LYNX THERAPEUTICS INC
EXHIBIT 10.38
<DOCUMENT>
<TYPE>EX-10.38
<SEQUENCE>4
<FILENAME>f92259exv10w38.txt
<DESCRIPTION>EXHIBIT 10.38
<TEXT>
<PAGE>

                                                                   EXHIBIT 10.38


                             LYNX THERAPEUTICS, INC.

                             1992 STOCK OPTION PLAN

                              ADOPTED JULY 1, 1992
                   LAST AMENDED BY THE BOARD ON JUNE 18, 2003
                  LAST APPROVED BY STOCKHOLDERS ON MAY 22, 2003
                        TERMINATION DATE: MARCH 11, 2006

1.    PURPOSES.

      (A)   ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options
are the Employees, Directors and Consultants of the Company and its Affiliates.

      (B)   AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by
which eligible recipients of Options may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of the following
Options: (i) Incentive Stock Options, and (ii) Nonstatutory Stock Options.

      (C)   GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Options, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.

2.    DEFINITIONS.

      (A)   "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.

      (B)   "BOARD" means the Board of Directors of the Company.

      (C)   "CODE" means the Internal Revenue Code of 1986, as amended.

      (D)   "COMMITTEE" means a Committee appointed by the Board in accordance
            with subsection 3(c).

      (E)   "COMMON STOCK" means the common stock of the Company.

      (F)   "COMPANY" means Lynx Therapeutics, Inc., a Delaware corporation.

      (G)   "CONSULTANT" means any person, including an advisor, (1) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (2) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.


                                       1.
<PAGE>
      (H)   "CONTINUOUS SERVICE" means that the Optionholder's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Optionholder's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionholder renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionholder
renders such service, provided that there is no interruption or termination of
the Optionholder's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.

      (I)   "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.

      (J)   "DIRECTOR" means a member of the Board of Directors of the Company.

      (K)   "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code; provided, however, that to
the extent that Section 260.140.41 of Title 10 of the California Code of
Regulations applies to an Option, "Disability" shall mean the inability of a
person, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of that person's position with the Company or an
Affiliate because of the sickness or injury of the person and such inability
results in termination of employment by the Company or an Affiliate.

      (L)   "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.

      (M)   "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

      (N)   "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows and in each case in a manner consistent with Section
260.140.50 of Title 10 of the California Code of Regulations:

            (I)   If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market, Nasdaq SmallCap Market or Over
The Counter Bulletin Board system the Fair Market Value of a share of Common
Stock shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange, market or system (or the
exchange, market or system with the greatest volume of trading the Common Stock)
on the last market trading day prior to determination, as reported in THE WALL
STREET JOURNAL or such other source as the Board deems reliable.

            (II)  In the absence of an established market or system for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Board.


                                       2.
<PAGE>
      (O)   "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

      (P)   "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either
(i) is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.

      (Q)   "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.

      (R)   "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

      (S)   "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.

      (T)   "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.

      (U)   "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.

      (V)   "OUTSIDE DIRECTOR" means a Director of the Company who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.

      (W)   "PLAN" means this Lynx Therapeutics, Inc. 1992 Stock Option Plan.

      (X)   "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.

      (Y)   "SECURITIES ACT" means the Securities Act of 1933, as amended.


                                       3.
<PAGE>
      (Z)   "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.

3.    ADMINISTRATION.

      (A)   ADMINISTRATION BY BOARD. The Board will administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).

      (B)   POWERS OF BOARD. The board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

            (I)   To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; what type or combination of types of Option shall be granted; the
provisions of each Option granted (which need not be identical), including the
time or times when a person shall be permitted to receive stock pursuant to an
Option; and the number of shares with respect to which an Option shall be
granted to each such person.

            (II)  To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.

            (III) To amend the Plan or an Option as provided in Section 11.

            (IV)  Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.

      (C)   DELEGATION TO COMMITTEE.

            (I)   GENERAL. The Board may delegate administration of the Plan to
a Committee or Committees of one or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

            (II)  COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3.



                                       4.
<PAGE>
Within the scope of such authority, the Board or the Committee may (i) delegate
to a committee of one or more members of the Board who are not Outside
Directors, the authority to grant Options to eligible persons who are either (a)
not then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Option or (b) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code
and/or (ii) delegate to a committee of one or more members of the Board who are
not Non-Employee Directors the authority to grant Options to eligible persons
who are not then subject to Section 16 of the Exchange Act.

4.    SHARES SUBJECT TO THE PLAN.

      (A)   SHARE RESERVE. Subject to the provisions of Section 10 relating to
adjustments upon changes in stock and Section 4(d) below, the stock that may be
issued pursuant to Options shall not exceed in the aggregate one million seventy
one thousand fifty two (1,071,052) shares of Common Stock less any shares of
Common Stock remaining outstanding which were originally issued to Employees,
Officers or Directors of, or Consultants to, the Company pursuant to stock
purchase agreements or similar compensatory arrangements approved by the Board.

      (B)   REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not acquired under such Option shall revert to
and again become available for issuance under the Plan. If any Common Stock
acquired pursuant to the exercise of an Option shall for any reason be
repurchased by the Company under an unvested share repurchase option provided
under the Plan, the stock repurchased by the Company under such repurchase
option shall not revert to and again become available for issuance under the
Plan.

      (C)   SOURCE OF SHARES. The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.

      (D)   RESERVE LIMITATION. Notwithstanding Section 4(a), if at the time of
each grant of a Stock Award under the Plan, the Company is subject to Section
260.140.45 of Title 10 of the California Code of Regulations ("Section
260.140.45"), and to the extent required by Section 260.140.45 the total number
of securities issuable upon exercise of all outstanding options of the Company
and the total number of shares provided for under this Plan or any other equity
incentive, stock bonus or similar plan or agreement of the Company shall not
exceed thirty percent (30%) of the then outstanding capital stock of the Company
(as measured as set forth in Section 260.140.45), unless stockholder approval to
exceed thirty percent (30%) has been obtained in compliance with Section
260.140.45, in which case the limit shall be such higher percentage as approved
by the stockholders.

5.    ELIGIBILITY.

      (A)   ELIGIBILITY FOR SPECIFIC OPTIONS. Incentive Stock Options may be
granted only to Employees. Nonstatutory Stock Options may be granted to
Employees, Directors and Consultants.

      (B)   TEN PERCENT STOCKHOLDERS.


                                       5.
<PAGE>
            (I)   So long as the Company is subject to Section 260.140.41 of
Title 10 of the California Code of Regulations, no Ten Percent Stockholder shall
be eligible for the grant of a Nonstatutory Stock Option unless the exercise
price of such Option is at least one hundred ten percent (110%) of the Fair
Market Value of the Common Stock at the date of grant and the Option is not
exercisable after the expiration of five (5) years from the date of grant;
provided, however, that a Nonstatutory Stock Option may be granted at a lower
exercise price and a longer term if a lower percentage of the Fair Market Value
of the Common Stock on the date of grant and a longer term is permitted by
Section 260.140.41 of Title 10 of the California Code of Regulations at the time
of the grant of the Nonstatutory Stock Option.

            (II)  No Ten Percent Stockholder shall be eligible for the grant of
a Nonstatutory Stock Option unless the exercise price of such Option is at least
one hundred ten percent (110%) of the Fair Market Value of the Common Stock at
the date of grant and the Option is not exercisable after the expiration of five
(5) years from the date of grant.

            (III) So long as the Company is subject to Section 260.140.42 of
Title 10 of the California Code of Regulations, a Ten Percent Stockholder shall
not be granted a restricted stock award unless the purchase price of the
restricted stock is at least (A) one hundred percent (100%) of the Fair Market
Value of the Common Stock on the date of grant or (B) such lower percentage of
the Fair Market Value of the Common Stock on the date of grant as is permitted
by Section 260.140.42 of Title 10 of the California Code of Regulations at the
time of the grant of the restricted stock award.

      (C)   SECTION 162(M) LIMITATION. Subject to the provisions of Section 10
relating to adjustments upon changes in stock, no employee shall be eligible to
be granted Options covering more than one hundred forty two thousand eight
hundred fifty seven (142,857) shares of the Common Stock during any calendar
year.

      (D)   CONSULTANTS.

            (I)   A Consultant shall not be eligible for the grant of an Option
if, at the time of grant, a Form S-8 Registration Statement under the Securities
Act ("Form S-8") is not available to register either the offer or the sale of
the Company's securities to such Consultant because of the nature of the
services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by the rules
governing the use of Form S-8, unless the Company determines both (i) that such
grant (A) shall be registered in another manner under the Securities Act (e.g.,
on a Form S-3 Registration Statement) or (B) does not require registration under
the Securities Act in order to comply with the requirements of the Securities
Act, if applicable, and (ii) that such grant complies with the securities laws
of all other relevant jurisdictions.

            (II)  Form S-8 generally is available to consultants and advisors
only if (i) they are natural persons; (ii) they provide bona fide services to
the issuer, its parents, its majority-owned subsidiaries or majority-owned
subsidiaries of the issuer's parent; and (iii) the services are not in
connection with the offer or sale of securities in a capital-raising
transaction, and do not directly or indirectly promote or maintain a market for
the issuer's securities.


                                       6.
<PAGE>
6.    OPTION PROVISIONS.

      Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:

      (A)   TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.

      (B)   EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option
may be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.

      (C)   EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of the stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

      (D)   CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by delivery to the
Company of other Common Stock, according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Optionholder or in any other
form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.

      In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement or at such higher rate of interest
necessary in order to avoid variable award treatment for financial accounting
purposes.


                                       7.
<PAGE>
      (E)   TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(e), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.

      (F)   TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement;
provided however, to the extent that the Company is subject to Section
260.140.41(d) of Title 10 of the California Code of Regulations at the time of
the grant of the Nonstatutory Stock Option, the Nonstatutory Stock Option shall
not be transferable except by will or by the laws of descent and distribution
and shall be exercisable during the lifetime of the Optionholder only by the
Optionholder. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing provisions of this subsection 6(f), the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.

      (G)   VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments which may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
Notwithstanding the foregoing, to the extent that the Company is subject to the
following restrictions on vesting under Section 260.140.41(f) of Title 10 of the
California Code of Regulations at the time of the grant of the Option, then an
Option granted to an Employee who is not an Officer or Director on the date of
grant shall provide for vesting of the total number of shares of Common Stock at
a rate of at least twenty percent (20%) per year over five (5) years from the
date the Option was granted, subject to reasonable conditions such as continued
employment.

      (H)   TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement), which period,
for so long as the Company is subject to Section 260.140.41(g) of Title 10 of
the California Code of Regulations, shall not be less than thirty (30) days
unless such termination is for cause), or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate.


                                       8.
<PAGE>
      (I)   EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in subsection 6(a) or (ii) the expiration of a period of
three (3) months after the termination of the Optionholder's Continuous Service
during which the exercise of the Option would not be in violation of such
registration requirements.

      (J)   DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement, which period, for so long as the Company is subject to Section
260.140.41(g) of Title 10 of the California Code of Regulations, shall not be
less than six (6) months) or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination, the Optionholder does
not exercise his or her Option within the time specified herein, the Option
shall terminate.

      (K)   DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within
the period ending on the earlier of (1) the date twelve (12) months following
the date of death (or such longer or shorter period specified in the Option
Agreement, which period, for so long as the Company is subject to Section
260.140.41(g) of Title 10 of the California Code of Regulations, shall not be
less than six (6) months) or (2) the expiration of the term of such Option as
set forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.

      (L)   EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option.
Subject to the "Repurchase Limitation of Section 9(h) (for so long as the
Company is subject to Sections 260.140.41 and 260.140.42 of Title 10 of the
California Code of Regulations), any unvested shares so purchased may be subject
to an unvested share repurchase option in favor of the Company or to any other
restriction the Board determines to be appropriate. Provided that the
"Repurchase Limitation" in Section 9(h) is not violated,(for so long as the
Company is subject to Sections 260.140.41 and 260.140.42 of Title 10 of the
California Code of Regulations) the Company will not exercise its repurchase
option until at least six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes) have
elapsed following exercise of the Option unless the Board otherwise specifically
provides in the Option.


                                       9.
<PAGE>
7.    COVENANTS OF THE COMPANY.

      (A)   AVAILABILITY OF SHARES. During the terms of the Options, the Company
shall keep available at all times the number of shares of Common Stock required
to satisfy such Options.

      (B)   SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Option or any stock issued or issuable pursuant to any such
Option. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.

8.    USE OF PROCEEDS FROM STOCK.

      Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.

9.    MISCELLANEOUS.

      (A)   ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which an Option may first be exercised or the
time during which an Option or any part thereof will vest in accordance with the
Plan, notwithstanding the provisions in the Option stating the time at which it
may first be exercised or the time during which it will vest.

      (B)   STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares subject
to such Option unless and until such Optionholder has satisfied all requirements
for exercise of the Option pursuant to its terms.

      (C)   NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Optionholder or other holder of Options any right to continue to serve the
Company or an Affiliate in the capacity in effect at the time the Option was
granted or shall affect the right of the Company or an Affiliate to terminate
(i) the employment of an Employee with or without notice and with or without
cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.

      (D)   INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars


                                      10.
<PAGE>
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.

      (E)   INVESTMENT ASSURANCES. The Company may require an Optionholder, as a
condition of exercising or acquiring stock under any Option, (i) to give written
assurances satisfactory to the Company as to the Optionholder's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Option; and (ii) to give written assurances satisfactory
to the Company stating that the Optionholder is acquiring the stock subject to
the Option for the Optionholder's own account and not with any present intention
of selling or otherwise distributing the stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if
(iii) the issuance of the shares upon the exercise or acquisition of stock under
the Option has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.

      (F)   WITHHOLDING OBLIGATIONS. To the extent provided by the terms of an
Option Agreement, the Optionholder may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of stock under an
Option by any of the following means (in addition to the Company's right to
withhold from any compensation paid to the Optionholder by the Company) or by a
combination of such means: (i) tendering a cash payment; (ii) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionholder as a result of the exercise or acquisition of stock
under the Option; or (iii) delivering to the Company owned and unencumbered
shares of the Common Stock.

      (G)   INFORMATION OBLIGATION. To the extent required by Section 260.140.46
of Title 10 of the California Code of Regulations, the Company shall deliver
financial statements to Participants at least annually. This Section 9(g) shall
not apply to key Employees whose duties in connection with the Company assure
them access to equivalent information.

      (H)   REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award, and the repurchase price may be either the Fair
Market Value of the shares of Common Stock on the date of termination of
Continuous Service or the lower of (i) the Fair Market Value of the shares of
Common Stock on the date of repurchase or (ii) their original purchase price. To
the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of
the California Code of Regulations at the time a Stock Award is made, any
repurchase option contained in a Stock Award granted to a person who is not an
Officer, Director or Consultant shall be upon the terms described below:

            (I)   FAIR MARKET VALUE. If the repurchase option gives the Company
the right to repurchase the shares of Common Stock upon termination of
Continuous Service at not less


                                      11.
<PAGE>
than the Fair Market Value of the shares of Common Stock to be purchased on the
date of termination of Continuous Service, then (i) the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares of Common Stock within ninety (90) days of termination of Continuous
Service (or in the case of shares of Common Stock issued upon exercise of Stock
Awards after such date of termination, within ninety (90) days after the date of
the exercise) or such longer period as may be agreed to by the Company and the
Participant (for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code regarding "qualified small business stock") and (ii) the
right terminates when the shares of Common Stock become publicly traded.

            (II)  ORIGINAL PURCHASE PRICE. If the repurchase option gives the
Company the right to repurchase the shares of Common Stock upon termination of
Continuous Service at the lower of (i) the Fair Market Value of the shares of
Common Stock on the date of repurchase or (ii) their original purchase price,
then (x) the right to repurchase at the original purchase price shall lapse at
the rate of at least twenty percent (20%) of the shares of Common Stock per year
over five (5) years from the date the Stock Award is granted (without respect to
the date the Stock Award was exercised or became exercisable) and (y) the right
to repurchase shall be exercised for cash or cancellation of purchase money
indebtedness for the shares of Common Stock within ninety (90) days of
termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Options after such date of termination, within ninety
(90) days after the date of the exercise) or such longer period as may be agreed
to by the Company and the Participant (for example, for purposes of satisfying
the requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock").

10.   ADJUSTMENTS UPON CHANGES IN STOCK.

      (A)   CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Options
will be appropriately adjusted in the class(es) and number of securities and
price per share of stock subject to such outstanding Options. Such adjustments
shall be made by the Board, the determination of which shall be final, binding
and conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a transaction "without receipt of consideration" by the
Company.)

      (B)   DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then such Options shall be terminated if not
exercised (if applicable) prior to such event.

      (C)   ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of
(1) a sale of substantially all of the assets of the Company, (2) a merger or
consolidation in which the Company is not the surviving corporation or (3) a
reverse merger in which the Company is the


                                      12.
<PAGE>
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then any surviving
corporation or acquiring corporation shall assume any Options outstanding under
the Plan or shall substitute similar Options (including an award to acquire the
same consideration paid to the stockholders in the transaction described in this
subsection) for those outstanding under the Plan. In the event any surviving
corporation or acquiring corporation refuses to assume such Options or to
substitute similar Options for those outstanding under the Plan, then with
respect to Options held by Optionholders whose Continuous Service has not
terminated, the vesting shall be accelerated in full, and the Options shall
terminate if not exercised at or prior to such event. With respect to any other
Options outstanding under the Plan, such Options shall terminate if not
exercised prior to such event.

11.   AMENDMENT OF THE PLAN AND OPTIONS.

      (A)   AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 10 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.

      (B)   STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.

      (C)   CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.

      (D)   NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.

      (E)   AMENDMENT OF OPTIONS. The Board at any time, and from time to time,
may amend the terms of any one or more Options; provided, however, that the
rights under any Option shall not be impaired by any such amendment unless (i)
the Company requests the consent of the Optionholder and (ii) the Optionholder
consents in writing.

12.   TERMINATION OR SUSPENSION OF THE PLAN.

      (A)   PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on March 11, 2006. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.


                                      13.
<PAGE>
      (B)   NO IMPAIRMENT OF RIGHTS. Rights and obligations under any Option
granted while the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the written consent of the Optionholder.

13.   EFFECTIVE DATE OF PLAN.

      The Plan shall become effective as determined by the Board, but no Option
shall be exercised unless and until the Plan has been approved by the
stockholders of the Company, which approval shall be within twelve (12) months
before or after the date the Plan is adopted by the Board.




                                      14.

</TEXT>
</DOCUMENT>
