PLANET ZANETT INC
INVESTORS' RIGHTS AGREEMENT
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>INVESTORS' RIGHTS AGREEMENT
<TEXT>


                                  EXHIBIT 10.12

<PAGE>

                                                                  EXECUTION COPY

                             APPLIED DISCOVERY, INC.

                           INVESTORS' RIGHTS AGREEMENT

                                January 28, 2000


<PAGE>

                                TABLE OF CONTENTS

                                                                       Page
                                                                       ----

1.    Registration Rights

      1.1   Definitions
      1.2   Request for Registration
      1.3   Company Registration
      1.4   Form S-3 Registration
      1.5   Obligations of the Company
      1.6   Furnish Information
      1.7   Expenses of Registration
      1.8   Underwriting Requirements
      1.9   Delay of Registration
      1.10  Indemnification
      1.11  Reports Under Exchange Act
      1.1.2 Assignment of Registration Rights
      1.13  Limitations on Subsequent Registration Rights
      1.14  "Market Stand-Off" Agreement
      1.15  Termination of Registration Rights

2.    Miscellaneous

      2.1   Successors and Assigns
      2.2   Amendments and Waivers
      2.3   Notices
      2.4   Severability
      2.5   Governing Law
      2.6   Counterparts
      2.7   Titles and Subtitles
      2.8   Aggregation of Stock


                                       2
<PAGE>

                             APPLIED DISCOVERY, INC.

                           INVESTORS' RIGHTS AGREEMENT

      This Investors' Rights Agreement (the "Agreement") is made as of the 28th
day of January, 2000 by and among Applied Discovery, Inc., a Washington
corporation (the "Company") and the purchasers of, and holders of outstanding
notes being converted into, the Company's Series A Preferred Stock listed on
Exhibit A hereto (each, an "Investor" and collectively, the "Investors").

                                    RECITALS

      WHEREAS, the Company and the Investors have entered into a Series A
Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date
herewith pursuant to which the Company desires to sell to the Investors and the
Investors desire to purchase from the Company up to 5,585,000 shares of Series A
Preferred Stock (the "Series A Preferred Stock"); and

      WHEREAS, a condition to the Investors' obligations under the Purchase
Agreement is that the Company and the Investors enter into this Agreement in
order to provide the Investors with certain rights to register shares of the
Company's common stock, par value $.01 per share ("Common Stock"), issuable upon
conversion of the Series A Preferred Stock held by the Investors; and

      WHEREAS, the Company desires to induce the Investors to purchase shares of
Series A Preferred Stock pursuant to the Purchase Agreement by agreeing to the
terms and conditions set forth herein.

                                    AGREEMENT

      NOW, THEREFORE, the parties hereby agree as follows:

      1. Registration Rights. The Company and the Investors covenant and agree
as follows:

            1.1 Definitions. For purposes of this Section 1:

                  (a) The terms "register ' "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), and the declaration or ordering of effectiveness
of such registration statement or document;

                  (b) The term "Registrable Securities" means (i) the shares of
Common Stock issuable or issued upon conversion of the Series A Preferred Stock
and (ii) any other shares of Common Stock of the Company issued as (or issuable
upon the conversion or exercise


                                       3
<PAGE>

of any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
shares listed in (i); provided, however that the foregoing definition shall
exclude in all cases any Registrable Securities sold by a person in a
transaction in which his or her rights under this Agreement are not assigned.
Notwithstanding the foregoing, Common Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been (A) sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(1) thereof so that all transfer restrictions, and restrictive legends
with respect thereto, if any, are removed upon the consummation of such sale;

                  (c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;

                  (d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.12 of this Agreement;

                  (e) The term "Form S-3" means such form under the Securities
Act as in effect on the date hereof or any successor form under the Securities
Act;

                  (f) The term "Qualified IPO" means an IPO with gross proceeds
(before deduction of underwriter commissions and offering expenses) of at least
$25,000,000 and an initial offering price per share of at least five (5) times
the original purchase price of $1.00 (subject to adjustment for stock splits,
dividends or recapitalizations).

                  (g) The term "SEC" means the Securities and Exchange
Commission; and

                  (h) The term "IPO" means a firm commitment underwritten public
offering of shares of Common Stock of the Company pursuant to a registration
statement on Form S-1, (or any successor form thereto) under the Securities Act.

            1.2 Request for Registration.

                  (a) If the Company shall receive at any time after the earlier
of (i) January ___, 2002 or (ii) nine (9) months after the effective date of an
IPO, a written request from the Holders of 25% of the Registrable Securities
(the "Initiating Holders") then outstanding that the Company file a registration
statement under the Securities Act covering the registration of such shares of
Registrable Securities held by such Holders as such Holders may specify
(provided that the gross proceeds, before underwriting discounts and
commissions, from issuance of the securities to be registered exceeds
$2,500,000), then the Company shall, within ten (10)


                                       4
<PAGE>

days of the receipt thereof, give written notice of such request to all Holders
and shall, subject to the limitations of subsection 1.2(b), use its best efforts
to effect as soon as practicable the registration under the Securities Act of
all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 2.3.

                  (b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a). The underwriter will be selected by a
majority in interest of the Initiating Holders and shall be reasonably
acceptable to the Company. In such event, the right of any Holder to include his
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.5(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provide , however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced Unless all other securities are first entirely
excluded from the underwriting.

                  (c) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2, a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
all Initiating Holders; provided, however, that the Company may not utilize this
right (or the similar right granted to the Company pursuant to Section 1.4(b))
more than once in any twelve-month period.

                  (d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:

                        (i) after the Company has effected one (1) registration
pursuant to this Section 1.2 and such registration has been declared or ordered
effective;


                                       5
<PAGE>

                        (ii) during the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof, provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or

                        (iii) if the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.4 below.

            1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock under the Securities Act in connection with the public offering of such
securities, solely for cash (other than a registration relating solely to the
sale of securities to participant's in a Company stock plan or a corporate
reorganization or other transaction covered by Rule 145 under the Securities
Act, or any registration on any form which does not include substantially the
same information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty-five (25) days after mailing
of such notice by the Company in accordance with Section 2.3, the Company shall,
subject to the provisions of Section 1.8. cause to be registered under the
Securities Act all of the Registrable Securities that each such Holder has
requested to be registered.

            1.4 Form S-3 Registration. In case the Company shall receive from
any Holder or Holders of not less than 25% of the Registrable Securities then
outstanding a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:

                  (a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and

                  (b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder's or
Holders' joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 1.4: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (before any
underwriters' discounts or


                                       6
<PAGE>

commissions) of less than $2,500,000; (iii) if the Company shall furnish to the
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 90 days after receipt of the request of the Holder or
Holders under this Section 1.4; provided, however, that the Company shall not
utilize this right (or the similar right granted to the Company pursuant to
Section 1.2(c)) more than once in any twelve month period; (iv) if the Company
has already effected four (4) registrations on Form S-3 for the Holders pursuant
to this Section 1.4; (v) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected one (1) registration on
Form S-3 for the Holders pursuant to this Section 1.4; (vi) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance; or (vii) during the period ending one
hundred eighty (180) days after the effective date of a registration statement
subject to Section 1.3.

                  (c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 1.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 1.2 or 1.3, respectively.

            1.5 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:

                  (a) prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred eighty (180) days or
until the Holders have completed the distribution described in the registration
statement relating thereto, whichever occurs first; provided, however, that such
period shall be extended for a period of time equal to the period the Holder
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company;

                  (b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement for up to one
hundred eighty (180) days;


                                       7
<PAGE>

                  (c) furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;

                  (d) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
"Blue Sky" laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;

                  (e) in the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering; provided that
each Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement;

                  (f) notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as A result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or ornits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, such obligation to continue for one hundred eighty (180) days from the
date of the final prospectus;

                  (g) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;

                  (h) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration; and

            1.6 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable. Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's


                                       8
<PAGE>

obligation to initiate such registration as specified in subsection 1.2(a) or
subsection 1.4(b)(ii), whichever is applicable.

            1.7 Expenses of Reeistration.

                  (a) Demand Registration and Registration on Form S-3. All
expenses other than underwriting discounts and commissions incurred in
connection with registrations, filings or qualifications pursuant to Section 1.2
or 1.4, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of one
counsel for the selling Holders selected by them shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 1.2 or 1.4 if
the registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (in which case all
participating Holders shall bear such expenses), unless the Holders of a
majority of the Registrable Securities agree to forfeit their right to one such
registration; provided further, however, that if at the time of such withdrawal,
the Holders have leamed of a material adverse change in the condition, business,
or prospects of the Company from that known to the Holders at the time of their
request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such material adverse change, then the Holders
shall not be required to pay a ny of such expenses and shall retain their
rights.

                  (b) Company Redstration. All expenses other than underwriting
discounts and comiriissions incurred in connection with registrations, filings
or qualifications of Registrable Securities pursuant to Section 1.3 for each
Holder, including (without limitation) all registration, filing, and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company and the reasonable fees and disbursements of one counsel
for the selling Holder or Holders selected by them shall be borne by the
Company.

            1.8 Underwriting Requirements.

                  (a) In connection with any offering involving an underwriting
of shares of the Company's capital stock, the Company shall not be required
under Section 1.3 to include any of the Holders' securities in such underwriting
unless they accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (or by other persons entitled to
select the underwriters pursuant to Section 1.2), and then only in such quantity
as the underwriters deterriline in their sole discretion will not jeopardize the
success of the offering by the Company. If the total amount of securities,
including Registrable Securities, requested by shareholders to be included in
such offering exceeds the amount of securities sold other than by the Company
that the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering but in no event shall (i) any Registrable Securities
be excluded from such offering unless all securities of selling


                                       9
<PAGE>

shareholders other than Holders of Registrable Securities shall have first been.
excluded and (ii) the amount of securities of the selling Holders included in
the offering be reduced below thirty percent (30%) of the total amount of
securities included in such offering, unless such offering is the IPO or any
secondary offering of primary shares, in which case, the Registrable Securities
of selling Holders may be excluded if the underwriters make the determination
described above and no other shareholder's securities are included. If any
Registrable Securities are to be excluded from the offering, the amount to be
excluded shall be apportioned among the selling Holders pro rata according to
the amount of Registrable Securities requested by each such Holder to be
included in the offering. For purposes of the preceding sentence conceming
apportionment, for any selling Holder of Registrable Securities which is a
partnership or corporation, the partners, retired partners and shareholders of
such Holder, or the estates and farnily members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling Holder " and any pro rata reduction with respect
to such "selling Holder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling Holder," as defined in this sentence.

                  (b) In connection with any offering involving an underwriting
of shares of.the Company's capital stock pursuant to a Qualified IPO, the
Company shall use its best efforts, consistent with federal and state securities
laws, to require that the underwriters selected by the Company establish a
directed share program in connection with the Qualified TO which shall consist
of at least that number of shares of capital stock determined by a fraction, the
numerator of which shall be the greater of (i) $5,000,000 or (ii) 10% of the
proceeds raised in the Qualified IPO (after deduction for underwriting
commissions and offering expenses), and the denominator of which shall be the
mid-point of the first filing range the Company sets in the registration
statement for the Qualified IPO (the "Program Shares"). The Company shall use
its best efforts consistent with federal and state securities laws to cause the
'underwriters to offer the Holders the right to purchase their pro rata portion
of the Program Shares (determined in accordance with their relative holdings of
Common Stock (assuming for this purpose that all shares of Series A Preferred
Stock had been converted into Common Stock)) at the initial public offering
price and to cause the underwriters to allow Holders exercising the right to
purchase their full pro rata portion of the Program Shares to have the further
right to purchase any non- fully exercising Holder's Program Shares.

            1.9 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.

            1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:

                  (a) The Company will indemnify and hold harmless each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any losses, claims, damages,


                                       10
<PAGE>

or liabilities joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof arise out
of or are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law; and the Company will pay to each
such Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld or delayed), nor shall the
Company be liable to any Holder, underwriter or controlling person for any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.

                  (b) Each selling Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Securities Act, any underwriter, any other Holder selling
Securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages, or liabilities
joint or several) to which any of the foregoing persons may become subject,
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
1.10(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided, that
in no event shall any indemnity under this Subsection 1.10(b) exceed the net
proceeds from the offering received by such Holder.

                  (c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party


                                       11
<PAGE>

under this Section 1.10, deliver to the indemnifying party a written notice of
the commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party (together with all other indemnified parties which may
be represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the reasonable fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.10, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.10.

                  (d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omission that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, that in no event shall any contribution by a Holder
under this Subsection 1.10(d) exceed the net proceeds from the offering received
by such Holder. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.

                  (e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.

                  (f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1.

            1.11 Reports Under Exchange Act. With a view to making available to
the Holders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or


                                       12
<PAGE>

regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:

                  (a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the Company's registration statement for its IPO;

                  (b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the Company's registration statement for its IPO is declared effective;

                  (c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and

                  (d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the Company's IPO
registration statement), the Securities Act and. the Exchange Act (at any time
after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.

            1.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section I may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of at least 100,000 shares of Registrable Securities (except to any
member, partner or affiliate of such Holder in which case no minimum threshold
applies), provided the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; provided, however, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act.
For the purposes of determining the number of shares of Registrable Securities
held by a transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under Section 1.


                                       13
<PAGE>

            1.13 Limitations on Subsequent Registration Rights. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his Securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or within
one hundred eighty (180) days of the effective date of any registration effected
pursuant to Section 1.2.

            1.14 "Market Stand-Off" Agreement. Each Holder hereby agrees that,
during the period of duration (up to, but not exceeding, one hundred eighty
(180) days) specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the date of the final prospectus
distributed in connection with a public offering, it shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any Registrable Securities held by it at
any time during such period except Registrable Securities included in such
registration (the "Lock-Up"); provided, however, that:

                  (a) such agreement shall be applicable only with respect to
the IPO;

                  (b) all officers and directors of the Company, all one-percent
(1%) securityholders, and all other persons with registration fights (whether or
not pursuant to this Agreement) enter into similar agreements;

                  (c) any discretionary waiver or termination of the Lock-Up by
the Company or by representatives of an underwriter shall apply to all persons
subject to such Lock- Up on a pro rata basis;

                  (d) the Company shall use its best effort in its negotiations
with the Company's lead underwriter in an IPO to limit the Lock-Up to not more
than one hundred twenty (120) days; and

                  (e) the Company agrees to use its best efforts to ensure that
all shares of its capital stock outstanding immediately prior to the
consummation of the IPO shall be subject to a Lock-Up substantially similar to
the Lock-Up in this Section 1.14.

      In order to enforce the foregoing covenants, the Company may impose stop
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period, and each


                                       14
<PAGE>

Holder agrees that, if so requested, such Holder will execute an agreement in
the form provided by the underwriter containing terms which are consistent with
the provisions of this Section 1.14.

      Notwithstanding the foregoing, the obligations described in this Section
1.14 shall not apply to a registration relating solely to employee benefit plans
on Form S-1 or Form S-8 or similar forms which may be promulgated in the future,
or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or
similar forms which may be promulgated in the future.

            1.15 Termination of Registration Rights. No Holder shall be entitled
to exercise any right provided for in this Section I after the earlier of (i)
seven (7) years following the consummation of a Qualified IPO, or (ii) such time
as Rule 144 or another similar exemption under the Securities Act is available
for the sale of all of such Holder's shares during a three (3)- month period
without registration.

      2.    Miscellaneous.

            2.1 Successors and Assigns. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties (including transferees of any Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

            2.2 Amendments and Waivers. Any term of this Agreement may be
amended or waived in writing and only with the written consent of the Company
and the holders of a majority of the Registrable Securities then outstanding.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each Holder of any Registrable Securities then outstanding, each
future Holder of all such Registrable Securities, and the Company.

            2.3 Notices. Unless otherwise provided, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, and addressed to the
party to be notified at such party's address or fax number as set forth below or
on Exhibit A hereto or as subsequently modified by written notice.

            2.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.


                                       15
<PAGE>

            2.5 Governing Law. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of Washington.

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

            2.7 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

            2.8 Aggregation of Stock. All shares of the Preferred Stock held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.

      The parties have executed this Investors' Rights Agreement as of the date
first above written.

                                    COMPANY:

                                    APPLIED DISCOVERY, INC.


                                    By:
                                       ---------------------------
                                           Name: Michael C. Weaver
                                           Title: President

                                    Address: 1756 - 114th Street Southeast
                                             Suite 125
                                             Bellevue, WA 98004
                                             Attn: M. Weaver
                                             Tel: 425-836-4428
                                             Fax: 425-456-0854


                                    INVESTORS:

                                    ZILKHA VENTURE PARTNERS, L.P.

                                    By:   Zilkha Ventures, LLC
                                          its general partner

                                    By:   AIMC LLC,
                                          its managing member


                                    By:
                                       -------------------------------


                                       16
<PAGE>

                                           Name: John P. Rigas
                                           Title: Managing Member


                                    APPLIED DISCOVERY PARTNERS, L.P.

                                    By:   Applied Discovery Management LLC
                                          its general partner

                                    By:
                                       ----------------------------------
                                           Name: John P. Rigas
                                           Title: Managing Member


                                    DANIEL L. EILERS

                                    --------------------------------------
                                    Daniel L. Eilers


                                    STANLEY J. MERESMAN AND SHARON A.
                                    MERESMAN, TRUSTEES OF THE
                                    MERESMAN FAMILY TRUST U/D/T DATED
                                    9/13/1989

                                    ---------------------------------------
                                    Stanley J. Meresman


                                    ASFAQ MUNSHI

                                    ---------------------------------------
                                    Asfaq Munshi


                                    AUDREY MACLEAN AND MICHAEL M.
                                    CLAIR, AS TRUSTEES, OR THEIR
                                    SUCCESSORS, OF THE AUDREY MACLEAN
                                    AND MICHAEL CLAIR TRUST AGREEMENT
                                    UAD 12/1/90

                                    ----------------------------------------
                                    Audrey MacLean, as trustee


                                       17
<PAGE>

                                    ROBERT D. SELVI
                                    and SANDRA A. SELVI

                                    ---------------------------------------
                                    Robert Selvi


                                    ---------------------------------------
                                    Sandra A. Selvi


                                    SHELLEY SCHWINN BROWNLOW

                                    ---------------------------------------
                                    Shelley Schwinn Brownlow


                                    JOHN BROWNLOW

                                    ---------------------------------------
                                    John Brownlow


                                       18
<PAGE>

                                    RICHARD AND CHRISTINE WEAVER

                                    ---------------------------------------
                                    Richard Weaver

                                    ---------------------------------------
                                    Christine Weaver


                                    RICHARD BLUM

                                    ---------------------------------------
                                    Richard Blum


                                    MARK MECHAM

                                    ---------------------------------------
                                    Mark Mecham


                                    ROBERT MCINTOSH

                                    ---------------------------------------
                                    Robert McIntosh



                                    PLANET ZANETT ANGEL FUND, L. P.

                                    By:
                                       ------------------------------------
                                        Its: General Partner


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


                                    CRAIG WATJEN

                                    ----------------------------------------
                                    Craig Watjen


                                       19
<PAGE>

                                    DR. GEORGE & NANCY SAVAGE

                                    -----------------------------------------
                                    Dr. George Savage

                                    -----------------------------------------
                                    Nancy Savage



                                       20
<PAGE>

                                    EXHIBIT A

                                    INVESTORS

1.    Zilkha Venture Partners, L.P.
2.    Applied Discovery Partners, L.P.
3.    Daniel L. Eilers
4.    Audrey MacLean and Michael M. Clair, as Trustees, or their successors, of
      the Audrey MacLean and Michael Clair Trust Agreement UAD 12/1/90
5.    Stanley J. Meresman and Sharon A. Meresman, Trustees of the Meresman
      Family Trust U/D/T/ 9/13/1989, as amended
6.    Asfaq Munshi
7.    Robert D. Selvi and Sandra A. Selvi
8.    Shelley Schwinn Brownlow
9.    John Brownlow
10.   Richard and Christine Weaver
11.   Richard Blum
12.   Mark Mecham
13.   Robert McIntosh
14.   Planet Zanett Angel Fund, L. P.
15.   Craig Watjen
16.   Dr. George & Nancy Savage

                                       21
</TEXT>
</DOCUMENT>
