or its reasonable attorneys' fees and costs
incurred in connection with such action.

         8.9 GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the law of the State of
California. Executive hereby expressly consents to the personal

                                        4



jurisdiction of the state and federal courts located in Alameda County,
California for any lawsuit filed there against Executive by the Company arising
from or related to this Agreement.

         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written below.

                                               LYNX THERAPEUTICS, INC.

                                               By: /s/ Kevin P. Corcoran
                                                   ---------------------------
                                                   Kevin P. Corcoran
                                                   Chief Executive Officer

                                                   Date: March 20, 2003

Accepted and agreed this 20th day of March 2003.

/s/ Kathy A. San Roman
- -----------------------------
Kathy A. San Roman

                                        5



                                                                       EXHIBIT A

                             LYNX THERAPEUTICS INC.

                          EMPLOYEE INVENTION AGREEMENT

1.       As an employee of Lynx Therapeutics Incorporated (the "Company"), and
         in consideration of the compensation now and hereafter paid to me, I
         agree at all times during the term of my employment and thereafter, to
         hold in strictest confidence, and not to use or to disclose to any
         person, firm or corporation, without express authorization of an
         officer of the Company, any information, manufacturing technique,
         processes, formulas, development or experimental work, work in process,
         trade secrets or any other proprietary or confidential matter relating
         to the products, sales or business of the Company.

2.       I further agree that I will promptly make full disclosure to the
         Company, will hold in trust for the sole right and benefit of the
         Company, and will assign all my right, title and interest to, any and
         all inventions, discoveries, developments, improvements or trade
         secrets which I may solely or jointly conceive, develop or reduce to
         practice, or cause to be conceived, developed or reduced to practice,
         during the period of time I am in the employ of the Company, except any
         invention, discovery, development, improvement or trade secret as to
         which I can prove that:

         a)       it was developed entirely on my own time; and

         b)       no equipment, supplies, facility or trade secret of the
                  Company was used in its development; and

         c)       (i) it does not relate to the business or actual or
                  demonstrably anticipated research or development of the
                  Company, or (ii) it does not result from any work performed by
                  me for the Company.

         Notwithstanding the foregoing, I also assign to or as directed by the
         Company all my right, title and interest in and to any and all
         inventions, discoveries, developments, improvements or trade secrets,
         full title to which is required to be in the United States by a
         contract between the Company and the United States or any of its
         agencies.

3.       I agree to execute any proper oath or verify any proper document in
         connection with carrying out the terms of this agreement. In the event
         the Company is unable (because of my mental or physical incapacity or
         for any other reason whatsoever) to secure my signature to apply for,
         or to pursue any application for any United States or foreign letters
         patent, covering inventions assigned to the Company as stated above, I
         hereby irrevocably designate and appoint the Company and its duly
         authorized officer and agents

                                        1



         as my agent and attorney in fact, to act for and in my behalf and stead
         to execute and file any such applications and to do all other lawfully
         permitted acts to further the prosecution and issuance of letters
         patent thereon with the same legal force and effect as if executed by
         me. I have attached hereto a list describing all inventions made by me
         prior to my employment with the Company belonging to me, relating to
         the Company's proposed business and products and not assigned to the
         Company, or, if no such list is attached, I represent that there are no
         such inventions. I hereby waive and quitclaim to the Company any and
         all claims of any nature whatsoever which I now or may hereafter have
         for infringement of any patent or patents resulting from any such
         applications for letters patent assigned hereunder to the Company.

4.       I recognize that the Company may receive from third parties their
         confidential or proprietary information subject to a duty on the
         Company's part to maintain the confidentiality of such information and
         to use it only for certain limited purposes. I agree that I owe the
         Company and such third parties during the term of my employment and
         thereafter a duty to hold all such confidential or proprietary
         information in the strictest confidence and not to disclose it to any
         person, firm or corporation (except as necessary in carrying out my
         work for the Company consistent with the Company's agreement with such
         third party) or use it for the benefit of anyone other than for the
         Company or such third party consistent with the Company's agreement
         with such third party without the express authorization of an officer
         of the Company.

5.       I further agree that at the time of leaving the employ of the Company,
         I will deliver to the Company and will not keep in my possession, nor
         deliver to anyone else, any and all drawings, blueprints, notes,
         memoranda, specifications, devices, documents, or any other material
         containing or disclosing any of the matters referred to herein.

6.       I agree that I will not during my employment at the Company improperly
         use or disclose any proprietary information or trade secrets of my
         former or concurrent employers or companies, if any, and that I shall
         not bring onto the premises of the Company any unpublished document or
         any property belonging to my former or concurrent employers or
         companies, if any, unless consented to in writing by said employers or
         companies.

7.       The provisions of this agreement requiring assignment to the Company do
         not apply to any invention which qualifies fully under the provisions
         of Section 2870 of the California Labor Code. I will advise the company
         promptly in writing of any inventions, discoveries, developments,
         improvement or trade secrets that I believe meet the criteria in
         subparagraphs 2 a, b, and c above; and I will at that time provide to
         the Company in writing all evidence necessary to substantiate that
         belief. I understand that the Company will keep in confidence and will
         not disclose to third parties without my consent any confidential
         information disclosed in writing to the company relating to inventions
         which qualify fully under the provision of Section 2870 of the
         California Labor Code.

                                        2



IN WITNESS WHEREOF, I have subscribed my name hereunto this

13th day of November, 1992.

                                     /s/ Kathy A. San Roman
                                     ----------------------------------
                                         Signature

                                     /s/ Kathy A. San Roman
                                     ----------------------------------
                                        Print Name

/s/ Tracey J. Rivas
- ----------------------------------
         Witness

                                        3

EX-99.1

                                                                    EXHIBIT 99.1

                                CERTIFICATION (1)

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

1.       The Company's Quarterly Report on Form 10-Q for the period ended March
31, 2003, 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.

IN WITNESS WHEREOF, the undersigned have set their hands hereto as of May 15,
2003.

                                          /s/ Kevin P. Corcoran
                                          ----------------------------------
                                          Kevin P. Corcoran
                                          Chief Executive Officer

                                          /s/ Edward C. Albini
                                          ----------------------------------
                                          Edward C. Albini
                                          Chief Financial Officer

- ----------------------------
(1) This certification "accompanies" the Quarterly Report on Form 10-Q to which
    it relates, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and
    is not deemed filed with the Securities and Exchange Commission and is not
    to be incorporated by reference into any filing of Lynx Therapeutics, Inc.
    under the Securities Act or the Exchange Act (whether made before or after
    the date of the Quarterly Report on Form 10-Q), irrespective of any general
    incorporation language contained in such filing.

    A signed original of this written statement required by Section 906 has been
    provided to Lynx Therapeutics, Inc. and will be retained by Lynx
    Therapeutics, Inc. and furnished to the Securities and Exchange Commission
    or its staff upon request.

                                        1