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<DESCRIPTION>LEXICON GENETICS INCORPORATED - DECEMBER 31, 2004
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================================================================================

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

                                    FORM 10-K

(MARK ONE)

    [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       OR

    [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          FOR THE TRANSITION PERIOD FROM _____________ TO _____________

                        COMMISSION FILE NUMBER: 000-30111

                          LEXICON GENETICS INCORPORATED
             (Exact Name of Registrant as Specified in its Charter)

                DELAWARE                           76-0474169
     (State or Other Jurisdiction of            (I.R.S. Employer
     Incorporation or Organization)          Identification Number)

      8800 TECHNOLOGY FOREST PLACE               (281) 863-3000
       THE WOODLANDS, TEXAS 77381        (Registrant's Telephone Number,
     (Address of Principal Executive          Including Area Code)
          Offices and Zip Code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, par value $0.001 per share

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

      The aggregate market value of voting stock held by non-affiliates of the
registrant as of the last day of the registrant's most recently completed second
quarter was approximately $413.9 million, based on the closing price of the
common stock on the Nasdaq National Market on June 30, 2004 of $7.84 per share.
For purposes of the preceding sentence only, all directors, executive officers
and beneficial owners of ten percent or more of the registrant's common stock
are assumed to be affiliates. As of March 8, 2005, 63,538,171 shares of common
stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Certain sections of the registrant's definitive proxy statement relating
to the registrant's 2005 annual meeting of stockholders, which proxy statement
will be filed under the Securities Exchange Act of 1934 within 120 days of the
end of the registrant's fiscal year ended December 31, 2004, are incorporated by
reference into Part III of this annual report on Form 10-K.

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

<PAGE>

                          LEXICON GENETICS INCORPORATED

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM
----
<S>                                                                                                       <C>
                                                    PART I

 1. Business...........................................................................................    1
 2. Properties.........................................................................................   20
 3. Legal Proceedings..................................................................................   20
 4. Submissions of Matters to a Vote of Security Holders...............................................   20

                                                   PART II

 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................   21
 6. Selected Financial Data............................................................................   22
 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............   23
7A. Quantitative and Qualitative Disclosure About Market Risk..........................................   31
 8. Financial Statements and Supplementary Data........................................................   31
 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............   31
9A. Controls and Procedures............................................................................   31

                                                   PART III

10. Directors and Executive Officers of the Registrant.................................................   33
11. Executive Compensation.............................................................................   33
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....   33
13. Certain Relationships and Related Transactions.....................................................   33
14. Principal Accounting Fees and Services.............................................................   33

                                                   PART IV

15. Exhibits and Financial Statement Schedules.........................................................   34

Signatures.............................................................................................   37
</TABLE>

      The Lexicon name and logo, LexVision(R) and OmniBank(R) are registered
trademarks and Genome5000(TM) and e-Biology(TM) are trademarks of
Lexicon Genetics Incorporated.

      In this annual report on Form 10-K, "Lexicon Genetics," "Lexicon," "we,"
"us" and "our" refer to Lexicon Genetics Incorporated.

                  FACTORS AFFECTING FORWARD LOOKING STATEMENTS

      This annual report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. We have
attempted to identify forward-looking statements by terminology including
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should" or "will" or the
negative of these terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Item 1. Business - Risk Factors,"
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.

      Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this annual report on Form
10-K to conform these statements to actual results, unless required by law.

<PAGE>

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

      Lexicon Genetics is a biopharmaceutical company focused on the discovery
and development of breakthrough treatments for human disease. We are
systematically discovering the physiological and behavioral functions of genes
to identify those that encode potential targets for therapeutic intervention, or
drug targets. We make our discoveries using our proprietary technology to knock
out, or disrupt, the function of genes in mice to model the effects on
physiology that could be expected from prospective drugs directed against those
targets. For targets that we believe have high pharmaceutical value, we engage
in programs for the discovery and development of potential small molecule,
antibody and protein drugs. We focus our discovery efforts in six therapeutic
areas - diabetes and obesity, cardiovascular disease, psychiatric and
neurological disorders, cancer, immune system disorders and ophthalmic disease -
and we have advanced targets into drug discovery programs in each of these areas
with potential for addressing large medical markets.

      We make our discoveries using proprietary technology to knock out genes in
mice, analyze the resulting effects on physiology and behavior, and identify
those genes that exhibit a favorable therapeutic profile in mouse models. Using
this information, we select potential targets encoded by the corresponding human
genes for our drug discovery programs. Our physiology-based approach to
understanding gene function and our use of mouse models in our drug discovery
efforts allow us to make highly-informed decisions throughout the drug discovery
and development process, which we believe will increase our likelihood of
success in discovering breakthrough therapeutics.

      The scope of our gene knockout technology, combined with the size and
sophistication of our facilities and our evaluative technologies, provides us
with what we believe to be a significant competitive advantage. We are using
these technologies in our Genome5000 program to discover the physiological and
behavioral functions of 5,000 genes from the human genome that belong to gene
families that we consider to be pharmaceutically important. We have completed
our analysis of more than 40% of these genes, and we expect to complete the
analysis of the remaining genes by the end of 2008. Through February 2005, we
have advanced into drug discovery programs more than 60 targets, each of which
we have validated in living mammals, or in vivo. To date, none of our programs
had yet advanced into clinical development.

      We are working both independently and through strategic collaborations and
alliances to commercialize our technology and turn our discoveries into drugs.
We have established multiple collaborations with leading pharmaceutical and
biotechnology companies, as well as research institutes and academic
institutions. We are working with Bristol-Myers Squibb Company to discover and
develop novel small molecule drugs in the neuroscience field. We are working
with Genentech, Inc. to discover the functions of secreted proteins and
potential antibody targets identified through Genentech's internal drug
discovery research. We are working with Takeda Pharmaceutical Company Limited
for the discovery of new drugs for the treatment of high blood pressure. In
addition, we have established collaborations and license agreements with many
other leading pharmaceutical and biotechnology companies under which we receive
fees and, in some cases, are eligible to receive milestone and royalty payments,
in return for granting access to some of our technologies and discoveries for
use in such companies' own drug discovery efforts.

      Lexicon Genetics was incorporated in Delaware in July 1995, and commenced
operations in September 1995. Our corporate headquarters are located at 8800
Technology Forest Place, The Woodlands, Texas 77381, and our telephone number is
(281) 863-3000.

      Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made
available free of charge on our corporate website located at
www.lexicon-genetics.com as soon as reasonably practicable after the filing of
those reports with the Securities and Exchange Commission. Information found on
our website should not be considered part of this annual report on Form 10-K.

                                       1
<PAGE>

OUR DRUG DISCOVERY PROCESS

      Our drug discovery process begins with our Genome5000 program, in which we
are using our gene knockout technology to discover the physiological and
behavioral functions of 5,000 human genes through analysis of the corresponding
knockout mouse models. Our Genome5000 efforts are focused on the discovery of
the functions in mammalian physiology of proteins encoded by gene families that
we consider to be pharmaceutically important, such as G-protein coupled, or
GPCRs, and other receptors, kinases, ion channels, other key enzymes and
secreted proteins. We have already completed our physiology- and behavior-based
analysis of more than 40% of these 5,000 genes, and we expect to complete the
analysis of the remaining genes by the end of 2008.

      We use knockout mice - mice whose DNA has been altered to disrupt, or
knock out, the function of the altered gene - to discover the physiological and
behavioral effects that result from loss of functioning protein encoded by the
disrupted gene. Historically, the study of such loss of function genetic
alterations in mice has been a very powerful tool for understanding human genes
because of the close similarity of gene function and physiology between mice and
humans. With the genomic sequence of both organisms now available, it is
noteworthy that approximately 99% of all human genes have a counterpart in the
mouse genome. Our patented gene trapping and gene targeting technologies enable
us to rapidly generate these knockout mice by altering the DNA of genes in a
special variety of mouse cells, called embryonic stem cells, which can be cloned
and used to generate mice with the altered gene. We employ an integrated
platform of advanced medical technologies to systematically discover, in vivo,
the physiological and behavioral functions and pharmaceutical utility of the
genes we have knocked out and the potential drug targets they encode.

      We believe that our medical center approach and the technology platform
that makes it possible provide us with substantial advantages over other
approaches to discover gene function and identify novel drug targets. In
particular, we believe that the comprehensive nature of this approach allows us
to uncover functions within the context of mammalian physiology that might be
missed by more narrowly focused efforts. We also believe our approach is more
likely to reveal those side effects that may be a direct result of inhibiting or
otherwise modulating the drug target and may limit the utility of potential
therapeutics directed at the drug target. We believe these advantages will
contribute to better target selection and, therefore, to the success of our drug
discovery and development efforts.

      We believe that the power of our technology has been described in a large
body of scientific literature which was summarized in a retrospective analysis
that we performed of the 100 best selling drugs of 2001 and their targets, as
modeled by the physiological characteristics of knockout mice. This analysis was
published in the January 2003 issue of Nature Reviews Drug Discovery, a
peer-reviewed scientific journal. In this analysis we concluded that in most
cases there was a direct correlation between the physiological characteristics,
or phenotypes, of knockout mice and the therapeutic effect of the 100
best-selling drugs of 2001.

      We are working to discover potential small molecule, antibody and protein
drugs for those in vivo-validated drug targets that we consider to have high
pharmaceutical value. We have established an internal small molecule drug
discovery program, in which we use our own sophisticated libraries of drug-like
chemical compounds in high-throughput screening assays to identify "hits," or
chemical compounds demonstrating activity, against these targets. We then employ
our industrialized medicinal chemistry platform to optimize the potency and
selectivity of these hits and to identify lead compounds for potential
development. Our compound libraries include chemical scaffolds and building
blocks that we designed based on analyses of the characteristics of drugs that
have proven safe and effective in the past. When we identify a hit, we can
rapidly reassemble these building blocks to create hundreds or thousands of
variations around the structure of the initial compound, enabling us to
accelerate our medicinal chemistry efforts.

      In all of our drug discovery programs, we use the same physiological
analysis technology platform that we use in the discovery of gene function to
analyze the in vivo efficacy and safety profiles of drug candidates in mice. We
believe that by focusing on the physiological functions and pharmaceutical
utility of genes at the outset of the drug discovery process, we will increase
our likelihood of success in discovering breakthrough treatments for human
disease.

                                       2
<PAGE>

OUR LEAD DRUG DISCOVERY PROGRAMS

      We have advanced two of our drug discovery programs into preclinical
development in preparation for Investigational New Drug applications.

      LX-1521. LX-1521 is a novel small molecule compound with potential for
treating solid tumor cancers. LX-1521 works by blocking the cell cycle prior to
cell division, resulting in cancer cell death through apoptosis. When
administered orally to mouse models of human cancer, LX-1521 demonstrates
significant anti-tumor activity in vivo. In vitro, the compound inhibits cell
growth of more than 20 human tumor cell lines derived from multiple types of
cancer. Potential uses of LX-1521 as a cancer therapy include the treatment of
breast, prostate, lung, colon, ovarian, renal and pancreatic cancer, as well as
melanoma. LX-1521 was discovered in our LG152 kinase target program.

      LX-5431. LX-5431 is a novel human protein with the potential for treating
thrombocytopenia, a disorder characterized by a substantial depletion of
platelets in the blood that can lead to severe bleeding. LX-5431 has been
demonstrated in ex vivo bone marrow culture to stimulate production of platelet
forming cells called megakaryocytes. LX-5431 may have potential for treating
thrombocytopenia resulting from chemotherapy, leukemia, autoimmune disease and
other conditions. LX-5431 was identified in our LG543 secreted protein program.

OUR TECHNOLOGY

      The scope of our gene knockout and evaluative technologies allows us to
create and analyze knockout mice at a rate and on a scale that we believe is
unmatched by our competitors. Combined with our state-of-the-art facilities,
which are among the largest and most sophisticated of their kind in the world,
these technologies provide us with what we believe to be a significant
competitive advantage. The core elements of our technology platform include our
patented technologies for the generation of knockout mice, our integrated
platform of advanced medical technologies for the systematic and comprehensive
biological analysis of in vivo physiology and our industrialized approach to
medicinal chemistry and the generation of high-quality, drug-like compound
libraries.

   GENE KNOCKOUT TECHNOLOGIES

      Gene Targeting. Our gene targeting technology, which is covered by eight
issued patents that we have licensed, enables us to generate highly specific
alterations in targeted genes. The technology uses a vector to replace DNA of a
gene in a mouse embryonic stem cell through a process known as homologous
recombination to disrupt the function of the targeted gene, permitting the
generation of knockout mice. By using this technology in combination with one or
more additional technologies, we are able to generate alterations that
selectively disrupt, or conditionally regulate, the function of the targeted
gene for the analysis of the gene's function in selected tissues, at selected
stages in the animal's development or at selected times in the animal's life. We
can also use this technology to replace the targeted gene with its corresponding
human gene for use for preclinical research in our therapeutic discovery
programs.

      Gene Trapping. Our gene trapping technology, which is covered by nine
issued patents that we own, is a high-throughput method of generating knockout
mouse clones that we invented. The technology uses genetically engineered
retroviruses that infect mouse embryonic stem cells in vitro, integrate into the
chromosome of the cell and disrupt the function of the gene into which it
integrates, permitting the generation of knockout mice. This process also
stimulates transcription of a non-protein producing portion of the trapped gene,
using the cell's own splicing machinery to extract this transcript from the
chromosome for automated DNA sequencing. This allows us to identify and
catalogue each embryonic stem cell clone by DNA sequence from the trapped gene
and to select embryonic stem cell clones by DNA sequence for the generation of
knockout mice. We have used our gene trapping technology in an automated process
to create our OmniBank library of more than 200,000 frozen gene knockout
embryonic stem cell clones, each identified by DNA sequence in a relational
database. We estimate that our OmniBank library currently contains embryonic
stem cell clones representing more than half of all genes in the mammalian
genome and believe it is the largest library of its kind.

                                       3
<PAGE>

   PHYSIOLOGICAL ANALYSIS TECHNOLOGIES

      We employ an integrated platform of advanced medical examinations to
rapidly and systematically discover the physiological and behavioral effects
resulting from loss of gene function in the mouse knockouts we have generated
using our gene trapping and gene targeting technologies and catalogue those
effects in our comprehensive and relational LexVision database. These
examinations include many of the most sophisticated diagnostic technologies and
tests currently available, many of which might be found in a major medical
center. The following are included among the many tests we use:

      -     CAT-scans;

      -     magnetic resonance imaging, or MRI;

      -     complete blood cell analysis, including red and white blood cell
            counts;

      -     fluorescently activated cell sorting, or FACS, analysis;

      -     automated behavior analyses;

      -     nuclear magnetic resonance, or NMR, analysis; and

      -     dual energy X-ray absorptiometry.

      Each of these technologies has been adapted specifically for the analysis
of mouse physiology. This state-of-the-art technology platform enables us to
assess the consequences of loss of gene function in a living mammal across a
wide variety of parameters relevant to human disease.

      We employ the same physiological analysis technology platform that we use
in the discovery of gene function to analyze the in vivo efficacy and safety
profiles of therapeutic candidates in mice. We believe that this approach will
allow us, at an early stage, to identify and optimize therapeutic candidates for
further preclinical and clinical development that demonstrate in vivo efficacy
and to distinguish side effects caused by a specific compound from the
target-related side effects that we defined using the same comprehensive series
of tests.

   PRODUCTION AND ANALYSIS INFRASTRUCTURE

      Our facilities, which are among the largest and most sophisticated of
their kind in the world, enable us to capitalize on our gene knockout and
physiological analysis technologies by generating knockout mice and analyzing
the physiological function of genes on an expansive scale. We are able to
generate knockout mice for the large number of genes that we believe may be
pharmaceutically important and analyze the physiology of each of those knockout
mice by utilizing our broad range of medical technologies. Our state-of-the-art
animal facilities, occupying a total of approximately 100,000 square feet, are
designed to allow us to generate and analyze approximately 1,000 knockout mice
per year. These facilities, completed in 1999 and 2002, respectively, were
custom designed for the generation and analysis of knockout mice and are
accredited by AAALAC International, or Association for Assessment and
Accreditation of Laboratory Animal Care.

      Our facilities also enable us to maintain in-house control over our entire
in vivo validation process, from the generation of embryonic stem cell clones
through the completion of in vivo analysis, in a specific pathogen-free
environment. As part of our Genome5000 program, we have already examined the
physiological functions of more than 2,000 genes and expect to complete our
analysis of an aggregate of 5,000 genes by the end of 2008. We are not aware of
any study approaching either the magnitude or breadth of our Genome5000 program,
and we believe that the investment of significant resources over a period of
several years would be required for any competitor to duplicate our gene
knockout and physiological analysis capabilities. The scope of our gene knockout
technology, combined with the size and sophistication of our facilities and our
evaluative technologies, provides us with what we believe to be a significant
competitive advantage.

   MEDICINAL CHEMISTRY TECHNOLOGY

      We use solution-phase chemistry to generate diverse libraries of optically
pure compounds that are targeted against the same pharmaceutically relevant gene
families that we address in our Genome5000 program. These

                                       4
<PAGE>

libraries are built using highly robust and scalable organic reactions that
allow us to generate compound collections of great diversity and to specially
tailor the compound collections to address various therapeutic target families.
We design these libraries by analyzing the chemical structures of drugs that
have been proven safe and effective against human disease and using that
knowledge in the design of scaffolds and chemical building blocks for the
generation of large numbers of new drug-like compounds. We can rapidly
reassemble these building blocks to generate optimization libraries when we
identify a hit against one of our in vivo-validated targets, enabling us to
rapidly optimize those hits and accelerate our medicinal chemistry efforts.

      Our medicinal chemistry technology is housed in a state-of-the-art 76,000
square foot facility in Hopewell, New Jersey. Our lead optimization chemistry
groups are organized around specific discovery targets and work closely with
their pharmaceutical biology counterparts in our facilities in The Woodlands,
Texas. The medicinal chemists optimize lead compounds in order to select
clinical candidates with the desired absorption, distribution, metabolism,
excretion and physicochemical characteristics. We have the capability to profile
our compounds using the same battery of in vivo assays that we use to
characterize our drug discovery targets. This provides us with valuable detailed
information relevant to the selection of the highest quality compounds for
clinical development.

   RESEARCH AND DEVELOPMENT EXPENSES

      In 2004, 2003 and 2002, respectively, we incurred expenses of $90.6
million, $82.2 million and $74.9 million in company-sponsored as well as
collaborative research and development activities, including $0.4 million, $5.0
million and $5.2 million, respectively, of stock-based compensation expense.

OUR COMMERCIALIZATION STRATEGY

      We are working both independently and through strategic collaborations and
alliances with leading pharmaceutical and biotechnology companies, research
institutes and academic institutions to commercialize our technology and turn
our discoveries into drugs. Consistent with this approach, we intend to develop
and commercialize certain of our drug discovery programs internally and retain
exclusive rights to the benefits of such programs and to collaborate with third
parties with respect to the development and commercialization of other drug
discovery programs.

      We apply our internal resources to our drug discovery programs in order to
commercialize our technology and turn our discoveries into drugs. As we advance
targets into our drug discovery programs, we allocate our internal resources in
a manner designed to maximize our ability to commercialize opportunities
presented by these programs. Our prioritization and allocation of internal
resources among these programs are based on our expectations regarding their
relative likelihood of success and the relevant medical market, as well as
progress realized in our drug discovery efforts for the program. We revise our
prioritization and resource allocation among programs as necessary in order to
capitalize on new discoveries and opportunities.

      Our collaboration and alliance strategy involves drug discovery alliances
to discover and develop therapeutics based on our drug target discoveries,
particularly when the alliance enables us to obtain access to technology and
expertise that we do not possess internally or is complementary to our own.
These strategic collaborations, as well as our licenses with pharmaceutical and
biotechnology companies, research institutes and academic institutions, enable
us to generate near-term revenues in exchange for access to some of our
technologies and discoveries for use by these third parties in their own drug
discovery efforts. These collaborations and licenses also offer us the
potential, in many cases, to receive milestone payments and royalties on
products that our collaborators and licensees develop using our technology.

ALLIANCES, COLLABORATIONS AND LICENSES

   DRUG DISCOVERY ALLIANCES

      We have entered into the following alliances for the discovery and
development of therapeutics based on our in vivo drug target discovery efforts:

      Bristol-Myers Squibb Company. We established a drug discovery alliance
with Bristol-Myers Squibb in December 2003 to discover, develop and
commercialize small molecule drugs in the neuroscience field. In the alliance,
we are contributing a number of neuroscience drug discovery programs at various
stages of development.

                                       5
<PAGE>

We will continue to use our gene knockout technology to identify additional drug
targets with promise in the neuroscience field. For those targets that are
selected for the alliance, we and Bristol-Myers Squibb will work together, on an
exclusive basis, to identify, characterize and carry out the preclinical
development of small molecule drugs, and will share equally both in the costs
and in the work attributable to those efforts. As drugs resulting from the
alliance enter clinical trials, Bristol-Myers Squibb will have the first option
to assume full responsibility for clinical development and commercialization.

      We received an upfront payment under the agreement and are entitled to
receive research funding during the initial three years of the agreement. We may
receive additional cash payments if we exceed specified research productivity
levels. We will also receive clinical and regulatory milestone payments for each
drug target for which Bristol-Myers Squibb develops a drug under the alliance
and royalties on sales of drugs commercialized by Bristol-Myers Squibb. The
target discovery portion of the alliance has a term of three years, subject to
Bristol-Myers Squibb's option to extend the discovery portion of the alliance
for an additional two years in exchange for further research funding payments.

      Genentech, Inc. We established a drug discovery alliance with Genentech in
December 2002 to discover novel therapeutic proteins and antibody targets. Under
the alliance agreement, we are using our target validation technologies to
discover the functions of secreted proteins and potential antibody targets
identified through Genentech's internal drug discovery research. Genentech will
have exclusive rights to the discoveries resulting from the collaboration for
the research, development and commercialization of therapeutic proteins and
antibodies. We will retain certain other rights to those discoveries, including
non-exclusive rights, along with Genentech, for the development and
commercialization of small molecule drugs. We received an up-front payment and
are entitled to receive performance payments for our work in the collaboration
as it is completed. We are also entitled to receive milestone payments and
royalties on sales of therapeutic proteins and antibodies for which Genentech
obtains exclusive rights. The agreement has an expected collaboration term of
three years.

      Takeda Pharmaceutical Company Limited. We established a drug discovery
alliance with Takeda in July 2004 to discover new drugs for the treatment of
high blood pressure. In the collaboration, we are using our gene knockout
technology to identify drug targets that control blood pressure. Takeda will be
responsible for the screening, medicinal chemistry, preclinical and clinical
development and commercialization of drugs directed against targets selected for
the alliance, and will bear all related costs. We received an upfront payment
under the agreement and are entitled to receive research milestone payments for
each target selected for therapeutic development. In addition, we are entitled
to receive clinical development and product launch milestone payments for each
product commercialized from the collaboration. We will also earn royalties on
sales of drugs commercialized by Takeda. The target discovery portion of the
alliance has a term of three years, subject to Takeda's option to extend the
discovery portion of the alliance for an additional two years in exchange for
further research funding payments.

   OTHER COMMERCIAL COLLABORATIONS

      Target Validation Collaborations. We have established target validation
collaboration agreements with a number of leading pharmaceutical and
biotechnology companies. Under these collaboration agreements, we generate and,
in some cases, analyze knockout mice for genes requested by the collaborator. In
addition, we grant non-exclusive licenses to the collaborator for use of the
knockout mice in its internal drug discovery programs and, if applicable,
analysis data that we generate under the agreement. Some of these agreements
also provide for non-exclusive access to our OmniBank database. We receive fees
for knockout mice under these agreements. In some cases, these agreements also
provide for annual subscription fees, annual minimum commitments and the
potential for royalties on products that our collaborators discover or develop
using our technology.

      LexVision Collaborations. The collaboration periods have terminated under
each of our LexVision collaborations, pursuant to which our LexVision
collaborators obtained non-exclusive access to our LexVision database of in
vivo-validated drug targets for the discovery of small molecule compounds. We
remain entitled to receive milestone payments and royalties on products those
LexVision collaborators develop using our technology.

   E-BIOLOGY COLLABORATION PROGRAM

      We provide access to our OmniBank database through the Internet to
subscribing researchers at academic and non-profit research institutions. Our
bioinformatics software allows subscribers to mine our OmniBank

                                       6
<PAGE>

database for genes of interest, and we permit subscribers to acquire OmniBank
knockout mice or embryonic stem cells on a non-exclusive basis in our e-Biology
collaboration program. We receive fees for knockout mice or embryonic stem cells
provided to collaborators in this program and, with participating institutions,
rights to license inventions or to receive royalties on products discovered
using our materials. In all cases we retain rights to use the same OmniBank
knockout mice in our own gene function research and with commercial
collaborators. We have entered into more than 250 agreements under our e-Biology
collaboration program with researchers at leading institutions throughout the
world.

   TECHNOLOGY LICENSES

      We have granted non-exclusive, internal research-use sublicenses under
certain of our gene targeting patent rights to a total of 13 leading
pharmaceutical and biotechnology companies. Many of these agreements extend for
the life of the patents. Others have terms of one to three years, in some cases
with provisions for subsequent renewals. We typically receive up-front license
fees and, in some cases, receive additional license fees or milestone payments
on products that the sublicensee discovers or develops using our technology.

PATENTS AND PROPRIETARY RIGHTS

      We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that those rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Accordingly,
patents and other proprietary rights are an essential element of our business.
We seek patent protection for the genes, proteins and drug targets that we
discover. Specifically, we seek patent protection for:

      -     the sequences of genes that we believe to be novel, including
            full-length human genes and partial human and mouse gene sequences,
            the proteins they encode and their predicted utility as a drug
            target or therapeutic protein;

      -     the utility of genes and the drug targets or therapeutic proteins
            they encode based on our discoveries of their biological functions
            using knockout mice;

      -     drug discovery assays for our in vivo-validated targets;

      -     chemical compounds and their use in treating human diseases and
            conditions; and

      -     various enabling technologies in the fields of mutagenesis,
            embryonic stem cell manipulation and transgenic or knockout mice.

      We own or have exclusive rights to nine issued United States patents that
are directed to our gene trapping technology, 70 issued United States patents
that are directed to full-length sequences of potential drug targets identified
in our gene discovery programs, and five issued United States patents that are
directed to specific knockout mice and discoveries of the functions of genes
made using knockout mice. We have licenses under 66 additional United States
patents, and corresponding foreign patents and patent applications, directed to
gene targeting, gene trapping and genetic manipulation of mouse embryonic stem
cells. These include patents to which we hold exclusive rights in certain
fields, including a total of eight United States patents directed to the use of
gene targeting technologies known as positive-negative selection and isogenic
DNA targeting, as well as patents directed to the use of site specific genetic
recombination technology known as Cre/lox technology.

      We have filed or have exclusive rights to more than 600 pending patent
applications in the United States Patent and Trademark Office, the European
Patent Office, the national patent offices of other foreign countries or under
the Patent Cooperation Treaty, directed to our gene trapping technology, the DNA
sequences of genes, the uses of specific drug targets, drug discovery assays,
and other products and processes. Collectively, these patent applications are
directed to, among other things, approximately 200 full-length human gene
sequences, more than 50,000 partial human gene sequences, and more than 45,000
knockout mouse clones and corresponding mouse gene sequence tags. Patents
typically have a term of no longer than 20 years from the date of filing.

      As noted above, we hold rights to a number of these patents and patent
applications under license agreements with third parties. In particular, we
license our gene targeting technologies from GenPharm International, Inc. and
our Cre/lox technology from DuPont Pharmaceuticals Company. Many of these
licenses are

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nonexclusive, although some are exclusive in specified fields. Most of the
licenses, including those licensed from GenPharm and DuPont, have terms that
extend for the life of the licensed patents. In the case of our license from
GenPharm, the license generally is exclusive in specified fields, subject to
specific rights held by third parties, and we are permitted to grant
sublicenses.

      All of our employees, consultants and advisors are required to execute a
proprietary information agreement upon the commencement of employment or
consultation. In general, the agreement provides that all inventions conceived
by the employee or consultant, and all confidential information developed or
made known to the individual during the term of the agreement, shall be our
exclusive property and shall be kept confidential, with disclosure to third
parties allowed only in specified circumstances. We cannot assure you, however,
that these agreements will provide useful protection of our proprietary
information in the event of unauthorized use or disclosure of such information.

COMPETITION

      The biotechnology and pharmaceutical industries are highly competitive and
characterized by rapid technological change. We face significant competition in
each of the aspects of our business from for-profit companies such as Human
Genome Sciences, Inc., Millennium Pharmaceuticals, Inc. and Exelixis, Inc.,
among others, many of which have substantially greater financial, scientific and
human resources than we do. In addition, the Human Genome Project and a large
number of universities and other not-for-profit institutions, many of which are
funded by the U.S. and foreign governments, are also conducting research to
discover genes and their functions.

      While we are not aware of any other commercial entity that is developing
large-scale gene trap mutagenesis in ES cells, we face competition from entities
using traditional knockout mouse technology and other technologies. Several
companies, including Regeneron Pharmaceuticals, Inc. and DNX (a subsidiary of
Xenogen Corporation), and a large number of academic institutions create
knockout mice for third parties using these more traditional methods, and a
number of companies create knockout mice for use in their own research.

      Many of our competitors in drug discovery and development have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than we do. As a result,
our competitors may succeed in developing products earlier than we do, obtaining
approvals from the FDA or other regulatory agencies for those products more
rapidly than we do, or developing products that are more effective than those we
propose to develop. Similarly, our collaborators face similar competition from
other competitors who may succeed in developing products more quickly, or
developing products that are more effective, than those developed by our
collaborators. We expect that competition in this field will intensify.

GOVERNMENT REGULATION

   REGULATION OF PHARMACEUTICAL PRODUCTS

      The development, manufacture and sale of any pharmaceutical or biological
products developed by us or our collaborators will be subject to extensive
regulation by United States and foreign governmental authorities, including
federal, state and local authorities. In the United States, new drugs are
subject to regulation under the Federal Food, Drug and Cosmetic Act and the
regulations promulgated thereunder, or the FDC Act, and biological products are
subject to regulation both under certain provisions of the FDC Act and under the
Public Health Services Act and the regulations promulgated thereunder, or the
PHS Act. The FDA regulates, among other things, the development, preclinical and
clinical testing, manufacture, safety, efficacy, record keeping, reporting,
labeling, storage, approval, advertising, promotion, sale, distribution and
export of drugs and biologics. The process of obtaining FDA approval has
historically been costly and time-consuming.

      The standard process required by the FDA before a pharmaceutical or
biological product may be marketed in the United States includes:

      -     preclinical laboratory and animal tests performed under the FDA's
            current Good Laboratory Practices regulations;

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      -     submission to the FDA of an Investigational New Drug application, or
            IND, which must become effective before human clinical trials may
            commence;

      -     adequate and well-controlled human clinical trials to establish the
            safety and efficacy of the drug or biologic in our intended
            application;

      -     for drugs, submission of a New Drug Application, or NDA, and, for
            biologics, submission of a Biologic License Application, or BLA,
            with the FDA; and

      -     FDA approval of the NDA or BLA prior to any commercial sale or
            shipment of the product.

      Among other things, the FDA reviews an NDA to determine whether a product
is safe and effective for its intended use and a BLA to determine whether a
product is safe, pure and potent and the facility in which it is manufactured,
processed, packed, or held meets standards designed to assure the product's
continued safety, purity and potency.

      In addition to obtaining FDA approval for each product, each drug or
biologic manufacturing establishment must be inspected and approved by the FDA.
All manufacturing establishments are subject to inspections by the FDA and by
other federal, state and local agencies and must comply with current Good
Manufacturing Practices requirements. Non-compliance with these requirements can
result in, among other things, total or partial suspension of production,
failure of the government to grant approval for marketing and withdrawal,
suspension or revocation of marketing approvals.

      Preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they take
years to complete. In addition, the FDA may place a clinical trial on hold or
terminate it if, among other reasons, the agency concludes that clinical
subjects are being exposed to an unacceptable health risk. After completion of
clinical trials of a new drug or biologic product, FDA marketing approval of the
NDA or BLA must be obtained. An NDA or BLA, depending on the submission, must
contain, among other things, information on chemistry, manufacturing controls
and potency and purity, non-clinical pharmacology and toxicology, human
pharmacokinetics and bioavailability and clinical data. The process of obtaining
approval requires substantial time and effort and there is no assurance that the
FDA will accept the NDA or BLA for filing and, even if filed, that approval will
be granted. The FDA's approval of an NDA or BLA can take years and can be
delayed if questions arise. Limited indications for use or other conditions
could also be placed on any approvals that could restrict the commercial
applications of products.

      Once the FDA approves a product, a manufacturer must provide certain
updated safety and efficacy information. Product changes as well as certain
changes in a manufacturing process or facility would necessitate additional FDA
review and approval. Other post-approval changes may also necessitate further
FDA review and approval. Additionally, a manufacturer must meet other
requirements including those related to adverse event reporting and record
keeping.

      Violations of the FDC Act, the PHS Act or regulatory requirements may
result in agency enforcement action, including voluntary or mandatory recall,
license suspension or revocation, product seizure, fines, injunctions and civil
or criminal penalties.

      In addition to regulatory approvals that must be obtained in the United
States, a drug or biological product is also subject to regulatory approval in
other countries in which it is marketed, although the requirements governing the
conduct of clinical trials, product licensing, pricing, and reimbursement vary
widely from country to country. No action can be taken to market any drug or
biological product in a country until the regulatory authorities in that country
have approved an appropriate application. FDA approval does not assure approval
by other regulatory authorities. The current approval process varies from
country to country, and the time spent in gaining approval varies from that
required for FDA approval. In some countries, the sale price of a drug or
biological product must also be approved. The pricing review period often begins
after marketing approval is granted. Even if a foreign regulatory authority
approves a drug or biological product, it may not approve satisfactory prices
for the product.

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<PAGE>

   OTHER REGULATIONS

      In addition to the foregoing, our business is and will be subject to
regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act
and the Toxic Substances Control Act. These and other laws govern our use,
handling and disposal of various biological, chemical and radioactive substances
used in and wastes generated by our operations. We believe that we are in
material compliance with applicable environmental laws and that our continued
compliance with these laws will not have a material adverse effect on our
business. We cannot predict, however, whether new regulatory restrictions on the
production, handling and marketing of biotechnology products will be imposed by
state or federal regulators and agencies or whether existing laws and
regulations will adversely affect us in the future.

EMPLOYEES AND CONSULTANTS

      We believe that our success will be based on, among other things,
achieving and retaining scientific and technological superiority and identifying
and retaining capable management. We have assembled a highly qualified team of
scientists as well as executives with extensive experience in the biotechnology
industry.

      As of March 8, 2005, we employed 704 persons, of whom 144 hold M.D., Ph.D.
or D.V.M. degrees and another 94 hold other advanced degrees. We believe that
our relationship with our employees is good.

RISK FACTORS

      Our business is subject to risks and uncertainties, including those
described below:

RISKS RELATED TO OUR COMPANY AND BUSINESS

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

      We have incurred net losses since our inception, including net losses of
$59.7 million for the year ended December 31, 2002, $64.2 million for the year
ended December 31, 2003 and $47.2 million for the year ended December 31, 2004.
As of December 31, 2004, we had an accumulated deficit of $261.1 million. We are
unsure when we will become profitable, if ever. The size of our net losses will
depend, in part, on the rate of growth, if any, in our revenues and on the level
of our expenses.

      We derive substantially all of our revenues from drug discovery alliances,
collaborations for the development and, in some cases, analysis of the
physiological effects of genes altered in knockout mice and technology licenses,
and will continue to do so for the foreseeable future. Our future revenues from
alliances and collaborations are uncertain because our existing agreements have
fixed terms or relate to specific projects of limited duration. Our future
revenues from technology licenses are uncertain because they depend, in part, on
securing new agreements. Our ability to secure future revenue-generating
agreements will depend upon our ability to address the needs of our potential
future collaborators and licensees, and to negotiate agreements that we believe
are in our long-term best interests. We may determine that our interests are
better served by retaining rights to our discoveries and advancing our
therapeutic programs to a later stage, which could limit our near-term revenues.
Given the early-stage nature of our operations, we do not currently derive any
revenues from sales of pharmaceuticals.

      A large portion of our expenses is fixed, including expenses related to
facilities, equipment and personnel. In addition, we expect to spend significant
amounts to fund research and development and to enhance our core technologies.
As a result, we expect that our operating expenses will continue to increase
significantly in the near term and, consequently, we will need to generate
significant additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

We will need additional capital in the future and, if it is not available, we
will have to curtail or cease operations.

      As of December 31, 2004, we had cash, cash equivalents and short-term
investments (net of restricted cash and investments) of $87.1 million. We
anticipate that our existing capital resources and the revenues we expect to
derive from drug discovery alliances, collaborations for the development and, in
some cases, analysis of the physiological effects of genes altered in knockout
mice and technology licenses will enable us to fund our currently

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<PAGE>

planned operations for approximately the next two years. Our currently planned
operations for that time period consist of the continuation of our efforts to
discover the physiological functions of 5,000 human genes that we consider to be
pharmaceutically important and the expansion of our medicinal chemistry and
preclinical research operations in preparation for the initiation of clinical
trials. However, we caution you that we may generate less revenues or incur
expenses more rapidly than we currently anticipate.

      Although difficult to accurately predict, the amount of our future capital
requirements will be substantial and will depend on many factors, including:

      -     our ability to obtain alliance, collaboration and technology license
            agreements;

      -     the amount and timing of payments under such agreements;

      -     the level and timing of our research and development expenditures;

      -     market acceptance of products that we successfully develop and
            commercially launch; and

      -     the resources we devote to developing and supporting such products.

      Our capital requirements will increase substantially to the extent we
advance potential therapeutics into clinical development. Our capital
requirements will also be affected by any expenditures we make in connection
with license agreements and acquisitions of and investments in complementary
products and technologies. For all of these reasons, our future capital
requirements cannot easily be quantified.

      If our capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds to continue the development
of our technologies and complete the commercialization of products, if any,
resulting from our technologies. We cannot be certain that additional financing,
whether debt or equity, will be available in amounts or on terms acceptable to
us, if at all. We may be unable to raise sufficient additional capital; if so,
we will have to curtail or cease operations.

Any sale of additional equity securities in the future may be dilutive to our
stockholders.

      If we raise additional capital by issuing equity securities, our
then-existing stockholders will experience dilution and the terms of any new
equity securities may have preferences over our common stock.

We are an early-stage company, and we may not successfully develop or
commercialize any therapeutics that we have identified.

      Our business strategy of using our technology platform and, specifically,
the discovery of the functions of genes using knockout mice to select promising
drug targets and developing and commercializing drugs based on our discoveries,
in significant part through collaborations and alliances, is unproven. Our
success will depend upon our ability to successfully develop potential
therapeutics for drug targets we consider to have pharmaceutical value, whether
on our own or through collaborations, and to select an appropriate
commercialization strategy for each potential therapeutic we choose to pursue.

      Biotechnology and pharmaceutical companies have successfully developed and
commercialized only a limited number of genomics-derived pharmaceutical products
to date. We have not proven our ability to develop or commercialize therapeutics
or drug targets that we identify, nor have we advanced any drug candidates to
clinical trials. We do not know that any pharmaceutical products based on our
drug target discoveries can be successfully commercialized. In addition, we may
experience unforeseen technical complications in the processes we use to
generate knockout mice, conduct in vivo analyses, generate compound libraries,
develop screening assays for drug targets or conduct screening of compounds
against those drug targets. These complications could materially delay or limit
the use of those resources, substantially increase the anticipated cost of
generating them or prevent us from implementing our processes at appropriate
quality and throughput levels. Finally, the information that we learn from
knockout mice may prove not to be useful in identifying
pharmaceutically-important drug targets or safe and effective therapies.

                                       11
<PAGE>

We face substantial competition in the discovery of the DNA sequences of genes
and their functions and in our drug discovery and product development efforts.

      We face significant competition in each of the aspects of our business
from companies such as Human Genome Sciences, Inc., Millennium Pharmaceuticals,
Inc., Exelixis, Inc. and other similar companies that engage in programs for the
discovery and development of drugs utilizing a genetics-based approach to target
discovery and validation.

      There are a finite number of genes in the human genome, and we believe
that the majority of such genes have been identified and that virtually all will
be identified within the next few years. We face substantial competition in our
efforts to discover and patent the sequence and other information derived from
such genes from entities using alternative, and in some cases higher volume and
larger scale, approaches for the same purpose. These alternative approaches may
ultimately prove superior, in some or all respects, to the use of knockout mice.

      We also face competition from other companies in our efforts to discover
the functions of genes. The Human Genome Project and a large number of
universities and other not-for-profit institutions, many of which are funded by
the United States and foreign governments, are also conducting research to
discover the functions of genes. Competitors could discover and establish
patents on genes or gene products that we identify as promising drug targets,
which might hinder or prevent our ability to capitalize on such targets.

      We face significant competition from other companies, as well as from
universities and other not-for-profit institutions, in our drug discovery and
product development efforts. Many of our competitors have substantially greater
financial, scientific and human resources than we do. As a result, our
competitors may succeed in developing products earlier than we do, obtaining
regulatory approvals faster than we do and developing products that are more
effective or safer than any that we may develop.

We rely heavily on our collaborators to develop and commercialize pharmaceutical
products based on genes that we identify as promising candidates for development
as drug targets, and our collaborators' efforts may fail to yield pharmaceutical
products on a timely basis, if at all.

      It is our strategy to develop drug candidates on our own as well as
developing drug candidates in collaboration with third parties, particularly
when such collaborations enable us to obtain access to technology and expertise
that we do not possess internally or is complementary to our own.

      Since we do not currently possess the resources necessary to develop,
obtain approvals for or commercialize potential pharmaceutical products based on
all of the genes that we identify as promising candidates for development as
drug targets, we must enter into collaborative arrangements to develop and
commercialize some of these products. We have limited or no control over the
resources that any collaborator may devote to this effort. Any of our present or
future collaborators may not perform their obligations as expected. These
collaborators may breach or terminate their agreements with us or otherwise fail
to conduct product discovery, development or commercialization activities
successfully or in a timely manner. Further, our collaborators may elect not to
develop pharmaceutical products arising out of our collaborative arrangements or
may not devote sufficient resources to the development, approval, manufacture,
marketing or sale of these products. If any of these events occurs, we may not
be able to develop or commercialize potential pharmaceutical products.

      Some of our existing collaboration agreements contain, and collaborations
that we enter into in the future may contain, exclusivity agreements or other
limitations on our activities. These agreements may have the effect of limiting
our flexibility and may cause us to forego attractive business opportunities.

We rely on several key collaborators for a significant portion of our revenues,
the loss of any of which would negatively impact our business to the extent such
losses are not offset by additional collaborators.

      Most of our revenues in a given year have been derived from a limited
number of collaborators. For the fiscal year ended December 31, 2004, for
example, Bristol-Myers Squibb accounted for approximately 43% of our revenues,
Genentech accounted for approximately 26% of our revenues and Incyte Corporation
accounted for approximately 8% of our revenues. In general, we cannot predict
with certainty which, if any, of our major collaborators will continue to
generate revenues for us. If our relationship terminates with any of these

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<PAGE>

collaborators, our revenues will be negatively impacted to the extent such
losses are not offset by additional collaboration agreements.

Cancellations by or conflicts with our collaborators could harm our business.

      Our alliance and collaboration agreements may not be renewed and may be
terminated in the event either party fails to fulfill its obligations under
these agreements. Failures to renew or cancellations by collaborators could mean
a significant loss of revenues and could harm our reputation in the business and
scientific communities.

      In addition, we may pursue opportunities in fields that could conflict
with those of our collaborators. Moreover, disagreements could arise with our
collaborators over rights to our intellectual property or our rights to share in
any of the future revenues of compounds or therapeutic approaches developed by
our collaborators. These kinds of disagreements could result in costly and time
consuming litigation. Conflicts with our collaborators could reduce our ability
to obtain future collaboration agreements and could have a negative impact on
our relationship with existing collaborators, materially impairing our business
and revenues. Some of our collaborators are also potential competitors or may
become competitors in the future. Our collaborators could develop competing
products, preclude us from entering into collaborations with their competitors
or terminate their agreements with us prematurely. Any of these events could
harm our product development efforts.

We may be unsuccessful in developing and commercializing pharmaceutical products
on our own.

      Our ability to develop and commercialize pharmaceutical products on our
own will depend on our ability to internally develop preclinical, clinical,
regulatory and sales and marketing capabilities, or enter into arrangements with
third parties to provide these functions. It will be expensive and will require
significant time for us to develop these capabilities internally. We may not be
successful in developing these capabilities or entering into agreements with
third parties on favorable terms, or at all. Further, our reliance upon third
parties for these capabilities could reduce our control over such activities and
could make us dependent upon these parties. Our inability to develop or contract
for these capabilities would significantly impair our ability to develop and
commercialize pharmaceutical products.

We lack the capability to manufacture materials for preclinical studies,
clinical trials or commercial sales and will rely on third parties to
manufacture our potential products, which may harm or delay our product
development and commercialization efforts.

      We currently do not have the manufacturing capabilities or experience
necessary to produce materials for preclinical studies, clinical trials or
commercial sales and intend to rely on collaborators and third-party contractors
to produce such materials. We will rely on selected manufacturers to deliver
materials on a timely basis and to comply with applicable regulatory
requirements, including the current Good Manufacturing Practices of the United
States Food and Drug Administration, or FDA, which relate to manufacturing and
quality control activities. These manufacturers may not be able to produce
material on a timely basis or manufacture material at the quality level or in
the quantity required to meet our development timelines and applicable
regulatory requirements. In addition, there are a limited number of
manufacturers that operate under the FDA's current Good Manufacturing Practices
and that are capable of producing such materials, and we may experience
difficulty finding manufacturers with adequate capacity for our needs. If we are
unable to contract for the production of sufficient quantity and quality of
materials on acceptable terms, our product development and commercialization
efforts may be delayed. Moreover, noncompliance with the FDA's current Good
Manufacturing Practices can result in, among other things, fines, injunctions,
civil and criminal penalties, product recalls or seizures, suspension of
production, failure to obtain marketing approval and withdrawal, suspension or
revocation of marketing approvals.

We may engage in future acquisitions, which may be expensive and time consuming
and from which we may not realize anticipated benefits.

      We may acquire additional businesses, technologies and products if we
determine that these businesses, technologies and products complement our
existing technology or otherwise serve our strategic goals. We currently have no
commitments or agreements with respect to any acquisitions. If we do undertake
any transactions of this sort, the process of integrating an acquired business,
technology or product may result in operating difficulties and expenditures and
may not be achieved in a timely and non-disruptive manner, if at all, and may
absorb significant management attention that would otherwise be available for
ongoing development of our business. If we fail to

                                       13
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integrate acquired businesses, technologies or products effectively or if key
employees of an acquired business leave, the anticipated benefits of the
acquisition would be jeopardized. Moreover, we may never realize the anticipated
benefits of any acquisition, such as increased revenues and earnings or enhanced
business synergies. Future acquisitions could result in potentially dilutive
issuances of our equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to intangible assets, which could
materially impair our results of operations and financial condition.

If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to pursue collaborations or develop our own
products.

      We are highly dependent on Arthur T. Sands, M.D., Ph.D., our president and
chief executive officer, as well as other principal members of our management
and scientific staff. We do not carry key man insurance on Dr. Sands or any
other key personnel. The loss of any of these personnel could negatively impact
our business, financial condition or results of operations and could inhibit our
product development and commercialization efforts. Although we have entered into
employment agreements with some of our key personnel, including Dr. Sands, these
employment agreements are all at will. In addition, not all key personnel have
employment agreements.

      Recruiting and retaining qualified scientific personnel to perform future
research and development work will be critical to our success. Competition for
experienced scientists is intense. Failure to recruit and retain scientific
personnel on acceptable terms could prevent us from achieving our business
objectives.

Any contamination among our knockout mouse population could negatively affect
the reliability of our scientific research or cause us to incur significant
remedial costs.

      Our generation and analysis of knockout mice are conducted in a specific
pathogen-free environment. Any contamination of our knockout mouse population
could distort or compromise the quality of our research and negatively impact
the reliability of our scientific discoveries. Although we have expended
substantial resources in order to secure our facilities from such risk, in the
event such a contamination were to occur, our drug discovery efforts could be
significantly harmed or delayed and our reputation within the scientific
community could be eroded. In addition, we may incur significant remedial costs
relating to the elimination of any pathogens present in our facilities.

Because all of our target validation operations are located at a single
facility, the occurrence of a disaster could significantly disrupt our business.

      Our OmniBank mouse clone library and its backup are stored in liquid
nitrogen freezers located at our facility in The Woodlands, Texas, and our
knockout mouse research operations are carried out entirely at the same
facility. While we have developed redundant and emergency backup systems to
protect these resources and the facilities in which they are stored, they may be
insufficient in the event of a severe fire, flood, hurricane, tornado,
mechanical failure or similar disaster. If such a disaster significantly damages
or destroys the facility in which these resources are maintained, our business
could be disrupted until we could regenerate the affected resources and, as a
result, our stock price could decline. Our business interruption insurance may
not be sufficient to compensate us in the event of a major interruption due to
such a disaster.

Our operating results have been and likely will continue to fluctuate, and we
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance.

      Our operating results and, in particular, our ability to generate
additional revenues are dependent on many factors, including:

      -     our ability to establish new research collaborations and technology
            licenses, and the timing of such arrangements;

      -     the expiration or other termination of research collaborations with
            our collaborators, which may not be renewed or replaced;

      -     the success rate of our discovery efforts leading to opportunities
            for new research collaborations and licenses, as well as milestone
            payments and royalties;

                                       14
<PAGE>

      -     the timing and willingness of our collaborators to commercialize
            pharmaceutical products that would result in milestone payments and
            royalties; and

      -     general and industry-specific economic conditions, which may affect
            our and our collaborators' research and development expenditures.

      Because of these and other factors, including the risks and uncertainties
described in this section, our operating results have fluctuated in the past and
are likely to do so in the future. Due to the likelihood of fluctuations in our
revenues and expenses, we believe that period-to-period comparisons of our
operating results are not a good indication of our future performance.

RISKS RELATED TO OUR INDUSTRY

Our ability to patent our inventions is uncertain because patent laws and their
interpretation are highly uncertain and subject to change.

      The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions that will determine who has the
right to develop or use a particular technology or product. No clear policy has
emerged regarding the scope of protection provided in biotechnology patents. The
biotechnology patent situation outside the United States is similarly uncertain.
Changes in, or different interpretations of, patent laws in the United States or
other countries might allow others to use our inventions or to develop and
commercialize any technologies or products that we may develop without any
compensation to us. We anticipate that these uncertainties will continue for a
significant period of time.

Our patent applications may not result in patent rights and, as a result, the
protection afforded to our scientific discoveries may be insufficient.

      Our disclosures in our patent applications may not be sufficient to meet
the statutory requirements for patentability. Our ability to obtain patent
protection based on genes or gene sequences will depend, in part, upon
identification of a use for the gene or gene sequences sufficient to meet the
statutory requirements that an invention have utility and that a patent
application enable one to make and use the invention. While the United States
Patent and Trademark Office has issued guidelines for the examination of patent
applications claiming gene sequences, their therapeutic uses and novel proteins
encoded by such genes, the impact of these guidelines is uncertain and may delay
or negatively affect our patent position. Furthermore, biologic data in addition
to that obtained by our current technologies may be required for issuance of
patents covering any potential human therapeutic products that we may develop.
If required, obtaining such biologic data could delay, add substantial costs to,
or affect our ability to obtain patent protection for such products. There can
be no assurance that the disclosures in our current or future patent
applications, including those we may file with our collaborators, will be
sufficient to meet these requirements. Even if patents are issued, there may be
current or future uncertainty as to the scope of the coverage or protection
provided by any such patents.

      Some court decisions indicate that disclosure of a partial sequence may
not be sufficient to support the patentability of a full-length sequence. These
decisions have been confirmed by recent pronouncements of the United States
Patent and Trademark Office. We believe that these court decisions and the
uncertain position of the United States Patent and Trademark Office present a
significant risk that the United States Patent and Trademark Office will not
issue patents based on patent disclosures limited to partial gene sequences. In
addition, we are uncertain about the scope of the coverage, enforceability and
commercial protection provided by any patents issued primarily on the basis of
gene sequence information.

If other companies and institutions obtain patents relating to our drug target
or product candidate discoveries, we may be unable to obtain patents for our
inventions based upon those discoveries and may be blocked from using or
developing some of our technologies and products.

      Many other entities have filed or may file patent applications on genes or
gene sequences, uses of those genes or gene sequences, gene products and drug
targets, assays for identifying potential therapeutic products, potential
therapeutic products and methods of treatment which are identical or similar to
some of our filings. Some of these applications attempt to assign biologic
function to the genes and proteins based on predictions of function based upon
similarity to other genes and proteins or patterns of gene expression. There is
the significant possibility

                                       15
<PAGE>

that patents claiming the functional uses of such genes and gene products will
be issued to our competitors based on such information. If any such patents are
issued to other entities, we will be unable to obtain patent protection for the
same or similar discoveries that we make. Moreover, we may be blocked from using
or developing some of our existing or proposed technologies and products, or may
be required to obtain a license that may not be available on reasonable terms,
if at all.

      Alternatively, the United States Patent and Trademark Office could decide
competing patent claims in an interference proceeding. Any such proceeding would
be costly, and we may not prevail. In this event, the prevailing party may
require us or our collaborators to stop using a particular technology or
pursuing a potential product or may require us to negotiate a license
arrangement to do so. We may not be able to obtain a license from the prevailing
party on acceptable terms, or at all.

      The Human Genome Project, as well as many companies and institutions, have
identified genes and deposited partial gene sequences in public databases and
are continuing to do so. The entire human genome and the entire mouse genome are
now publicly known. These public disclosures might limit the scope of our claims
or make unpatentable subsequent patent applications on partial or full-length
genes or their uses.

Issued or pending patents may not fully protect our discoveries, and our
competitors may be able to commercialize technologies or products similar to
those covered by our issued or pending patents.

      Pending patent applications do not provide protection against competitors
because they are not enforceable until they issue as patents. Issued patents may
not provide commercially meaningful protection. If anyone infringes upon our or
our collaborators' patent rights, enforcing these rights may be difficult,
costly and time-consuming and, as a result, it may not be cost-effective or
otherwise expedient to pursue litigation to enforce those patent rights. Others
may be able to design around these patents or develop unique products providing
effects similar to any products that we may develop. Other companies or
institutions may challenge our or our collaborators' patents or independently
develop similar products that could result in an interference proceeding in the
United States Patent and Trademark Office or a legal action.

      In addition, others may discover uses for genes, drug targets or
therapeutic products other than those covered in our issued or pending patents,
and these other uses may be separately patentable. Even if we have a patent
claim on a particular gene, drug target or therapeutic product, the holder of a
patent covering the use of that gene, drug target or therapeutic product could
exclude us from selling a product that is based on the same use of that product.

We may be involved in patent litigation and other disputes regarding
intellectual property rights and may require licenses from third parties for our
discovery and development and planned commercialization activities. We may not
prevail in any such litigation or other dispute or be able to obtain required
licenses.

      Our discovery and development efforts as well as our potential products
and those of our collaborators may give rise to claims that they infringe the
patents of others. This risk will increase as the biotechnology industry expands
and as other companies and institutions obtain more patents covering the
sequences, functions and uses of genes and the drug targets they encode. We are
aware that other companies and institutions have conducted research on many of
the same targets that we have identified and have filed patent applications
potentially covering many of the genes and encoded drug targets that are the
focus of our drug discovery programs. In some cases, patents have issued from
these applications. In addition, many companies and institutions have
well-established patent portfolios directed to common techniques, methods and
means of developing, producing and manufacturing pharmaceutical products. Other
companies or institutions could bring legal actions against us or our
collaborators for damages or to stop us or our collaborators from engaging in
certain discovery or development activities or from manufacturing and marketing
any resulting therapeutic products. If any of these actions are successful, in
addition to our potential liability for damages, these entities would likely
require us or our collaborators to obtain a license in order to continue
engaging in the infringing activities or to manufacture or market the resulting
therapeutic products or may force us to terminate such activities or
manufacturing and marketing efforts.

      We may need to pursue litigation against others to enforce our patents and
intellectual property rights and may be the subject of litigation brought by
third parties to enforce their patent and intellectual property rights. In
addition, we may become involved in litigation based on intellectual property
indemnification undertakings that we

                                       16
<PAGE>

have given to certain of our collaborators. Patent litigation is expensive and
requires substantial amounts of management attention. The eventual outcome of
any such litigation is uncertain and involves substantial risks.

      We believe that there will continue to be significant litigation in our
industry regarding patent and other intellectual property rights. We have
expended and many of our competitors have expended and are continuing to expend
significant amounts of time, money and management resources on intellectual
property litigation. If we become involved in future intellectual property
litigation, it could consume a substantial portion of our resources and could
negatively affect our results of operations.

      Furthermore, in light of recent United States Supreme Court precedent, our
ability to enforce our patents against state agencies, including state sponsored
universities and research laboratories, is limited by the Eleventh Amendment to
the United States Constitution. In addition, opposition by academicians and the
government may hamper our ability to enforce our patents against academic or
government research laboratories. Finally, enforcement of our patents may cause
our reputation in the academic community to be injured.

We use intellectual property that we license from third parties. If we do not
comply with these licenses, we could lose our rights under them.

      We rely, in part, on licenses to use certain technologies that are
important to our business, such as certain gene targeting technology licensed
from GenPharm International, Inc. and conditional knockout technology licensed
from DuPont Pharmaceuticals Company. We do not own the patents that underlie
these licenses. Most of these licenses, however, including those licensed from
GenPharm and DuPont, have terms that extend for the life of the licensed
patents. Our rights to use these technologies and practice the inventions
claimed in the licensed patents are subject to our abiding by the terms of those
licenses and the licensors not terminating them. We are currently in compliance
with all requirements of these licenses. In many cases, we do not control the
filing, prosecution or maintenance of the patent rights to which we hold
licenses and rely upon our licensors to prosecute infringement of those rights.
The scope of our rights under our licenses may be subject to dispute by our
licensors or third parties.

We have not sought patent protection outside of the United States for some of
our inventions, and some of our licensed patents only provide coverage in the
United States. As a result, our international competitors could be granted
foreign patent protection with respect to our discoveries.

      We have decided not to pursue patent protection with respect to some of
our inventions outside the United States, both because we do not believe it is
cost-effective and because of confidentiality concerns. Accordingly, our
international competitors could develop, and receive foreign patent protection
for, genes or gene sequences, uses of those genes or gene sequences, gene
products and drug targets, assays for identifying potential therapeutic
products, potential therapeutic products and methods of treatment for which we
are seeking United States patent protection. In addition, most of our gene
trapping patents and our licensed gene targeting patents cover only the United
States and do not apply to discovery activities conducted outside of the United
States or, in some circumstances, to importing into the United States products
developed using this technology.

We may be unable to protect our trade secrets.

      Significant aspects of our intellectual property are not protected by
patents. As a result, we seek to protect the proprietary nature of this
intellectual property as trade secrets through proprietary information
agreements and other measures. While we have entered into proprietary
information agreements with all of our employees, consultants, advisers and
collaborators, we may not be able to prevent the disclosure of our trade
secrets. In addition, other companies or institutions may independently develop
substantially equivalent information and techniques.

Our efforts to discover, evaluate and validate potential targets for drug
intervention and our drug discovery programs are subject to evolving data and
other risks inherent in the drug discovery process.

      We are employing our knockout technology and integrated drug discovery
platform to systematically discover, evaluate and validate potential targets for
drug intervention and to develop drugs to address those targets. The drug
discovery and development process involves significant risks of delay or failure
due, in part, to evolving data and the uncertainties involved with the
applications of new technologies. As we refine and advance our efforts, it is
likely that the resulting data will cause us to change our targets from time to
time and, therefore, that the targets

                                       17
<PAGE>

that we believe at any time to be promising may prove not to be so. These
developments can occur at any stage of the drug discovery and development
process.

Our industry is subject to extensive and uncertain government regulatory
requirements, which could significantly hinder our ability, or the ability of
our collaborators, to obtain, in a timely manner or at all, government approval
of products based on genes that we identify, or to commercialize such products.

      We or our collaborators must obtain approval from the FDA in order to
conduct clinical trials and sell our future product candidates in the United
States and from foreign regulatory authorities in order to conduct clinical
trials and sell our future product candidates in other countries. In order to
obtain regulatory approvals for the commercial sale of any products that we may
develop, we will be required to complete extensive clinical trials in humans to
demonstrate the safety and efficacy of our drug candidates. We or our
collaborators may not be able to obtain authority from the FDA or other
equivalent foreign regulatory agencies to initiate or complete any clinical
trials. In addition, we have limited internal resources for making regulatory
filings and dealing with regulatory authorities.

      The results from preclinical testing of a drug candidate that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale, advanced stage
clinical trials. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after achieving
positive results in earlier trials. Negative or inconclusive results from a
preclinical study or a clinical trial could cause us, one of our collaborators
or the FDA to terminate a preclinical study or clinical trial or require that we
repeat it. Furthermore, we, one of our collaborators or a regulatory agency with
jurisdiction over the trials may suspend clinical trials at any time if the
subjects or patients participating in such trials are being exposed to
unacceptable health risks or for other reasons.

      Any preclinical or clinical test may fail to produce results satisfactory
to the FDA or foreign regulatory authorities. Preclinical and clinical data can
be interpreted in different ways, which could delay, limit or prevent regulatory
approval. The FDA or institutional review boards at the medical institutions and
healthcare facilities where we sponsor clinical trials may suspend any trial
indefinitely if they find deficiencies in the conduct of these trials. Clinical
trials must be conducted in accordance with the FDA's current Good Clinical
Practices. The FDA and these institutional review boards have authority to
oversee our clinical trials, and the FDA may require large numbers of test
subjects. In addition, we must manufacture, or contract for the manufacture of,
the product candidates that we use in our clinical trials under the FDA's
current Good Manufacturing Practices.

      The rate of completion of clinical trials is dependent, in part, upon the
rate of enrollment of patients. Patient accrual is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the nature of the study,
the existence of competitive clinical trials and the availability of alternative
treatments. Delays in planned patient enrollment may result in increased costs
and prolonged clinical development, which in turn could allow our competitors to
bring products to market before we do and impair our ability to commercialize
our products or potential products.

      We or our collaborators may not be able to successfully complete any
clinical trial of a potential product within any specified time period. In some
cases, we or our collaborators may not be able to complete the trial at all.
Moreover, clinical trials may not show our potential products to be both safe
and effective. Thus, the FDA and other regulatory authorities may not approve
any products that we develop for any indication or may limit the approved
indications or impose other conditions.

If our potential products receive regulatory approval, we or our collaborators
will remain subject to extensive and rigorous ongoing regulation.

      If we or our collaborators obtain initial regulatory approvals from the
FDA or foreign regulatory authorities for any products that we may develop, we
or our collaborators will be subject to extensive and rigorous ongoing domestic
and foreign government regulation of, among other things, the research,
development, testing, manufacture, labeling, promotion, advertising,
distribution and marketing of our products and product candidates. The failure
to comply with these requirements or the identification of safety problems
during commercial marketing could lead to the need for product marketing
restrictions, product withdrawal or recall or other voluntary or

                                       18
<PAGE>

regulatory action, which could delay further marketing until the product is
brought into compliance. The failure to comply with these requirements may also
subject us or our collaborators to stringent penalties.

      Moreover, several of our product development areas involve relatively new
technology and have not been the subject of extensive product testing in humans.
The regulatory requirements governing these products and related clinical
procedures remain uncertain and the products themselves may be subject to
substantial review by foreign governmental regulatory authorities that could
prevent or delay approval in those countries. Regulatory requirements ultimately
imposed on any products that we may develop could limit our ability to test,
manufacture and, ultimately, commercialize such products.

The uncertainty of pharmaceutical pricing and reimbursement may decrease the
commercial potential of any products that we or our collaborators may develop
and affect our ability to raise capital.

      Our ability and the ability of our collaborators to successfully
commercialize pharmaceutical products will depend, in part, on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
coverage insurers and other organizations. The pricing, availability of
distribution channels and reimbursement status of newly approved pharmaceutical
products is highly uncertain. As a result, adequate third-party coverage may not
be available for us to maintain price levels sufficient for realization of an
appropriate return on our investment in product discovery and development.

      In certain foreign markets, pricing or profitability of healthcare
products is subject to government control. In the United States, there have
been, and we expect that there will continue to be, a number of federal and
state proposals to implement similar governmental control. In addition, an
increasing emphasis on managed care in the United States has increased and will
continue to increase the pressure on pharmaceutical pricing. While we cannot
predict the adoption of any such legislative or regulatory proposals or the
effect such proposals or managed care efforts may have on our business, the
announcement of such proposals or efforts could harm our ability to raise
capital, and the adoption of such proposals or efforts could harm our results of
operations. Further, to the extent that such proposals or efforts harm other
pharmaceutical companies that are our prospective collaborators, our ability to
establish corporate collaborations would be impaired. In addition, third-party
payers are increasingly challenging the prices charged for medical products and
services. We do not know whether consumers, third-party payers and others will
consider any products that we or our collaborators develop to be cost-effective
or that reimbursement to the consumer will be available or will be sufficient to
allow us or our collaborators to sell such products on a profitable basis.

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

      Our research and development processes involve the use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge or any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts. We do not currently maintain insurance coverage that would
cover these types of environmental liabilities.

We may be sued for product liability.

      We or our collaborators may be held liable if any product that we or our
collaborators develop, or any product that is made with the use or incorporation
of any of our technologies, causes injury or is found otherwise unsuitable
during product testing, manufacturing, marketing or sale. Although we currently
have and intend to maintain product liability insurance, this insurance may
become prohibitively expensive or may not fully cover our potential liabilities.
Our inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit the commercialization of products

                                       19
<PAGE>

developed by us or our collaborators. If we are sued for any injury caused by
our or our collaborators' products, our liability could exceed our total assets.

Public perception of ethical and social issues may limit or discourage the use
of our technologies, which could reduce our revenues.

      Our success will depend, in part, upon our ability to develop products
discovered through our knockout mouse technologies. Governmental authorities
could, for ethical, social or other purposes, limit the use of genetic processes
or prohibit the practice of our knockout mouse technologies. Claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment may influence public perceptions. The subject of genetically
modified organisms, like knockout mice, has received negative publicity and
aroused public debate in some countries. Ethical and other concerns about our
technologies, particularly the use of genes from nature for commercial purposes
and the products resulting from this use, could reduce the likelihood of
maintaining market acceptance of our technologies.

ITEM 2. PROPERTIES

      We currently own approximately 300,000 square feet of space for our
corporate offices and laboratories in buildings located in The Woodlands, Texas,
a suburb of Houston, Texas, and lease approximately 76,000 square feet of space
for offices and laboratories near Princeton, New Jersey.

      Our facilities in The Woodlands, Texas include two state-of-the art animal
facilities totaling approximately 100,000 square feet. These facilities,
completed in 1999 and 2002, respectively, were custom designed for the
generation and analysis of knockout mice and are accredited by AAALAC
International (Association for Assessment and Accreditation of Laboratory Animal
Care). These facilities enable us to maintain in-house control over our entire
in vivo validation process, from the generation of embryonic stem cell clones
through the completion of in vivo analysis, in a specific pathogen free
environment. We believe these facilities, which are among the largest and most
sophisticated of their kind in the world, provide us with significant strategic
and operational advantages relative to our competitors. Because of the size and
sophistication of our facilities, it would require the investment of significant
resources over an extended period of time for any competitor to develop
facilities with the scale, efficiency and productivity with respect to the
analysis of the functionality of genes that our facilities provide.

      In April 2004, we purchased our facilities in The Woodlands, Texas from
the lessor under our previous synthetic lease agreement. In connection with such
purchase, we repaid the $54.8 million funded under the synthetic lease with
proceeds from a $34.0 million third-party mortgage financing and $20.8 million
in cash. The mortgage loan has a ten-year term with a 20-year amortization and
bears interest at a fixed rate of 8.23%. As a result of the refinancing, all
restrictions on the cash and investments that had secured the obligations under
the synthetic lease were eliminated.

      In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a lease for a 76,000 square-foot facility in Hopewell, New Jersey.
The term of the lease extends until June 30, 2013. The lease provides for an
escalating yearly base rent payment of $1.3 million in the first year, $2.1
million in years two and three, $2.2 million in years four to six, $2.3 million
in years seven to nine and $2.4 million in years ten and eleven. We are the
guarantor of the obligations of our subsidiary under the lease.

      We believe that our facilities are well-maintained, in good operating
condition and acceptable for our current operations.

ITEM 3. LEGAL PROCEEDINGS

      We are not presently a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted during the fourth quarter of the year ended
December 31, 2004.

                                       20
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our common stock is quoted on The Nasdaq National Market under the symbol
"LEXG." The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock as reported on The Nasdaq National Market.

<TABLE>
<CAPTION>
                               HIGH    LOW
<S>                           <C>     <C>
2003
First Quarter...............  $5.29   $3.00
Second Quarter..............  $7.00   $3.98
Third Quarter...............  $7.45   $4.24
Fourth Quarter..............  $6.90   $4.75
2004
First Quarter...............  $8.19   $5.68
Second Quarter..............  $8.24   $6.00
Third Quarter...............  $7.90   $5.03
Fourth Quarter..............  $7.95   $6.02
</TABLE>

      As of March 8, 2005, there were approximately 240 holders of record of our
common stock.

      We have never paid cash dividends on our common stock. We anticipate that
we will retain all of our future earnings, if any, for use in the expansion and
operation of our business and do not anticipate paying cash dividends in the
foreseeable future.

                                       21
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The statement of operations data for the years ended December 31, 2004,
2003 and 2002 and the balance sheet data as of December 31, 2004 and 2003 have
been derived from our audited financial statements included elsewhere in this
annual report on Form 10-K. The statements of operations data for the years
ended December 31, 2001 and 2000, and the balance sheet data as of December 31,
2002, 2001 and 2000 have been derived from our audited financial statements not
included in this annual report on Form 10-K. Our historical results are not
necessarily indicative of results to be expected for any future period. The data
presented below has been derived from financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States and should be read with our financial statements, including the
notes, and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this annual report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------------------
                                                                     2004        2003        2002        2001       2000
                                                                     ----        ----        ----        ----       ----
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                               <C>         <C>         <C>         <C>         <C>
STATEMENTS OF OPERATIONS DATA:
Revenues .......................................................  $  61,740   $  42,838   $  35,200   $  30,577   $  14,459
Operating expenses:
     Research and development, including stock-based
         compensation of $426 in 2004, $5,048 in 2003,
         $5,155 in 2002, $5,539 in 2001 and $10,883 in 2000 ....     90,586      82,198      74,859      53,355      31,647
     General and administrative, including stock-based
         compensation of $412 in 2004, $5,067 in 2003,
         $5,113 in 2002, $5,231 in 2001 and $9,958 in 2000 .....     18,608      23,233      23,234      20,861      18,289
                                                                  ---------   ---------   ---------   ---------   ---------
Total operating expenses .......................................    109,194     105,431      98,093      74,216      49,936
                                                                  ---------   ---------   ---------   ---------   ---------
Loss from operations ...........................................    (47,454)    (62,593)    (62,893)    (43,639)    (35,477)
Interest and other income, net .................................        282       1,471       3,223       8,467       9,483
                                                                  ---------   ---------   ---------   ---------   ---------
Net loss before cumulative effect of a change in
     accounting principle ......................................    (47,172)    (61,122)    (59,670)    (35,172)    (25,994)
Cumulative effect of a change in accounting principle ..........         --      (3,076)         --          --          --
                                                                  ---------   ---------   ---------   ---------   ---------
Net loss .......................................................    (47,172)    (64,198)    (59,670)    (35,172)    (25,994)
Accretion on redeemable convertible preferred stock ............         --          --          --          --        (134)
                                                                  ---------   ---------   ---------   ---------   ---------
Net loss attributable to common stockholders ...................  $ (47,172)  $ (64,198)  $ (59,670)  $ (35,172)  $ (26,128)
                                                                  =========   =========   =========   =========   =========

Net loss per common share basic and diluted:
     Net loss before cumulative effect of a change
         in accounting principle ...............................  $   (0.74)  $   (1.08)  $   (1.14)  $   (0.70)  $   (0.63)
     Cumulative effect of a change in accounting principle .....         --       (0.05)         --          --          --
                                                                  ---------   ---------   ---------   ---------   ---------
Net loss per common share, basic and diluted ...................  $   (0.74)  $   (1.13)  $   (1.14)  $   (0.70)  $   (0.63)
                                                                  =========   =========   =========   =========   =========
     Shares used in computing net loss per common
         share, basic and diluted ..............................     63,327      56,820      52,263      50,213      41,618
</TABLE>

<TABLE>
<CAPTION>
                                                                                      AS OF DECEMBER 31,
                                                                  ----------------------------------------------------------
                                                                     2004        2003        2002        2001       2000
                                                                     ----        ----        ----        ----       ----
                                                                                        (IN THOUSANDS)
<S>                                                               <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments, including
     restricted cash and investments of $430 in 2004,
     $57,514 in 2003, $57,710 in 2002, $43,338 in 2001
     and $13,879 in 2000........................................  $  87,558   $ 161,001   $ 123,096   $ 166,840   $202,680
Working capital.................................................     60,038     139,739     111,833     147,663    194,801
Total assets                                                        211,980     284,199     201,772     239,990    220,693
Long-term debt, net of current portion..........................     32,940      56,344       4,000         --       1,834
Accumulated deficit.............................................   (261,115)   (213,943)   (149,745)    (90,075)   (54,903)
Stockholders' equity............................................    121,594     166,216     169,902     218,372    207,628
</TABLE>

                                       22
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The following discussion and analysis should be read with "Selected
Financial Data" and our financial statements and notes included elsewhere in
this annual report on Form 10-K.

OVERVIEW

      We are a biopharmaceutical company focused on the discovery and
development of breakthrough treatments for human disease. We are using gene
knockout technology to systematically discover the physiological functions of
genes in living mammals, or in vivo. We generate our gene function discoveries
using knockout mice - mice whose DNA has been altered to disrupt, or "knock
out," the function of the altered gene. Our patented gene trapping and gene
targeting technologies enable us to rapidly generate these knockout mice by
altering the DNA of genes in a special variety of mouse cells, called embryonic
stem cells, which can be cloned and used to generate mice with the altered gene.
We employ an integrated platform of advanced medical technologies to
systematically discover and validate which genes, when knocked out, result in a
favorable medical profile with pharmaceutical utility. We then pursue those
genes and the proteins they encode as potential targets for therapeutic
intervention in our drug discovery programs.

      We employ internal resources and drug discovery alliances to discover
potential small molecule, antibody and protein drugs for in vivo-validated drug
targets that we consider to have high pharmaceutical value. We use our own
sophisticated libraries of drug-like chemical compounds and an industrialized
medicinal chemistry platform to identify small molecule drug candidates for our
in vivo-validated drug targets. We have established alliances with Bristol-Myers
Squibb Company to discover and develop novel small molecule drugs in the
neuroscience field; with Genentech, Inc. for the discovery of therapeutic
proteins and antibody targets; and with Takeda Pharmaceutical Company Limited to
discover new drugs for the treatment of high blood pressure. In addition, we
have established collaborations and license agreements with many other leading
pharmaceutical and biotechnology companies under which we receive fees and, in
some cases, are eligible to receive milestone and royalty payments, for access
to some of our technologies and discoveries for use in their own drug discovery
efforts.

      We derive substantially all of our revenues from drug discovery alliances,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice and
technology licenses. To date, we have generated a substantial portion of our
revenues from a limited number of sources.

      Our operating results and, in particular, our ability to generate
additional revenues are dependent on many factors, including our success in
establishing research collaborations and technology licenses, expirations of our
research collaborations, the success rate of our discovery efforts leading to
opportunities for new research collaborations and licenses, as well as milestone
payments and royalties, the timing and willingness of collaborators to
commercialize products which may result in royalties, and general and
industry-specific economic conditions which may affect research and development
expenditures. Our future revenues from collaborations and alliances are
uncertain because our existing agreements have fixed terms or relate to specific
projects of limited duration. Our future revenues from technology licenses are
uncertain because they depend, in large part, on securing new agreements.
Subject to limited exceptions, we do not intend to offer subscriptions to our
databases or make our compound libraries available for purchase in the future.
Our ability to secure future revenue-generating agreements will depend upon our
ability to address the needs of our potential future collaborators and
licensees, and to negotiate agreements that we believe are in our long-term best
interests. We may determine that our interests are better served by retaining
rights to our discoveries and advancing our therapeutic programs to a later
stage, which could limit our near-term revenues. Because of these and other
factors, our operating results have fluctuated in the past and are likely to do
so in the future, and we do not believe that period-to-period comparisons of our
operating results are a good indication of our future performance.

      Since our inception, we have incurred significant losses and, as of
December 31, 2004, we had an accumulated deficit of $261.1 million. Our losses
have resulted principally from costs incurred in research and development,
general and administrative costs associated with our operations, and non-cash
stock-based compensation expenses associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs, material costs, facility costs, depreciation on property and
equipment, legal expenses resulting from intellectual

                                       23
<PAGE>

property prosecution and other expenses related to our drug discovery and
LexVision programs, the development and analysis of knockout mice and our other
target validation research efforts, and the development of compound libraries.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, professional
fees and other corporate expenses including information technology, facilities
costs and general legal activities. In connection with the expansion of our drug
discovery programs and our target validation research efforts, we expect to
incur increasing research and development and general and administrative costs.
As a result, we will need to generate significantly higher revenues to achieve
profitability.

      As of December 31, 2004 we had net operating loss carryforwards of
approximately $190.8 million. We also had research and development tax credit
carryforwards of approximately $8.6 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2011, if not utilized.
Utilization of the net operating losses and credits may be significantly limited
due to a change in ownership as defined by provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.

CRITICAL ACCOUNTING POLICIES

   REVENUE RECOGNITION

      We recognize revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed and
determinable, and collectibility is reasonably assured. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.

      Upfront fees and annual research funding under our drug discovery
alliances are recognized as revenue on a straight-line basis over the estimated
period of service, generally the contractual research term, to the extent they
are non-refundable. Milestone-based fees are recognized upon completion of
specified milestones according to contract terms. Fees for access to our
databases and other target validation resources are recognized ratably over the
subscription or access period. Payments received under target validation
collaborations and government grants are recognized as revenue as we perform our
obligations related to such research to the extent such fees are non-refundable.
Non-refundable technology license fees are recognized as revenue upon the grant
of the license when performance is complete and there is no continuing
involvement.

      Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair value of the elements. The
determination of fair value of each element is based on objective evidence. When
revenues for an element are specifically tied to a separate earnings process,
revenue is recognized when the specific performance obligation associated with
the element is completed. When revenues for an element are not specifically tied
to a separate earnings process, they are recognized ratably over the term of the
agreement.

      A change in our revenue recognition policy or changes in the terms of
contracts under which we recognize revenues could have an impact on the amount
and timing of our recognition of revenues.

   RESEARCH AND DEVELOPMENT EXPENSES

      Research and development expenses consist of costs incurred for
company-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses and are
expensed as incurred. Patent costs and technology license fees for technologies
that are utilized in research and development and have no alternative future use
are expensed when incurred.

      Prior to preclinical development work, we are unable to segregate the
costs related to research performed on drug candidates because the drug
candidate is often not specifically identified until the later stages of our
research. With the commencement of formal preclinical development in 2005, we
will account on a program by program basis for the costs related to the
development of the identified drug products.

                                       24
<PAGE>

   GOODWILL IMPAIRMENT

      Goodwill is not amortized, but is tested at least annually for impairment
at the reporting unit level. We have determined that the reporting unit is the
single operating segment disclosed in our current financial statements.
Impairment is the condition that exists when the carrying amount of goodwill
exceeds its implied fair value. The first step in the impairment process is to
determine the fair value of the reporting unit and then compare it to the
carrying value, including goodwill. We determined that the market capitalization
approach is the most appropriate method of measuring fair value of the reporting
unit. Under this approach, fair value is calculated as the average closing price
of our common stock for the 30 days preceding the date that the annual
impairment test is performed, multiplied by the number of outstanding shares on
that date. A control premium, which is representative of premiums paid in the
marketplace to acquire a controlling interest in a company, is then added to the
market capitalization to determine the fair value of the reporting unit. If the
fair value exceeds the carrying value, no further action is required and no
impairment loss is recognized. Additional impairment assessments may be
performed on an interim basis if we encounter events or changes in circumstances
that would indicate that, more likely than not, the carrying value of goodwill
has been impaired. There was no impairment of goodwill in 2004.

RECENT ACCOUNTING PRONOUNCEMENT

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 123 (Revised) "Share-Based Payment." The statement eliminates the ability
to account for stock-based compensation using APB 25 and requires such
transactions be recognized as compensation expense in the income statement based
on their fair values on the date of the grant, with the compensation expense
recognized over the period in which an employee is required to provide service
in exchange for the stock award. We will adopt this statement on July 1, 2005
using a modified prospective application. As such, the compensation expense
recognition provisions will apply to new awards and to any awards modified,
repurchased or cancelled after the adoption date. Additionally, for any unvested
awards outstanding at the adoption date, we will recognize compensation expense
over the remaining vesting period. We are currently evaluating the impact of
SFAS 123 (Revised) on our financial condition and results of operation. However,
if we continue to use a Black-Scholes option pricing model consistent with our
current practice, the adoption of SFAS 123 (Revised) on July 1, 2005 is
estimated to result in additional compensation expense of approximately $4.0
million for the year ended December 31, 2005 related to options granted as of
December 31, 2004 that will be unvested on the date of adoption. Grants awarded
subsequent to December 31, 2004 will result in increased compensation expense.

RESULTS OF OPERATIONS

   YEARS ENDED DECEMBER 31, 2004 AND 2003

      Revenues. Total revenues and dollar and percentage changes as compared to
the prior year are as follows (dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                             YEAR ENDED DECEMBER 31,
                             -----------------------
                              2004             2003
                              ----             ----
<S>                          <C>              <C>
Total revenues............   $61.7            $42.8
Dollar increase...........   $18.9
Percentage increase.......      44%
</TABLE>

      -     Subscription and license fees - Revenue from subscriptions and
            license fees decreased 44% to $12.0 million due to decreased
            technology license fees and the termination of Incyte's subscription
            to our LexVision database in June 2004.

      -     Collaborative research - Revenue from collaborative research
            increased 134% to $49.7 million primarily due to increased revenue
            under our neuroscience drug discovery alliance with Bristol-Myers
            Squibb, which was entered into in December 2003, our completion of a
            performance milestone under our therapeutic protein and antibody
            target discovery alliance with Genentech and the commencement of our
            hypertension drug discovery alliance with Takeda, which was entered
            into in July 2004. This was offset in part by a decrease in revenues
            from target validation collaborations due to the scheduled
            conclusion of many of these arrangements and the termination of our
            collaboration with Incyte in June 2004.

                                       25
<PAGE>

      In 2004, Bristol-Myers Squibb, Genentech and Incyte represented 43%, 26%
and 8% of revenues, respectively. In 2003, Incyte, Amgen, Inc., Bristol-Myers
Squibb and Genentech represented 23%, 15%, 14% and 14% of revenues,
respectively.

      Research and Development Expenses. Research and development expenses and
dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
                                                           2004         2003
                                                           ----         ----
<S>                                                       <C>          <C>
Total research and development expense..........          $90.6        $82.2
Dollar increase.................................          $ 8.4
Percentage increase.............................             10%
</TABLE>

      Research and development expenses consist primarily of salaries and other
personnel-related expenses, stock-based compensation expenses, laboratory
supplies, facility and equipment costs, third-party and other services. The
change in 2004 as compared to 2003 resulted primarily from the following costs:

      -     Personnel - Personnel costs increased 24% to $43.3 million primarily
            due to increased personnel to support the expansion of our drug
            discovery programs, merit-based pay increases for employees and
            increasing employee benefit costs. Salaries, bonuses, employee
            benefits, payroll taxes, recruiting and relocation costs are
            included in personnel costs.

      -     Stock-based compensation - Stock based compensation expense,
            primarily relating to option grants made prior to our April 2000
            initial public offering, decreased 92% to $0.4 million. All deferred
            stock compensation relating to these options was fully amortized as
            of January 31, 2004 when these options became fully vested.

      -     Laboratory supplies - Laboratory supplies expense increased 27% to
            $14.1 million due primarily to increased purchases of consumables
            and other supplies, compounds and animal food and bedding related to
            our drug discovery activities.

      -     Facilities and equipment - Facilities and equipment costs increased
            2% to $20.2 million primarily due to an increase in depreciation
            expense on our facilities in The Woodlands, Texas offset, in part,
            by the elimination of rent expense for those facilities as a result
            of our consolidation of the lessor under our synthetic lease on
            December 31, 2003 and subsequent refinancing of those facilities as
            well as the January 2004 expiration of the lease for our former
            facility in East Windsor, New Jersey.

      -     Third-party and other services - Third-party and other services
            increased 7% to $7.5 million primarily due an increase in
            third-party research costs offset, in part, by the termination of
            our subscription to a third-party database. Third-party and other
            services include third-party research, subscriptions to third-party
            databases, technology licenses, legal and patent fees.

      -     Other - Other costs increased by 17% to $5.0 million.

      General and Administrative Expenses. General and administrative expenses
and dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                         2004       2003
                                                         ----       ----
<S>                                                     <C>        <C>
Total general and administrative expense.........       $18.6      $23.2
Dollar decrease..................................       $ 4.6
Percentage decrease..............................          20%
</TABLE>

      General and administrative expenses consist primarily of personnel costs
to support our research activities, stock-based compensation expense, facility
and equipment costs and professional fees, such as legal fees. The change in
2004 as compared to 2003 resulted primarily from the following costs:

      -     Personnel - Personnel costs were $10.6 million in both periods.
            Salaries, bonuses, employee benefits, payroll taxes, recruiting and
            relocation costs are included in personnel costs.

                                       26
<PAGE>

      -     Stock-based compensation - Stock based compensation expense,
            primarily relating to option grants made prior to our April 2000
            initial public offering, decreased 92% to $0.4 million. All deferred
            stock compensation relating to these options was fully amortized as
            of January 31, 2004 when these options became fully vested.

      -     Facilities and equipment - Facilities and equipment costs decreased
            15% to $3.1 million primarily due to the elimination of rent expense
            on our facilities in The Woodlands, Texas as a result of our
            consolidation of the lessor under our synthetic lease on December
            31, 2003 and subsequent refinancing of those facilities as well as
            the January 2004 expiration of the lease for our former facility in
            East Windsor, New Jersey.

      -     Professional fees - Professional fees increased 30% to $2.1 million
            primarily due to increased board of director fees and audit fees.

      -     Other - Other costs increased 6% to $2.4 million.

      Interest Income. Interest income was $1.6 million in 2004 and 2003.

      Interest Expense. Interest expense increased 718% to $2.7 million in 2004
from $0.3 million in 2003. This increase was attributable to the interest
expense on the $54.8 million funded under the synthetic lease following our
consolidation of the lessor on December 31, 2003 and the interest expense on the
$34.0 million mortgage loan used in the subsequent refinancing in April 2004 of
the facilities funded under the synthetic lease.

      Other Income. Other income increased 441% to $1.3 million in 2004 from
$0.2 million in 2003. This increase resulted primarily from a settlement with
our former insurance provider for a disputed claim under our insurance policy.

      Net Loss and Net Loss Per Common Share Before Cumulative Effect of a
Change in Accounting Principle. Net loss before a change in accounting principle
decreased to $47.2 million in 2004 from $61.1 million in 2003. Net loss per
common share before a change in accounting principle decreased to $0.74 in 2004
from $1.08 in 2003. Net loss before a change in accounting principle includes
stock-based compensation expense of $0.8 million and $10.1 million in 2004 and
2003, respectively.

      Change In Accounting Principle. We adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51,"
or FIN 46 on December 31, 2003. We determined that the lessor under the
synthetic lease is a variable interest entity as defined by FIN 46, and that we
absorb a majority of the variable interest entity's expected losses.
Accordingly, we recorded a cumulative effect of a change in accounting principle
equal to the accumulated depreciation of $3.1 million for the period from the
date the buildings were placed in service under the synthetic lease through
December 31, 2003.

      Net Loss and Net Loss Per Common Share. Net loss decreased to $47.2
million in 2004 from $64.2 million in 2003. Net loss per common share decreased
to $0.74 in 2004 from $1.13 in 2003.

   YEARS ENDED DECEMBER 31, 2003 AND 2002

      Revenues. Total revenues and dollar and percentage changes as compared to
the prior year are as follows (dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31,
                                    -----------------------
                                      2003          2002
                                      ----          ----
<S>                                  <C>           <C>
Total revenues...............        $42.8         $35.2
Dollar increase..............        $ 7.6
Percentage increase..........           22%
</TABLE>

      -     Subscription and license fees - Revenue from subscriptions and
            license fees increased 21% to $21.6 million due to additional
            technology licenses granted to pharmaceutical and biotechnology
            companies in 2003.

                                       27
<PAGE>

      -     Collaborative research - Revenue from collaborative research
            increased 24% to $21.2 million primarily due to increased revenue
            under our drug discovery alliances with Genentech, Inc., which was
            entered into in December 2002, and with Bristol-Myers Squibb
            Company, which was entered into in December 2003, offset in part by
            a decrease in revenues from target validation collaborations due to
            the scheduled conclusion of many of these arrangements.

      -     Other - Other revenue decreased 81% to $46,000 due to the fact that
            we no longer made our compound libraries available for purchase,
            subject to limited exceptions. We may, however, provide additional
            quantities of selected compounds or optimization services under
            existing compound sales agreements.

      In 2003, Incyte Corporation, Amgen, Inc., Bristol-Myers Squibb and
Genentech represented 23%, 15%, 14% and 14% of revenues, respectively. In 2002,
Incyte, Bristol-Myers Squibb and Millennium Pharmaceuticals, Inc. represented
28%, 14% and 11% of revenues, respectively.

      Research and Development Expenses. Research and development expenses and
dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                                     2003        2002
                                                     ----        ----
<S>                                                 <C>         <C>
Total research and development expense........      $82.2       $74.9
Dollar increase...............................      $ 7.3
Percentage increase...........................         10%
</TABLE>

      Research and development expenses consist primarily of salaries and other
personnel-related expenses, stock-based compensation expenses, laboratory
supplies, facility and equipment costs, third-party and other services. The
change in 2003 as compared to 2002 resulted primarily from the following costs:

      -     Personnel - Personnel costs increased 14% to $35.0 million primarily
            due to increased personnel to support the expansion of our drug
            discovery programs, merit pay increases for employees and increasing
            employee benefit costs. Salaries, bonuses, employee benefits,
            payroll taxes, recruiting and relocation costs are included in
            personnel costs.

      -     Stock-based compensation - Stock based compensation expense,
            primarily relating to option grants made prior to our April 2000
            initial public offering, decreased 2% to $5.0 million.

      -     Laboratory supplies - Laboratory supplies expense increased 5% to
            $11.1 million due primarily to an increase in drug discovery
            activities such as high throughput screening.

      -     Facilities and equipment - Facility and equipment costs increased
            13% to $19.8 million primarily due to increased rent resulting from
            the May 2002 lease of our facility in Hopewell, New Jersey and
            increased property taxes on our facilities in The Woodlands, Texas.
            Additionally, depreciation expense increased as a result of
            purchases of capital equipment and leasehold improvements.

      -     Third-party and other services - Third-party and other services
            decreased by 1% to $7.7 million. Third-party and other services
            include subscriptions to third-party databases, technology licenses
            and legal and patent fees.

      -     Other - Other costs increased by 17% to $3.6 million.

                                       28
<PAGE>

      General and Administrative Expenses. General and administrative expenses
and dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                        2003        2002
                                                        ----        ----
<S>                                                   <C>         <C>
Total general and administrative expense.......       $ 23.2      $ 23.2
Dollar increase................................       $   --
Percentage increase............................           --
</TABLE>

      General and administrative expenses consist primarily of personnel costs
to support our research activities, stock-based compensation expense, facility
and equipment costs and professional fees, such as legal fees. The change in
2003 as compared to 2002 resulted primarily from the following costs:

      -     Personnel - Personnel costs decreased 4% to $10.6 million primarily
            due to decreased staffing in overhead departments. Salaries,
            bonuses, employee benefits, payroll taxes, recruiting and relocation
            costs are included in personnel costs.

      -     Stock-based compensation - Stock based compensation expense,
            primarily relating to option grants made prior to our April 2000
            initial public offering, decreased 1% to $5.1 million.

      -     Facilities and equipment - Facility and equipment costs increased
            12% to $3.6 million primarily due to increased rent resulting from
            the May 2002 lease of our facility in Hopewell, New Jersey and
            increased property taxes on our facilities in The Woodlands, Texas.

      -     Professional fees - Professional fees increased 43% to $1.6 million
            primarily due to increased legal fees.

      -     Other - Other costs increased 13% to $2.3 million.

      Interest Income. Interest income decreased 48% to $1.6 million in 2003
from $3.0 million in 2002. This decrease resulted primarily from lower average
cash and investment balances due to the timing of cash receipts and lower
average interest rates on our investments.

      Net Loss and Net Loss Per Common Share Before Cumulative Effect of a
Change in Accounting Principle. Net loss before a change in accounting principle
increased to $61.1 million in 2003 from $59.7 million in 2002. Net loss per
common share before a change in accounting principle decreased to $1.08 in 2003
from $1.14 in 2002. Net loss before a change in accounting principle includes
stock-based compensation expense of $10.1 million and $10.3 million in 2003 and
2002, respectively.

      Change In Accounting Principle. We adopted FIN 46 on December 31, 2003 and
determined that the lessor under the synthetic lease is a variable interest
entity as defined by FIN 46, and that we absorb a majority of the variable
interest entity's expected losses. Accordingly, we recorded a cumulative effect
of a change in accounting principle equal to the accumulated depreciation of
$3.1 million for the period from the date the buildings were placed in service
under the synthetic lease through December 31, 2003.

      Net Loss and Net Loss Per Common Share. Net loss increased to $64.2
million in 2003 from $59.7 million in 2002. Net loss per common share decreased
to $1.13 in 2003 from $1.14 in 2002.

LIQUIDITY AND CAPITAL RESOURCES

      We have financed our operations from inception primarily through sales of
common and preferred stock, contract and milestone payments to us under our drug
discovery alliance, target validation, database subscription, and license
agreements, equipment financing arrangements and leasing arrangements. From our
inception through December 31, 2004, we had received net proceeds of $294.8
million from issuances of common and preferred stock, including $203.2 million
of net proceeds from the initial public offering of our common stock in April
2000 and $50.1 million from our July 2003 common stock offering. In addition,
from our inception through December 31, 2004, we received $224.0 million in cash
payments from drug discovery alliances, target validation collaborations,

                                       29
<PAGE>

database subscription and technology license fees, sales of compound libraries
and reagents and government grants, of which $193.1 million had been recognized
as revenues through December 31, 2004.

      As of December 31, 2004, we had $87.6 million in cash, cash equivalents
and short-term investments (including $0.4 million of restricted investments),
as compared to $161.0 million (including $57.5 million of restricted cash and
investments) as of December 31, 2003. We used cash of $42.3 million in
operations in 2004. This consisted primarily of the net loss for the year of
$47.2 million offset by non-cash charges of $10.8 million related to
depreciation expense, $1.2 million related to amortization of intangible assets
other than goodwill and $0.8 million related to stock-based compensation
expense; a $10.1 million decrease in deferred revenue; and changes in other
operating assets and liabilities of $2.1 million. Investing activities provided
cash of $40.5 million, primarily due to net sales of short-term investments of
$37.8 million. Additionally, restricted cash decreased by $14.4 million as a
result of the April 2004 refinancing of our synthetic lease with a conventional
mortgage loan (discussed in the following paragraph), which resulted in the
elimination of all restricted cash and investments that had secured our
obligations under the synthetic lease. This was offset by purchases of property
and equipment of $11.8 million. We used cash of $19.5 million in financing
activities. This consisted of the repayment of $54.8 million in obligations
under the synthetic lease and principal repayments of $0.4 million on the
mortgage loan, offset by cash proceeds of $34.0 million from the mortgage loan
and $1.7 million from stock option exercises.

      In April 2004, we purchased our facilities in The Woodlands, Texas from
the lessor under our previous synthetic lease agreement. In connection with such
purchase, we repaid the $54.8 million funded under the synthetic lease with
proceeds from a $34.0 million third-party mortgage financing and $20.8 million
in cash. The mortgage loan has a ten-year term with a 20 year amortization and
bears interest at a fixed rate of 8.23%. As a result of the refinancing, all
restrictions on the cash and investments that had secured our obligations under
the synthetic lease were eliminated, leaving a total of $0.4 million in
restricted investments related to our New Jersey facility.

      In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a lease for a 76,000 square-foot facility in Hopewell, New Jersey.
The term of the lease extends until June 30, 2013. The lease provides for an
escalating yearly base rent payment of $1.3 million in the first year, $2.1
million in years two and three, $2.2 million in years four to six, $2.3 million
in years seven to nine and $2.4 million in years ten and eleven. We are the
guarantor of the obligations of our subsidiary under the lease.

      In December 2002, we borrowed $4.0 million under a note agreement with
Genentech. The proceeds of the loan are to be used to fund research efforts
under our alliance with Genentech for the discovery of therapeutic proteins and
antibody targets. The note matures on or before December 31, 2005, but we may
prepay it at any time. We may repay the note, at our option, in cash, in shares
of our common stock valued at the then-current market value, or in a combination
of cash and shares, subject to certain limitations. The note accrues interest at
an annual rate of 8%, compounded quarterly.

      Including the lease and debt obligations described above, we had incurred
the following contractual obligations as of December 31, 2004:

<TABLE>
<CAPTION>
                                                             PAYMENTS DUE BY PERIOD (IN MILLIONS)
                                                             ------------------------------------
       CONTRACTUAL OBLIGATIONS            TOTAL       LESS THAN 1 YEAR     1-3 YEARS     3-5 YEARS    MORE THAN 5 YEARS
                                          -----       ----------------     ---------     ---------    -----------------
<S>                                     <C>           <C>                 <C>           <C>           <C>
Debt..................................  $      37.6      $       4.7      $       1.6   $       1.8     $      29.5
Interest payment obligations..........         24.1              3.8              5.4           5.1             9.8
Operating leases......................         20.3              2.2              4.6           4.8             8.7
                                        -----------      -----------      -----------   -----------     -----------
   Total..............................  $      82.0      $      10.7      $      11.6   $      11.7     $      48.0
                                        ===========      ===========      ===========   ===========     ===========
</TABLE>

      Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain alliance, collaboration and
technology license agreements, the amount and timing of payments under such
agreements, the level and timing of our research and development expenditures,
market acceptance of our products, the resources we devote to developing and
supporting our products and other factors. Our capital requirements will also be
affected by any expenditures we make in connection with license agreements and
acquisitions of and investments in complementary technologies and businesses. We
expect to devote substantial capital resources to continue our research and
development efforts, to expand our support and product development activities,
and for other general corporate activities. We believe that our current
unrestricted cash and investment balances and revenues we expect to derive from
drug discovery alliances, target validation collaborations and technology
licenses

                                       30
<PAGE>

will be sufficient to fund our operations at least through the next two years.
During or after this period, if cash generated by operations is insufficient to
satisfy our liquidity requirements, we will need to sell additional equity or
debt securities or obtain additional credit arrangements. Additional financing
may not be available on terms acceptable to us or at all. The sale of additional
equity or convertible debt securities may result in additional dilution to our
stockholders.

DISCLOSURE ABOUT MARKET RISK

      We are exposed to limited market and credit risk on our cash equivalents
which have maturities of three months or less. We maintain a short-term
investment portfolio which consists of U.S. government agency debt obligations,
investment grade commercial paper, corporate debt securities and certificates of
deposit that mature three to twelve months from the time of purchase and auction
rate securities that mature greater than twelve months from the time of
purchase, which we believe are subject to limited market and credit risk. We
currently do not hedge interest rate exposure or hold any derivative financial
instruments in our investment portfolio.

      We have operated primarily in the United States and substantially all
sales to date have been made in U.S. dollars. Accordingly, we have not had any
material exposure to foreign currency rate fluctuations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      See "Disclosure about Market Risk" under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" for quantitative
and qualitative disclosures about market risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements required by this Item are incorporated under Item
15 in Part IV of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      None.

ITEM 9A.  CONTROLS AND PROCEDURES

      Our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are sufficiently effective
to ensure that the information required to be disclosed by us in the reports we
file under the Securities Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation of such
controls and procedures as of the end of the period covered by this report.

      Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934).

      Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

      Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.

      Based on such assessment using those criteria, management believes that,
as of December 31, 2004, our internal control over financial reporting is
effective.

                                       31
<PAGE>

      Our independent auditors have issued an audit report on our assessment of
our internal control over financial reporting which appears on page F-2 and is
incorporated under Item 15 in Part IV of this report.

                                       32
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this Item as to our directors and executive
officers is hereby incorporated by reference from the information appearing
under the captions "Stock Ownership of Certain Beneficial Owners and Management
- Section 16(a) Beneficial Ownership Reporting Compliance," "Election of
Directors" and "Executive Compensation - Executive Officers" in our definitive
proxy statement which involves the election of directors and is to be filed with
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934 within 120 days of the end of our fiscal year on December 31, 2004.

ITEM 11. EXECUTIVE COMPENSATION

      The information required by this Item as to our management is hereby
incorporated by reference from the information appearing under the captions
"Executive Compensation" and "Election of Directors - Director Compensation" in
our definitive proxy statement which involves the election of directors and is
to be filed with the Commission pursuant to the Securities Exchange Act of 1934
within 120 days of the end of our fiscal year on December 31, 2004.
Notwithstanding the foregoing, in accordance with the instructions to Item 402
of Regulation S-K, the information contained in our proxy statement under the
sub-heading "Report of the Compensation Committee of the Board of Directors" and
"Performance Graph" shall not be deemed to be filed as part of or incorporated
by reference into this annual report on Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The information required by this Item as to the ownership by management
and others of our securities is hereby incorporated by reference from the
information appearing under the captions "Stock Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" in our
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Securities Exchange Act of 1934 within
120 days of the end of our fiscal year on December 31, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item as to certain business relationships
and transactions with our management and other related parties is hereby
incorporated by reference from the information appearing under the captions
"Election of Directors - Director Compensation" and "Election of Directors -
Compensation Committee Interlocks and Insider Participation" in our definitive
proxy statement which involves the election of directors and is to be filed with
the Commission pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of our fiscal year on December 31, 2004.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information required by this Item as to the fees we pay our principal
accountant is hereby incorporated by reference from the information appearing
under the caption "Ratification and Approval of Independent Auditors -
Compensation of Independent Auditors" in our definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
our fiscal year on December 31, 2004.

                                       33
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a) Documents filed as a part of this report:

            1. Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                  PAGE
                                                                  ----
<S>                                                               <C>
Report of Independent Registered Public Accounting Firm.........   F-1
Report of Independent Registered Public Accounting Firm.........   F-2
Consolidated Balance Sheets.....................................   F-3
Consolidated Statements of Operations...........................   F-4
Consolidated Statements of Stockholders' Equity.................   F-5
Consolidated Statements of Cash Flows...........................   F-6
Notes to Consolidated Financial Statements......................   F-7
</TABLE>

            All other financial statement schedules are omitted because they are
      not applicable or not required, or because the required information is
      included in the financial statements or notes thereto.

            2. Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.                                                    DESCRIPTION
-----------                                                    -----------
<S>          <C>
   3.1  --   Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1
             (Registration No. 333-96469) and incorporated by reference herein).

   3.2  --   Restated Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-96469)
             and incorporated by reference herein).

   4.1  --   Amended and Restated Registration Rights Agreement, dated May 7, 1998, with the stockholders named therein (filed as
             Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 333-67294) and incorporated by
             reference herein).

  10.1  --   Employment Agreement with Arthur T. Sands, M.D., Ph.D. (filed as Exhibit 10.1 to the Company's Registration Statement
             on Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

  10.2  --   Employment Agreement with James R. Piggott, Ph.D. (filed as Exhibit 10.2 to the Company's Registration Statement on
             Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

  10.3  --   Employment Agreement with Jeffrey L. Wade, J.D. (filed as Exhibit 10.3 to the Company's Registration Statement on Form
             S-1 (Registration No. 333-96469) and incorporated by reference herein).

  10.4  --   Employment Agreement with Brian P. Zambrowicz, Ph.D. (filed as Exhibit 10.4 to the Company's Registration Statement on
             Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

  10.5  --   Employment Agreement with Julia P. Gregory (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1
             (Registration No. 333-96469) and incorporated by reference herein).

  10.6  --   Employment Agreement with Alan Main, Ph.D. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
             the period ended September 30, 2001 and incorporated by reference herein).
</TABLE>

                                       34
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                                                    DESCRIPTION
-----------                                                    -----------
<S>          <C>
  10.7  --   Consulting Agreement with Alan S. Nies, M.D. dated February 19, 2003, as amended (filed as Exhibit 10.1 to the
             Company's Quarterly Report on Form 10-Q for the period ended March 31, 2004 and incorporated by reference herein).

  10.8  --   Consulting Agreement with Robert J. Lefkowitz, M.D. dated March 31, 2003 (filed as Exhibit 10.1 to the Company's
             Quarterly Report on Form 10-Q for the period ended March 31, 2003 and incorporated by reference herein).

  10.9  --   Form of Indemnification Agreement with Officers and Directors (filed as Exhibit 10.7 to the Company's Registration
             Statement on Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

*10.10  --   2000 Equity Incentive Plan

 10.11  --   2000 Non-Employee Directors' Stock Option Plan (filed as Exhibit 10.9 to the Company's Registration Statement on Form
             S-1 (Registration No. 333-96469) and incorporated by reference herein).

 10.12  --   Coelacanth Corporation 1999 Stock Option Plan (filed as Exhibit 99.1 to the Company's Registration Statement on Form
             S-8 (Registration No. 333-66380) and incorporated by reference herein).

 10.13  --   Form of Stock Option Agreement with Officers under the 2000 Equity Incentive Plan (filed as Exhibit 10.2 to the
             Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004 and incorporated by reference herein).

 10.14  --   Form of Stock Option Agreement with Directors under the 2000 Non-Employee Directors' Stock Option Plan (filed as
             Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004 and incorporated by
             reference herein).

+10.15  --   Amended and Restated Collaboration and License Agreement, dated November 19, 2003, with Genentech, Inc. (filed as
             Exhibit 10.14 to the amendment to the Company's Annual Report on Form 10-K/A for the period ended December 31, 2003, as
             filed on July 16, 2004, and incorporated by reference herein).

+10.16  --   Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.15
             to the amendment to the Company's Annual Report on Form 10-K/A for the period ended December 31, 2003, as filed on July
             16, 2004, and incorporated by reference herein).

+10.17  --   Collaboration Agreement, dated July 27, 2004, with Takeda Pharmaceutical Company Limited (filed as Exhibit 10.1 to the
             Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004 and incorporated by reference herein).

*10.18  --   Loan and Security Agreement, dated April 21, 2004, between Lex-Gen Woodlands, L.P. and iStar Financial Inc.

 10.19  --   Lease Agreement, dated May 23, 2002, between Lexicon Pharmaceuticals (New Jersey), Inc. and Townsend Property Trust
             Limited Partnership (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
             2002 and incorporated by reference herein).

 *21.1  --   Subsidiaries

 *23.1  --   Consent of Independent Registered Public Accounting Firm

 *24.1  --   Power of Attorney (contained in signature page)

 *31.1  --   Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 *31.2  --   Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
</TABLE>

                                       35
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION
-----------                                     -----------
<S>          <C>
 *32.1  --   Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

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

*     Filed herewith.

+     Confidential treatment has been requested for a portion of this exhibit.
      The confidential portions of this exhibit have been omitted and filed
      separately with the Securities and Exchange Commission.

                                       36
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                            LEXICON GENETICS INCORPORATED

Date: March 11, 2005        By: /s/ ARTHUR T. SANDS
                                -------------------------------------
                                Arthur T. Sands, M.D., Ph.D.
                                President and Chief Executive Officer

Date: March 11, 2005        By: /s/ JULIA P. GREGORY
                                -------------------------------------
                                Julia P. Gregory
                                Executive Vice President, Corporate Development
                                and Chief Financial Officer

                                POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Julia P. Gregory and Jeffrey L. Wade, or
either of them, each with the power of substitution, his or her
attorney-in-fact, to sign any amendments to this Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, here ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
          SIGNATURE                        TITLE                                           DATE
          ---------                        -----                                           ----
<S>                                 <C>                                                <C>
/s/ ARTHUR T. SANDS                 President and Chief Executive Officer              March 11, 2005
------------------------------      (Principal Executive Officer)
Arthur T. Sands, M.D., Ph.D.

/s/ JULIA P. GREGORY                Executive Vice President, Corporate Development    March 11, 2005
------------------------------      and Chief Financial Officer
Julia P. Gregory                    (Principal Financial and Accounting Officer)


/s/ C. THOMAS CASKEY                Chairman of the Board of Directors                 March 11, 2005
------------------------------
C. Thomas Caskey, M.D.

/s/ SAM L. BARKER                   Director                                           March 11, 2005
------------------------------
Sam L. Barker, Ph.D.

/s/ PATRICIA M. CLOHERTY            Director                                           March 11, 2005
------------------------------
Patricia M. Cloherty

/s/ ROBERT J. LEFKOWITZ             Director                                           March 11, 2005
------------------------------
Robert J. Lefkowitz, M.D.

/s/ ALAN S. NIES                    Director                                           March 11, 2005
------------------------------
Alan S. Nies, M.D.

/s/ FRANK PALANTONI                 Director                                           March 11, 2005
------------------------------
Frank Palantoni

/s/ CLAYTON S. ROSE                 Director                                           March 11, 2005
------------------------------
Clayton S. Rose
</TABLE>

                                       37
<PAGE>

                              REPORT OF INDEPENDENT
                        REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Lexicon Genetics Incorporated:

We have audited the accompanying consolidated balance sheets of Lexicon Genetics
Incorporated and subsidiaries (the Company) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lexicon Genetics
Incorporated and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lexicon
Genetics Incorporated's internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 25, 2005 expressed an unqualified opinion thereon.

                                                          /s/ ERNST & YOUNG LLP

Houston, Texas
February 25, 2005

                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Lexicon Genetics Incorporated:

We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Lexicon Genetics
Incorporated (Lexicon) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Lexicon's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Lexicon Genetics Incorporated
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Lexicon Genetics Incorporated maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Lexicon Genetics Incorporated and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2004 of
Lexicon Genetics Incorporated and our report dated February 25, 2005 expressed
an unqualified opinion thereon.

                                                           /s/ ERNST & YOUNG LLP

Houston, Texas
February 25, 2005

                                      F-2
<PAGE>

                          LEXICON GENETICS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT PAR VALUE)

<TABLE>
<CAPTION>
                                                                                       AS OF DECEMBER 31,
                                                                                       ------------------
                                                                                   2004                2003
                                                                                   ----                ----
<S>                                                                            <C>                 <C>
ASSETS
Current assets:
    Cash and cash equivalents .............................................    $       14,612      $      35,856
    Restricted cash........................................................               --              14,372
    Short-term investments, including restricted investments of $430 and
       $43,142, respectively...............................................            72,946            110,773
    Accounts receivable, net of allowances of $75 and $109, respectively...             5,345              6,571
    Other receivables......................................................             1,052                 --
    Prepaid expenses and other current assets..............................             4,793              3,933
                                                                               --------------      -------------
       Total current assets................................................            98,748            171,505
Property and equipment, net of accumulated depreciation and amortization
    of $41,892 and $31,941, respectively...................................            84,573             83,676
Goodwill   ................................................................            25,798             25,798
Intangible assets, net of amortization of $4,160 and $2,960, respectively..             1,840              3,040
Other assets...............................................................             1,021                180
                                                                               --------------      -------------
       Total assets........................................................    $      211,980      $     284,199
                                                                               ==============      =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable.......................................................    $        7,574      $       5,884
    Accrued liabilities....................................................             6,945              4,757
    Current portion of deferred revenue....................................            19,500             21,125
    Current portion of long-term debt......................................             4,691                 --
                                                                               --------------      ------------
       Total current liabilities...........................................            38,710             31,766
Deferred revenue, net of current portion...................................            18,092             26,567
Long-term debt.............................................................            32,940             56,344
Other long-term liabilities................................................               644              3,306
                                                                               --------------      -------------
       Total liabilities...................................................            90,386            117,983

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.01 par value; 5,000 shares authorized;
       no shares issued and outstanding....................................               --                 --
    Common stock, $.001 par value; 120,000 shares authorized;
       63,491 and 62,827 shares issued and outstanding, respectively.......                63                 63
    Additional paid-in capital.............................................           382,666            380,995
    Deferred stock compensation............................................               (20)              (899)
    Accumulated deficit....................................................          (261,115)          (213,943)
                                                                               --------------      -------------
       Total stockholders' equity .........................................           121,594            166,216
                                                                               --------------      -------------
       Total liabilities and stockholders' equity..........................    $      211,980      $     284,199
                                                                               ==============      =============
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-3
<PAGE>

                          LEXICON GENETICS INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                                   -----------------------
                                                                       2004                2003                 2002
                                                                       ----                ----                 ----
<S>                                                               <C>                  <C>                  <C>
Revenues:
   Subscription and license fees..............................    $       12,004       $      21,550        $      17,871
   Collaborative research.....................................            49,736              21,242               17,088
   Other  ....................................................               --                   46                  241
                                                                  --------------       -------------        -------------
     Total revenues...........................................            61,740              42,838               35,200
Operating expenses:
   Research and development, including stock-based
     compensation of $426, $5,048, and $5,155, respectively..             90,586              82,198               74,859
   General and administrative, including stock-based
     compensation of $412, $5,067, and $5,113, respectively...            18,608              23,233               23,234
                                                                  --------------       -------------        -------------
     Total operating expenses.................................           109,194             105,431               98,093
                                                                  --------------       -------------        -------------
Loss from operations..........................................           (47,454)            (62,593)             (62,893)
Interest income...............................................             1,638               1,555                3,003
Interest expense..............................................            (2,660)               (325)                  (7)
Other income, net.............................................             1,304                 241                  227
                                                                  --------------       -------------        -------------
Net loss before cumulative effect of a change
   in accounting principle....................................           (47,172)            (61,122)             (59,670)
Cumulative effect of a change in accounting principle.........               --               (3,076)                 --
                                                                  --------------       -------------        ------------
Net loss  ....................................................    $      (47,172)      $     (64,198)       $     (59,670)
                                                                  ==============       =============        =============

Net loss per common share basic and diluted:
   Net loss before cumulative effect of a
     change in accounting principle...........................    $        (0.74)      $       (1.08)       $       (1.14)
   Cumulative effect of a change in accounting principle......               --                (0.05)                 --
                                                                  --------------       --------------       ------------
   Net loss per common share, basic and diluted...............    $        (0.74)      $       (1.13)       $       (1.14)
                                                                  ==============       =============        =============
Shares used in computing net loss per common share,
   basic and diluted..........................................            63,327              56,820               52,263
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-4
<PAGE>

                          LEXICON GENETICS INCORPORATED

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                         ACCUMULATED
                                          COMMON STOCK        ADDITIONAL      DEFERRED                     OTHER          TOTAL
                                         ---------------       PAID-IN         STOCK       ACCUMULATED  COMPREHENSIVE  STOCKHOLDERS'
                                       SHARES    PAR VALUE     CAPITAL      COMPENSATION     DEFICIT        LOSS          EQUITY
                                       ------    ---------     -------      ------------     -------        ----          ------
<S>                                   <C>        <C>          <C>           <C>            <C>          <C>            <C>
Balance at December 31, 2001.......    52,022       $52       $331,092       $(22,260)      $(90,075)     $(437)         $218,372
Deferred stock compensation, net
  of reversals.....................        --        --           (985)           985             --         --                --
Issuance of restricted stock.......        18        --             99            (99)            --         --                --
Amortization of deferred stock
  compensation.....................        --        --             --         10,268             --         --            10,268
Cancellation of equity securities
  in connection with acquisition...        (7)       --            (79)            --             --         --               (79)
Exercise of common stock options...       330        --            574             --             --         --               574
Exercise of common stock warrants..         4        --             --             --             --         --                --
Net loss...........................        --        --             --             --        (59,670)        --           (59,670)
Reversal of unrealized loss on
  sale of long-term investments....        --        --             --             --             --        437               437
                                                                                                                        ---------
Comprehensive loss.................        --        --             --             --             --         --           (59,233)
                                      -------       ---      ---------       --------      ---------       ----         ---------
Balance at December 31, 2002.......    52,367        52        330,701        (11,106)      (149,745)        --           169,902
Deferred stock compensation, net
  of reversals.....................        --        --            (92)            92             --         --                --
Amortization of deferred stock
  compensation.....................        --        --             --         10,115             --         --            10,115
Public offering of common stock,
  net of offering costs............    10,240        10         50,147             --             --         --            50,157
Exercise of common stock options...       102         1            239             --             --         --               240
Exercise of common stock warrants..       118        --             --             --             --         --                --
Net and comprehensive loss.........        --        --             --             --        (64,198)        --           (64,198)
                                      -------       ---      ---------       --------      ---------       ----         ---------
Balance at December 31, 2003.......    62,827        63        380,995           (899)      (213,943)        --           166,216
Deferred stock compensation, net
  of reversals.....................        --        --            (41)            41             --         --                --
Amortization of deferred stock
  compensation.....................        --        --             --            838             --         --               838
Exercise of common stock options...       664        --          1,712             --             --         --             1,712
Net and comprehensive loss.........        --        --             --             --        (47,172)        --           (47,172)
                                      -------       ---      ---------       --------      ---------       ----         ---------
Balance at December 31, 2004.......    63,491       $63      $ 382,666       $    (20)     $(261,115)      $ --         $ 121,594
                                      =======       ===      =========       ========      =========       ====         =========
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-5
<PAGE>

                          LEXICON GENETICS INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                              -----------------------
                                                                                2004                 2003                2002
                                                                                ----                 ----                ----
<S>                                                                        <C>                   <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss............................................................    $     (47,172)        $     (64,198)      $     (59,670)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
     Depreciation......................................................           10,834                10,215               9,111
     Amortization of intangible assets, other than goodwill............            1,200                 1,200               1,200
     Amortization of deferred stock compensation.......................              838                10,115              10,268
     Loss on sale of long-term investments.............................              --                    --                  197
     Gain on disposal of property and equipment........................              (11)                  (18)                --
     Cumulative effect of a change in accounting principle ............              --                  3,076                 --
     Changes in operating assets and liabilities:
       (Increase) decrease in receivables..............................              174                (1,428)               (599)
       (Increase) decrease in prepaid expenses and other current
          assets.......................................................             (860)                  960                 484
       (Increase) decrease in other assets.............................             (841)                1,060               3,965
       Increase in accounts payable and other liabilities..............            3,682                 2,257                 700
       Increase (decrease) in deferred revenue.........................          (10,100)               29,045               5,552
                                                                           -------------         -------------       -------------
         Net cash used in operating activities.........................          (42,256)               (7,716)            (28,792)
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment.................................          (11,811)               (4,824)            (19,766)
   Proceeds from disposal of property and equipment....................               91                    48                 --
   (Increase) decrease in restricted cash..............................           14,372                15,115             (22,794)
   Purchase of short-term investments..................................         (178,355)             (212,869)           (107,603)
   Sale of short-term investments......................................          216,182               170,939             172,154
   Sale of long-term investments.......................................              --                    --               10,638
                                                                           -------------         -------------       -------------
         Net cash provided by (used in) investing activities...........           40,479               (31,591)             32,629
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock..............................            1,712                50,397                 574
   Proceeds from debt borrowings.......................................           34,000                   --                4,000
   Repayment of debt borrowings........................................          (52,713)                  --                  --
   Repayment of other long-term liabilities............................           (2,466)                  --                  --
                                                                           -------------         -------------       ------------
         Net cash provided by (used in) financing activities...........          (19,467)               50,397               4,574
                                                                           -------------         -------------       -------------
Net increase (decrease) in cash and cash equivalents...................          (21,244)               11,090               8,411
Cash and cash equivalents at beginning of year.........................           35,856                24,766              16,355
                                                                           -------------         -------------       -------------
Cash and cash equivalents at end of year...............................    $      14,612         $      35,856       $      24,766
                                                                           =============         =============       =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest..............................................    $       1,985         $           4       $           7

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
   Reversal of unrealized loss on long-term investments................    $          --         $         --        $         437
   Cancellation of equity securities in connection with acquisition....    $          --         $         --        $         (79)
   Deferred stock compensation, net of reversals.......................    $          41         $          92       $         886
   Retirement of property and equipment................................    $         963         $       1,148       $          90
   Property and equipment recorded in connection with consolidation of
     variable interest entity..........................................    $          --         $      54,811       $         --
   Long-term debt recorded in connection with consolidation of variable
     interest entity...................................................    $          --         $     (52,344)      $         --
   Other long-term liabilities recorded in connection with consolidation
     of variable interest entity.......................................    $          --         $      (2,467)      $         --
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-6
<PAGE>

                          LEXICON GENETICS INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2004

1. ORGANIZATION AND OPERATIONS

Lexicon Genetics Incorporated (Lexicon or the Company) is a Delaware corporation
incorporated on July 7, 1995. Lexicon was organized to discover the functions
and pharmaceutical utility of genes and use those gene function discoveries in
the discovery and development of pharmaceutical products for the treatment of
human disease.

Lexicon has financed its operations from inception primarily through sales of
common and preferred stock, contract and milestone payments received under
database subscription and collaboration agreements, technology licenses,
equipment financing arrangements and leasing arrangements. The Company's future
success is dependent upon many factors, including, but not limited to, its
ability to discover and develop pharmaceutical products for the treatment of
human disease, discover additional promising candidates for drug discovery and
development using its gene knockout technology, establish additional research
contracts and agreements for access to its technology, achieve milestones under
such contracts and agreements, obtain and enforce patents and other proprietary
rights in its discoveries, comply with federal and state regulations, and
maintain sufficient capital to fund its activities. As a result of the
aforementioned factors and the related uncertainties, there can be no assurance
of the Company's future success.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Lexicon and its subsidiaries. Intercompany transactions
and balances are eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with U.
S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-term Investments: Lexicon considers all
highly-liquid investments with original maturities of three months or less to be
cash equivalents. Short-term investments consist of U.S. government agency debt
obligations, investment grade commercial paper, corporate debt securities,
certificates of deposit and auction rate securities. Short-term investments are
classified as available-for-sale securities and are carried at fair value, based
on quoted market prices of the securities. The Company views its
available-for-sale securities as available for use in current operations
regardless of the stated maturity date of the security. Unrealized gains and
losses on such securities, when material, are reported as a separate component
of stockholders equity. Net realized gains and losses, interest and dividends
are included in interest income. The cost of securities sold is based on the
specific identification method.

Restricted Cash and Investments: Lexicon is required to maintain restricted cash
or investments to collateralize standby letters of credit for the lease on its
office and laboratory facilities in Hopewell, New Jersey (see Note 10). As of
December 31, 2004, the Company maintained restricted cash and investments of
$0.4 million. As of December 31, 2003, restricted cash and investments were
$57.5 million, which collateralized borrowings made under the previous synthetic
lease as well as standby letters of credit for the leases on office and
laboratory facilities in East Windsor and Hopewell, New Jersey.

Concentration of Credit Risk: Lexicon's cash equivalents, short-term investments
and trade accounts receivable represent potential concentrations of credit risk.
The Company minimizes potential concentrations of risk in cash equivalents and
short-term investments by placing investments in high-quality financial
instruments. The Company's accounts receivable are unsecured and are
concentrated in pharmaceutical and biotechnology companies located in the United
States, Europe and Japan. The Company has not experienced any significant credit
losses to date and, at December 31, 2004, management believes that the Company
has no significant concentrations of credit risk.

Segment Information and Significant Customers: Lexicon operates in one business
segment, which primarily focuses on the discovery of the functions and
pharmaceutical utility of genes and the use of those gene function

                                      F-7
<PAGE>

discoveries in the discovery and development of pharmaceutical products for the
treatment of human disease. Substantially all of the Company's revenues have
been derived from drug discovery alliances, target validation collaborations for
the development and, in some cases, analysis of the physiological effects of
genes altered in knockout mice, technology licenses, subscriptions to its
databases and compound library sales. In 2004, Bristol-Myers Squibb Company,
Genentech, Inc. and Incyte Corporation represented 43%, 26% and 8% of revenues,
respectively. In 2003, Incyte, Amgen Inc., Bristol-Myers Squibb and Genentech
represented 23%, 15%, 14% and 14% of revenues, respectively. In 2002, Incyte,
Bristol-Myers Squibb and Millennium Pharmaceuticals, Inc. represented 28%, 14%
and 11% of revenues, respectively.

Property and Equipment: Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of the
assets which ranges from three to 40 years. Maintenance, repairs and minor
replacements are charged to expense as incurred. Leasehold improvements are
amortized over the shorter of the estimated useful life or the remaining lease
term. Significant renewals and betterments are capitalized.

Impairment of Long-Lived Assets: Under Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets and certain identifiable intangible assets
to be held and used are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written
down to their estimated fair values.

Goodwill Impairment: Under SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is not amortized, but is tested at least annually for impairment at the
reporting unit level. Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value. The first step in the
impairment process is to determine the fair value of the reporting unit and then
compare it to the carrying value, including goodwill. If the fair value exceeds
the carrying value, no further action is required and no impairment loss is
recognized. Additional impairment assessments may be performed on an interim
basis if the Company encounters events or changes in circumstances that would
indicate that, more likely than not, the carrying value of goodwill has been
impaired. There was no impairment of goodwill in 2004.

Revenue Recognition: Revenues are recognized under Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition," when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.
Revenues are earned from drug discovery alliances, database subscriptions,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice,
technology licenses, government grants and compound library sales.

Upfront fees and annual research funding under our drug discovery alliances are
recognized as revenue on a straight line basis over the estimated period of
service, generally the contractual research term, to the extent they are
non-refundable. Milestone-based fees are recognized upon completion of specified
milestones according to contract terms. Fees for access to databases and other
target validation resources are recognized ratably over the subscription or
access period. Payments received under target validation collaborations and
government grants are recognized as revenue as Lexicon performs its obligations
related to such research to the extent such fees are non-refundable.
Non-refundable technology license fees are recognized as revenue upon the grant
of the license when performance is complete and there is no continuing
involvement. Compound library sales are recognized as revenue upon shipment.

Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair values of the elements.
The determination of fair value of each element is based on objective evidence.
When revenues for an element are specifically tied to a separate earnings
process, revenue is recognized when the specific performance obligation
associated with the element is completed. When revenues for an element are not
specifically tied to a separate earnings process, they are recognized ratably
over the term of the agreement.

Research and Development Expenses: Research and development expenses consist of
costs incurred for company-sponsored as well as collaborative research and
development activities. These costs include direct and research-related overhead
expenses and are expensed as incurred. Patent costs and technology license fees
for

                                      F-8
<PAGE>

technologies that are utilized in research and development and have no
alternative future use are expensed when incurred.

Stock-Based Compensation: As further discussed in Note 12, Lexicon has three
stock-based compensation plans, which are accounted for under the recognition
and measurement provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." Under
the intrinsic value method described in APB Opinion No. 25, no compensation
expense is recognized if the exercise price of the employee stock option equals
the market price of the underlying stock on the date of grant. Lexicon
recognized $0.8 million, $10.1 million and $10.3 million of stock-based
compensation during 2004, 2003 and 2002, respectively, which was primarily
related to option grants made prior to Lexicon's April 2000 initial public
offering. The following table illustrates the effect on net loss and net loss
per share if the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock Based Compensation," had been applied to all outstanding and unvested
awards in each period:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                           2004          2003           2002
                                                           ----          ----           ----
                                                                   (IN THOUSANDS)
<S>                                                      <C>            <C>            <C>
Net loss, as reported .............................      $(47,172)      $(64,198)      $(59,670)
Add: Stock-based employee compensation
   expense included in reported net loss ..........           838         10,115         10,268
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards .................................       (16,189)       (26,344)       (25,913)
                                                         --------       --------       --------
Pro forma net loss ................................      $(62,523)      $(80,427)      $(75,315)
                                                         ========       ========       ========

Net loss per common share, basic and diluted
   As reported ....................................      $  (0.74)      $  (1.13)      $  (1.14)
                                                         ========       ========       ========
   Pro forma ......................................      $  (0.99)      $  (1.42)      $  (1.44)
                                                         ========       ========       ========
</TABLE>

Net Loss Per Common Share: Net loss per common share is computed using the
weighted average number of shares of common stock outstanding. Shares associated
with stock options and warrants are not included because they are antidilutive.

Comprehensive Loss: Comprehensive loss is comprised of net loss and unrealized
gains and losses on available-for-sale securities. Comprehensive loss is
reflected in the consolidated statements of stockholders' equity. There were no
unrealized gains or losses as of December 31, 2004 and 2003. During 2002,
Lexicon sold its long-term investment for $10.6 million, resulting in a realized
loss of $197,000 reflected in its net loss for the year.

3. RECENT ACCOUNTING PRONOUNCEMENT

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123 (Revised) "Share-Based Payment." The statement eliminates the ability to
account for stock-based compensation using APB 25 and requires such transactions
be recognized as compensation expense in the income statement based on their
fair values on the date of the grant, with the compensation expense recognized
over the period in which an employee is required to provide service in exchange
for the stock award. The Company will adopt this statement on July 1, 2005 using
a modified prospective application. As such, the compensation expense
recognition provisions will apply to new awards and to any awards modified,
repurchased or cancelled after the adoption date. Additionally, for any unvested
awards outstanding at the adoption date, the Company will recognize compensation
expense over the remaining vesting period. The Company is currently evaluating
the impact of SFAS 123 (Revised) on its financial condition and results of
operation. However, if the Company continues to use a Black-Scholes option
pricing model consistent with its current practice, the adoption of SFAS 123
(Revised) on July 1, 2005 is estimated to result in additional compensation
expense of approximately $4.0 million for the year ended December 31, 2005
related to options granted as of December 31, 2004 that will be unvested on the
date of adoption. Grants awarded subsequent to December 31, 2004 will result in
increased compensation expense.

4. RECLASSIFICATION

In the accompanying consolidated balance sheet as of December 31, 2003, Lexicon
has reclassified $46.1 million of auction rate securities from cash equivalents
to short-term investments and $42.6 million from restricted cash to

                                      F-9
<PAGE>

short-term investments. The accompanying consolidated statements of cash flow
for the years ended December 31, 2003 and 2002 have been adjusted to reflect
this reclassification.

5. SHORT-TERM INVESTMENTS

The fair value of securities held at December 31, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31
                                                             ------------------
                                                             2004          2003
                                                             ----          ----
                                                               (IN THOUSANDS)
<S>                                                         <C>          <C>
Securities maturing within one year:
    Certificates of Deposit ..........................      $   565      $    561
    U.S. government agencies .........................        2,499         3,500
    Corporate debt securities ........................       25,832        16,572
    Auction rate securities ..........................        1,000            --
    Commercial paper .................................           --         1,490
                                                            -------      --------
       Total securities maturing within one year .....       29,896        22,123

Securities maturing after one year through five years:
    Auction rate securities ..........................        7,450        22,350

Securities maturing after ten years:
    Auction rate securities ..........................       35,600        66,300
                                                            -------      --------
       Total available-for-sale investments ..........      $72,946      $110,773
                                                            =======      ========
</TABLE>

There were no unrealized gains or losses as of December 31, 2004 and 2003.
Realized losses were $0, $0, and $197,000 for the years ended December 31, 2004,
2003 and 2002, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                                      ESTIMATED          AS OF DECEMBER 31,
                                                                     USEFUL LIVES       -------------------
                                                                      IN YEARS       2004                2003
                                                                      --------       ----                ----
                                                                                           (IN THOUSANDS)
<S>                                                                  <C>          <C>                <C>
Computers and software.............................................       3-5     $     12,522       $     11,519
Furniture and fixtures.............................................       5-7            7,538              7,676
Laboratory equipment...............................................       3-7           33,764             29,847
Leasehold improvements.............................................      3-10            7,764             11,765
Buildings..........................................................     15-40           61,313             51,246
Land...............................................................        --            3,564              3,564
                                                                                  ------------       ------------
   Total property and equipment....................................                    126,465            115,617
Less: Accumulated depreciation and amortization....................                    (41,892)           (31,941)
                                                                                  ------------       ------------
    Net property and equipment.....................................               $     84,573       $     83,676
                                                                                  ============       ============
</TABLE>

7. INCOME TAXES

Lexicon recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized differently in the
financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of liabilities and assets
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided.

                                     F-10
<PAGE>

The components of Lexicon's deferred tax assets (liabilities) at December 31,
2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                               AS OF DECEMBER 31,
                                              -------------------
                                              2004           2003
                                              ----           ----
                                                (IN THOUSANDS)
<S>                                         <C>            <C>
Deferred tax assets:
  Net operating loss carryforwards ...      $ 66,767       $ 46,130
  Research and development tax
   credits............................         8,597          8,105
  Stock-based compensation ...........         7,206          7,468
  Deferred revenue ...................        13,149         16,685
  Other ..............................         2,121          1,628
                                            --------       --------
    Total deferred tax assets ........        97,840         80,016

Deferred tax liabilities:
  Property and equipment .............        (1,502)        (1,643)
  Other ..............................          (139)           (59)
                                            --------       --------
    Total deferred tax liabilities ...        (1,641)        (1,702)

Less: Valuation allowance ............       (96,199)       (78,314)
                                            --------       --------
    Net deferred tax assets .......         $     --       $     --
                                            ========       ========
</TABLE>

At December 31, 2004, Lexicon had net operating loss carryforwards of
approximately $190.8 million and research and development tax credit
carryforwards of approximately $8.6 million available to reduce future income
taxes. These carryforwards will begin to expire in 2011. A change in ownership,
as defined by federal income tax regulations, could significantly limit the
Company's ability to utilize its carryforwards. Based on the federal tax law
limits and the Company's cumulative loss position, Lexicon concluded it was
appropriate to establish a full valuation allowance for its net deferred tax
assets until an appropriate level of profitability is sustained. During 2004,
the valuation allowance increased $17.9 million primarily due to the Company's
current year net loss.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

On July 12, 2001, Lexicon completed the acquisition of Coelacanth Corporation in
a merger. Coelacanth, now Lexicon Pharmaceuticals (New Jersey), Inc., forms the
core of Lexicon Pharmaceuticals, the division of the Company responsible for
small molecule compound discovery. The results of Lexicon Pharmaceuticals (New
Jersey), Inc. are included in the Company's results of operations for the period
subsequent to the acquisition.

Goodwill, associated with the acquisition, of $25.8 million, which represents
the excess of the $36.0 million purchase price over the fair value of the
underlying net identifiable assets, was assigned to the consolidated entity,
Lexicon. There was no change in the carrying amount of goodwill for the year
ended December 31, 2004. In accordance with SFAS No. 142, the goodwill balance
is not subject to amortization, but is tested at least annually for impairment
at the reporting unit level, which is the Company's single operating segment.
The Company performed an impairment test of goodwill on its annual impairment
assessment date. This test did not result in an impairment of goodwill.

Other intangible assets represent Coelacanth's technology platform, which
consists of its proprietary ClickChem(TM) reactions, novel building blocks and
compound sets, automated production systems, high throughput ADMET (Absorption,
Distribution, Metabolism, Excretion and Toxicity) capabilities and its know-how
and trade secrets. The Company amortizes other intangible assets on a
straight-line basis over an estimated life of five years.

The amortization expense for the year ended December 31, 2004 was $1.2 million.
The estimated remaining amortization expense is as follows:

<TABLE>
<CAPTION>
                                    FOR THE YEAR ENDING DECEMBER 31
                                    -------------------------------
                                           (IN THOUSANDS)
<S>                                 <C>
2005....................                  $     1,200
2006....................                          640
</TABLE>

9. DEBT OBLIGATIONS

Genentech Loan: On December 31, 2002, Lexicon borrowed $4.0 million under a note
agreement with Genentech, Inc. The proceeds of the loan are to be used to fund
research efforts under the alliance agreement with Genentech

                                     F-11
<PAGE>

discussed in Note 14. The note matures on December 31, 2005, but the Company may
prepay it at any time. The Company may repay the note, at its option, in cash,
in shares of common stock valued at the then-current market price, or in a
combination of cash and shares, subject to certain limitations. The note accrues
interest at an annual rate of 8%, compounded quarterly.

Mortgage Loan: In October 2000, Lexicon entered into a synthetic lease agreement
under which the lessor purchased the Company's existing laboratory and office
buildings and animal facility in The Woodlands, Texas and agreed to fund the
construction of additional facilities. Including the purchase price for the
Company's existing facilities, the synthetic lease, as amended, provided funding
of $54.8 million in property and improvements and required that the Company
maintain restricted cash or investments to collateralize these borrowings.
Lexicon adopted Financial Accounting Standards Board Interpretation No. 46, or
FIN 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB
No. 51" on December 31, 2003. Lexicon determined that the lessor under the
synthetic lease was a variable interest entity as defined by FIN 46, and that
the Company absorbed a majority of the variable interest entity's expected
losses. Accordingly, the Company consolidated the variable interest entity. In
April 2004, Lexicon purchased the facilities subject to the synthetic lease,
repaying the $54.8 million funded under the synthetic lease with proceeds from a
$34.0 million third-party mortgage financing and $20.8 million in cash. The
mortgage loan has a ten-year term with a 20-year amortization and bears interest
at a fixed rate of 8.23%. As a result of the refinancing, all restrictions on
the cash and investments that had secured the obligations under the synthetic
lease were eliminated. The buildings and land that serve as collateral for the
mortgage loan are included in property and equipment at $61.3 million and $3.6
million, respectively, before accumulated depreciation.

The following table includes the aggregate future principal payments of the
Company's long-term debt as of December 31, 2004:

<TABLE>
<CAPTION>
                             FOR THE YEAR ENDING DECEMBER 31
                             -------------------------------
                                   (IN THOUSANDS)
<S>                          <C>
2005 .....................         $  4,691
2006 .....................              751
2007 .....................              816
2008 .....................              880
2009 .....................              964
Thereafter ...............           29,529
                                   --------
                                     37,631
Less current portion .....           (4,691)
                                   --------
  Total long-term debt ...         $ 32,940
</TABLE>

The fair value of Lexicon's debt financial instruments approximates their
carrying value.

10. COMMITMENTS AND CONTINGENCIES

Operating Lease Obligation: A Lexicon subsidiary leases laboratory and office
space in Hopewell, New Jersey under an agreement that expires in June 2013. The
lease provides for two five year renewal options at 95% of the fair market rent.
Lexicon is the guarantor of the obligation of its subsidiary under this lease.
The Company is required to maintain restricted investments to collateralize a
standby letter of credit for this lease. As of December 31, 2004, the Company
had $0.4 million in restricted investments as collateral. Lexicon's subsidiary
had also leased a facility in East Windsor, New Jersey through January 2004. As
of December 31, 2003, the Company had $0.5 million in restricted investments to
collateralize standby letters of credit under both the Hopewell and East Windsor
leases. Additionally, Lexicon leases certain equipment under operating leases.

Rent expense for all operating leases was approximately $2.3 million, $3.7
million, and $2.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively. These amounts included rent expense related to the synthetic lease
in 2003 and 2002. Payments under the synthetic lease made subsequent to the
consolidation of the lessor under the lease on December 31, 2003 are reflected
in interest expense rather than rent expense as are the interest payments made
under the mortgage loan used to purchase the facilities funded under the
synthetic lease in April 2004. The following table includes non-cancelable,
escalating future lease payments for the facility in New Jersey:

                                     F-12
<PAGE>

<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDING DECEMBER 31
                                                      -------------------------------
                                                             (IN THOUSANDS)
<S>                                                   <C>
2005.......................................                $     2,230
2006.......................................                      2,287
2007.......................................                      2,287
2008.......................................                      2,347
2009.......................................                      2,408
Thereafter.................................                      8,687
                                                           -----------
    Total..................................                $    20,246
                                                           ===========
</TABLE>

Employment Agreements: Lexicon has entered into employment agreements with
certain of its corporate officers. Under the agreements, each officer receives a
base salary, subject to adjustment, with an annual discretionary bonus based
upon specific objectives to be determined by the compensation committee. The
employment agreements are at-will and contain non-competition agreements. The
agreements also provide for a termination clause, which requires either a six or
12-month payment based on the officer's salary, in the event of termination or
change in corporate control.

11. CAPITAL STOCK

Common Stock: In July 2003, Lexicon completed the public offering and sale of
10.0 million shares of its common stock at a price of $5.25 per share. In August
2003, the underwriters partially exercised their over-allotment option,
purchasing an additional 240,000 shares. The total net proceeds from the
offering was $50.1 million, after deducting underwriting discounts of $3.2
million and offering expenses of $0.4 million.

12. STOCK OPTIONS AND WARRANTS

Stock Options

2000 Equity Incentive Plan: In September 1995, Lexicon adopted the 1995 Stock
Option Plan, which was subsequently amended and restated in February 2000 as the
2000 Equity Incentive Plan (the "Equity Incentive Plan"). The Equity Incentive
Plan will terminate in 2010 unless the Board of Directors terminates it sooner.
The Equity Incentive Plan provides that it will be administered by the Board of
Directors, or a committee appointed by the Board of Directors, which determines
recipients and types of options to be granted, including number of shares under
the option and the exercisability of the shares. The Equity Incentive Plan is
presently administered by the Compensation Committee of the Board of Directors.

The Equity Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options to employees, directors and consultants
of the Company. The plan also permits the grant of stock bonuses and restricted
stock purchase awards. Incentive stock options have an exercise price of 100% or
more of the fair market value of our common stock on the date of grant.
Nonstatutory stock options may have an exercise price as low as 85% of fair
market value on the date of grant. The purchase price of other stock awards may
not be less than 85% of fair market value. However, the plan administrator may
award bonuses in consideration of past services without a purchase payment.
Shares may be subject to a repurchase option in the discretion of the plan
administrator.

The Board of Directors initially authorized and reserved an aggregate of
11,250,000 shares of common stock for issuance under the Equity Incentive Plan.
On January 1 of each year for ten years, beginning in 2001, the number of shares
reserved for issuance under the Equity Incentive Plan automatically will be
increased by the greater of:

      -     5% of Lexicon's outstanding shares on a fully-diluted basis; or

      -     that number of shares that could be issued under awards granted
            under the Equity Incentive Plan during the prior 12-month period;

provided that the Board of Directors may provide for a lesser increase in the
number of shares reserved under the Equity Incentive Plan for any year. The
total number of shares reserved in the aggregate may not exceed 60,000,000
shares over the ten-year period.

                                     F-13
<PAGE>

As of December 31, 2004, an aggregate of 17,000,000 shares of common stock had
been reserved for issuance, options to purchase 13,026,084 shares were
outstanding and 2,455,846 shares had been issued upon the exercise of stock
options issued under the Equity Incentive Plan.

2000 Non-Employee Directors' Stock Option Plan: In February 2000, Lexicon
adopted the 2000 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") to provide for the automatic grant of options to purchase shares of
common stock to non-employee directors of the Company. Under the Directors'
Plan, non-employee directors first elected after the closing of the Company's
initial public offering receive an initial option to purchase 30,000 shares of
common stock. In addition, on the day following each of the Company's annual
meetings of stockholders, beginning with the annual meeting in 2001, each
non-employee director who has been a director for at least six months is
automatically granted an option to purchase 6,000 shares of common stock.
Initial option grants become vested and exercisable over a period of five years
and annual option grants become vested over a period of 12 months from the date
of grant. Options granted under the Directors' Plan have an exercise price equal
to the fair market value of the Company's common stock on the date of grant and
term of ten years from the date of grant.

The Board of Directors initially authorized and reserved a total of 600,000
shares of its common stock for issuance under the Directors' Plan. On the day
following each annual meeting of Lexicon's stockholders, for 10 years, starting
in 2001, the share reserve will automatically be increased by a number of shares
equal to the greater of:

      -     0.3% of the Company's outstanding shares on a fully-diluted basis;
            or

      -     that number of shares that could be issued under options granted
            under the Directors' Plan during the prior 12-month period;

provided that the Board of Directors may provide for a lesser increase in the
number of shares reserved under the Directors' Plan for any year.

As of December 31, 2004, an aggregate of 600,000 shares of common stock had been
reserved for issuance, options to purchase 198,000 shares were outstanding and
no options had been exercised under the Directors' Plan.

Coelacanth Corporation 1999 Stock Option Plan: Lexicon assumed the Coelacanth
Corporation 1999 Stock Option Plan (the "Coelacanth Plan") and the outstanding
stock options under the plan in connection with our July 2001 acquisition of
Coelacanth Corporation. The Company will not grant any further options under the
plan. As outstanding options under the plan expire or terminate, the number of
shares authorized for issuance under the plan will be correspondingly reduced.

The purpose of the plan was to provide an opportunity for employees, directors
and consultants of Coelacanth to acquire a proprietary interest, or otherwise
increase their proprietary interest, in Coelacanth as an incentive to continue
their employment or service. Both incentive and nonstatutory options are
outstanding under the plan. Most outstanding options vest over time and expire
ten years from the date of grant. The exercise price of options awarded under
the plan was determined by the plan administrator at the time of grant. In
general, incentive stock options have an exercise price of 100% or more of the
fair market value of Coelacanth common stock on the date of grant and
nonstatutory stock options have an exercise price as low as 85% of fair market
value on the date of grant.

As of December 31, 2004, an aggregate of 122,649 shares of common stock had been
reserved for issuance, options to purchase 74,821 shares of common stock were
outstanding, options to purchase 21,756 shares of common stock had been
cancelled and 26,072 shares of common stock had been issued upon the exercise of
stock options issued under the Coelacanth Plan.

Stock-Based Compensation: SFAS No. 123, "Accounting for Stock-Based
Compensation," allows companies to adopt one of two methods for accounting for
stock options. Lexicon has elected the method that requires disclosure only of
stock-based compensation. Because of this election, the Company is required to
account for its employee stock-based compensation plans under APB Opinion No. 25
and its related interpretations. Accordingly, deferred compensation is recorded
for stock-based compensation grants based on the excess of the estimated fair
value of the common stock on the measurement date over the exercise price. The
deferred compensation is amortized over the vesting period of each unit of
stock-based compensation grant, generally four years. If the exercise price of
the stock-based compensation grants is equal to the estimated fair value of the
Company's stock on the date of grant, no compensation expense is recorded.

                                     F-14
<PAGE>

During the year ended December 31, 2000, Lexicon recorded $54.1 million in
aggregate deferred compensation relating to options issued to employees and
non-employee directors prior to our initial public offering. During the years
ended December 31, 2004, 2003 and 2002, the Company recognized $0.8 million,
$10.1 million and $10.3 million, respectively, in compensation expense relating
to these options.

The pro forma information regarding net loss required by SFAS No. 123 has been
included in Note 2. The information has been determined as if Lexicon had
accounted for its employee stock options under the fair-value method as defined
by SFAS No. 123. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period of the options
using the straight-line method. The fair value of these options was estimated at
the date of grant using the Black-Scholes method and the following
weighted-average assumptions for 2004, 2003 and 2002:

      -     volatility factors of 92%, 92% and 100%, respectively;

      -     risk-free interest rates of 3.69%, 3.40% and 4.64%, respectively;

      -     expected option lives of seven years;

      -     three percent expected turnover; and

      -     no dividends.

Lexicon records the fair value of options issued to non-employee consultants,
including Scientific Advisory Panel members, at the fair value of the options
issued. The fair values of the issuances were estimated using the Black-Scholes
pricing model with the assumptions noted in the preceding paragraph. Any expense
is recognized over the service period or at the date of issuance if the options
are fully vested and no performance obligation exists.

Stock Option Activity: The following is a summary of option activity under
Lexicon's stock option plans:

<TABLE>
<CAPTION>
                                                                                                         WEIGHTED
                                                                                      OPTIONS            AVERAGE
                                                                                    OUTSTANDING      EXERCISE PRICE
                                                                                    -----------      --------------
                                                                                  (IN THOUSANDS)
<S>                                                                                <C>               <C>
Balance at December 31, 2001...........................................               10,103           $   6.04
    Granted............................................................                2,200               8.68
    Exercised..........................................................                 (330)              1.74
    Canceled...........................................................                 (601)              9.70
                                                                                      ------
Balance at December 31, 2002...........................................               11,372               6.47
                                                                                      ------
    Granted............................................................                1,897               4.24
    Exercised..........................................................                 (102)              2.34
    Canceled...........................................................                 (278)              8.92
                                                                                      ------
Balance at December 31, 2003...........................................               12,889               6.12
                                                                                      ------
    Granted............................................................                1,935               7.40
    Exercised..........................................................                 (664)              2.65
    Canceled...........................................................                 (861)             10.44
                                                                                      ------
Outstanding at December 31, 2004.......................................               13,299           $   6.20
                                                                                      ======
</TABLE>

The weighted average fair values of options granted during the years ended
December 31, 2004, 2003 and 2002 were $5.95, $3.52 and $7.32, respectively. As
of December 31, 2004, 1,920,070 shares of common stock were available for grant
under Lexicon's stock option plans.

                                     F-15
<PAGE>

Stock Options Outstanding: The following table summarizes information about
stock options outstanding at December 31, 2004:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                                      OPTIONS EXERCISABLE
                                 -------------------                                      -------------------
                                               WEIGHTED
                         OUTSTANDING AS         AVERAGE          WEIGHTED            EXERCISABLE AS       WEIGHTED
                              OF               REMAINING         AVERAGE                  OF              AVERAGE
     RANGE OF             DECEMBER 31         CONTRACTUAL        EXERCISE             DECEMBER 31,        EXERCISE
  EXERCISE PRICE             2004           LIFE (IN YEARS)       PRICE                  2004              PRICE
  --------------             ----           ---------------       -----                  ----              -----
                        (IN THOUSANDS)                                              (IN THOUSANDS)
<S>                     <C>                 <C>                  <C>                 <C>                  <C>
$0.0003 - $0.22                862                 0.9           $  0.05                   862            $  0.05
    1.67 - 2.50              4,935                 4.3              2.40                 4,935               2.40
    3.16 - 4.70              1,383                 8.1              3.92                   638               3.93
    4.76 - 7.12                905                 8.7              6.02                   283               5.71
   7.15 - 10.55              3,228                 7.9              8.55                 1,314               9.36
  10.87 - 16.00              1,429                 6.3             12.65                 1,321              12.69
  16.63 - 22.06                374                 5.3             19.66                   372              19.66
  25.25 - 31.63                 31                 5.8             26.68                    31              26.88
  38.00 - 38.50                152                 5.7             38.49                   152              38.49
                            ------                                                       -----
                            13,299                               $  6.20                 9,908            $  5.96
                            ======                                                       =====
</TABLE>

Warrants

In July 1998, Lexicon issued a warrant to purchase 249,999 shares of common
stock at an exercise price of $2.50 per share, in connection with the grant to
the Company of an option to lease additional real property. Amortization of the
remaining balance of $155,000 on the lease option was expensed in 2000 upon the
Company's completion of a synthetic lease agreement under which the lessor
purchased the optioned real property under an arrangement providing for its
lease to the Company. The warrant was exercised in 2003 by way of a cashless
exercise, resulting in the issuance of a total of 117,784 shares of common
stock.

In connection with the acquisition of Coelacanth in July 2001, Lexicon assumed
Coelacanth's outstanding warrants to purchase 25,169 shares of common stock. The
warrants expire on March 31, 2009. The fair value of the warrants was included
in the total purchase price for the acquisition. As of December 31, 2004,
warrants to purchase 16,483 shares of common stock, with an exercise price of
$11.93 per share, remained outstanding.

Aggregate Shares Reserved for Issuance

As of December 31, 2004 an aggregate of 13,315,388 shares of common stock were
reserved for issuance upon exercise of outstanding stock options and warrants
and 1,920,070 additional shares were available for future grants under Lexicon's
stock option plans.

13. BENEFIT PLANS

Lexicon has established an Annual Profit Sharing Incentive Plan (the Profit
Sharing Plan). The purpose of the Profit Sharing Plan is to provide for the
payment of incentive compensation out of the profits of the Company to certain
of its employees. Participants in the Profit Sharing Plan are entitled to an
annual cash bonus equal to their proportionate share (based on salary) of 15
percent of the Company's annual pretax income, if any.

Lexicon maintains a defined-contribution savings plan under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. Beginning in 2000,
the Company was required to match employee contributions according to a
specified formula. The matching contributions totaled approximately $776,000,
$637,000, and $645,000, in 2004, 2003 and 2002, respectively. Company
contributions are vested based on the employee's years of service, with full
vesting after four years of service.

14. COLLABORATION AND LICENSE AGREEMENTS

Lexicon has derived substantially all of its revenues from drug discovery
alliances, target validation collaborations for the development and, in some
cases, analysis of the physiological effects of genes altered in knockout mice,
technology licenses, subscriptions to its databases and compound library sales.

                                     F-16
<PAGE>

Drug Discovery Alliances

Lexicon has entered into the following alliances for the discovery and
development of therapeutics based on its in vivo drug target discovery efforts:

Abgenix, Inc. Lexicon established a drug discovery alliance with Abgenix in July
2000 to discover novel therapeutic antibodies using the Company's target
validation technologies and Abgenix's technology for generating fully human
monoclonal antibodies. Lexicon and Abgenix expanded and extended the alliance in
January 2002, with the intent of accelerating the selection of in vivo-validated
antigens for antibody discovery and the development and commercialization of
therapeutic antibodies based on those targets. Under the alliance agreement, the
Company and Abgenix will each have the right to obtain exclusive
commercialization rights, including sublicensing rights, for an equal number of
qualifying therapeutic antibodies, and will each receive milestone payments and
royalties on sales of therapeutic antibodies from the alliance that are
commercialized by the other party or a third party sublicensee. Each party bears
its own expenses under the alliance. The expanded alliance also provides us with
access to Abgenix's XenoMouse(R) technology for use in some of our own drug
discovery programs. The collaboration period under the agreement terminated in
July 2004.

Bristol-Myers Squibb Company: Lexicon established an alliance with Bristol-Myers
Squibb in December 2003 to discover, develop and commercialize small molecule
drugs in the neuroscience field. Lexicon is contributing a number of drug
discovery programs at various stages of development. Lexicon will continue to
use its gene knockout technology to identify additional drug targets with
promise in the neuroscience field. For those targets that are selected for the
alliance, Lexicon and Bristol-Myers Squibb will work together, on an exclusive
basis, to identify, characterize and carry out the preclinical development of
small molecule drugs, and will share equally both in the costs and in the work
attributable to those efforts. As drugs resulting from the collaboration enter
clinical trials, Bristol-Myers Squibb will have the first option to assume full
responsibility for clinical development and commercialization. Lexicon received
an upfront payment of $36.0 million and is entitled to receive research funding
of $30.0 million in the initial three years of the agreement. Bristol-Myers
Squibb has the option to extend the discovery portion of the alliance for an
additional two years in exchange for further committed research funding of up to
$50.0 million. Lexicon may receive additional cash payments for exceeding
specified research productivity levels. Lexicon will also receive clinical and
regulatory milestone payments for each drug target for which Bristol-Myers
Squibb develops a drug under the alliance. Lexicon will earn royalties on sales
of drugs commercialized by Bristol-Myers Squibb. The party with responsibility
for the clinical development and commercialization of drugs resulting from the
alliance will bear the costs of those efforts. Revenue recognized under this
agreement was $21.5 million and $0.8 million for the years ended December 31,
2004 and 2003, respectively.

Genentech, Inc. Lexicon established a drug discovery alliance with Genentech in
December 2002 to discover novel therapeutic proteins and antibody targets. Under
the alliance agreement, Lexicon will use its target validation technologies to
discover the functions of secreted proteins and potential antibody targets
identified through Genentech's internal drug discovery research. Genentech will
have exclusive rights in the discoveries resulting from the collaboration for
the research, development and commercialization of therapeutic proteins and
antibodies. Lexicon will retain certain other rights in those discoveries,
including rights for the development of small molecule drugs. Lexicon received
an upfront payment of $9.0 million and funding under a $4.0 million loan in
2002. The terms of the loan are discussed in Note 9. In addition, Lexicon can
earn up to $24.0 million in performance payments for its work in the
collaboration as it is completed. Lexicon will also receive milestone payments
and royalties on sales of therapeutic proteins and antibodies for which
Genentech obtains exclusive rights. The agreement has an expected collaboration
term of three years. Total revenue recognized under this agreement was $16.0
million, $6.0 million and $0.1 million for the years ended December 31, 2004,
2003 and 2002, respectively.

Incyte Corporation. Lexicon established a drug discovery alliance with Incyte in
June 2001 to discover novel therapeutic proteins using the Company's target
validation technologies in the discovery of the functions of secreted proteins
from Incyte's LifeSeq(R) Gold database. Under the alliance agreement, the
Company and Incyte will each have the right to obtain exclusive
commercialization rights, including sublicensing rights, for an equal number of
qualifying therapeutic proteins, and will each receive milestone payments and
royalties on sales of therapeutic proteins from the alliance that are
commercialized by the other party or a third party sublicensee. Lexicon received
research funding of $15.0 million under the agreement and recognized revenue of
$2.5 million, $5.0 million and $5.0 million for the years ended December 31,
2004, 2003 and 2002, respectively and $2.5 million in a previous year. The
collaboration period under the agreement terminated in June 2004.

                                     F-17
<PAGE>

Takeda Pharmaceutical Company Limited. Lexicon established an alliance with
Takeda in July 2004 to discover new drugs for the treatment of high blood
pressure. In the collaboration, Lexicon is using its gene knockout technology to
identify drug targets that control blood pressure. Takeda will be responsible
for the screening, medicinal chemistry, preclinical and clinical development and
commercialization of drugs directed against targets selected for the alliance,
and will bear all related costs. Lexicon received an upfront payment of $12
million from Takeda for the initial, three-year term of the agreement. This
upfront payment will be recognized as revenue over the three-year contractual
service period. Takeda has the option to extend the discovery portion of the
alliance for an additional two years in exchange for further committed funding.
Takeda will make research milestone payments to Lexicon for each target selected
for therapeutic development. In addition, Takeda will make clinical development
and product launch milestone payments to Lexicon for each product commercialized
from the collaboration. Lexicon will also earn royalties on sales of drugs
commercialized by Takeda. Total revenue recognized under this agreement was $3.2
million for the year ended December 31, 2004.

Revenues from drug discovery alliances are included in collaborative research
revenue in the accompanying consolidated statements of operations.

Other Collaborations

Lexicon has entered into the following other collaborations:

Bristol-Myers Squibb Company. Lexicon established a LexVision collaboration with
Bristol-Myers Squibb in September 2000, under which Bristol-Myers Squibb was
granted non-exclusive access to the Company's LexVision database and OmniBank
library for the discovery of small molecule drugs. The Company received annual
access fees under this agreement, and is entitled to receive milestone payments
and royalties on products Bristol-Myers Squibb develops using the Company's
technology. The collaboration period under the agreement, as amended, terminated
in December 2004. Revenue recognized under this agreement was $5.0 million, in
each of the years ended December 31, 2004, 2003 and 2002.

Lexicon entered into a drug target validation agreement with Bristol-Myers
Squibb in December 2004. Under this agreement, Lexicon will develop mice and
phenotypic data for certain genes previously requested by Bristol-Myers Squibb
under their LexVision Agreement, but that Lexicon was not required to deliver
thereunder, and certain additional genes to be requested by Bristol-Myers
Squibb. The agreement terminates in March 2007. There was no revenue recognized
under this agreement for the year ended December 31, 2004.

Incyte Corporation. Lexicon established a LexVision collaboration with Incyte in
June 2001, under which Incyte was granted non-exclusive access to the Company's
LexVision database and OmniBank library for the discovery of small molecule
drugs. The Company received annual access fees under this agreement, and is
entitled to receive milestone payments and royalties on products Incyte develops
using the Company's technology. The collaboration period under the agreement
terminated in June 2004. Revenue recognized under this agreement was $2.5
million, $5.0 million and $5.0 million for the years ended December 31, 2004,
2003 and 2002, respectively, and $2.5 million in a previous period.

15. SELECTED QUARTERLY FINANCIAL DATA

The table below sets forth certain unaudited statements of operations data, and
net loss per common share data, for each quarter of 2004 and 2003.

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                                                              -------------
                                                           MARCH 31       JUNE 30      SEPTEMBER 30    DECEMBER 31
                                                           --------       -------      ------------    -----------
                                                                              (UNAUDITED)
<S>                                                        <C>            <C>          <C>             <C>
2004

Revenues ............................................      $ 11,842       $ 10,778       $ 13,109        $ 26,011
Loss from operations ................................      $(15,603)      $(16,444)      $(13,949)       $ (1,458)
Net loss ............................................      $(15,466)      $(16,788)      $(14,377)       $   (541)
Net loss per common share, basic and diluted ........      $  (0.25)      $  (0.26)      $  (0.23)       $  (0.01)
Shares used in computing net loss per common share ..        63,065         63,369         63,422          63,449
</TABLE>

                                     F-18
<PAGE>

<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                                                              -------------
                                                           MARCH 31       JUNE 30      SEPTEMBER 30    DECEMBER 31
                                                           --------       -------      ------------    -----------
                                                                              (UNAUDITED)
<S>                                                        <C>            <C>          <C>             <C>
2003

Revenues ...............................................   $  8,106       $  8,921       $ 12,111       $ 13,700
Loss from operations ...................................   $(17,532)      $(17,852)      $(14,868)      $(12,341)
Net loss before cumulative effect of a change
   in accounting principle .............................   $(17,145)      $(17,619)      $(14,558)      $(11,800)
Cumulative effect of a change in accounting principle...         --             --             --         (3,076)
                                                           --------       --------       --------       --------
Net loss ...............................................   $(17,145)      $(17,619)      $(14,558)      $(14,876)
                                                           ========       ========       ========       ========
Net loss per common share before cumulative effect
   of a change in accounting principle .................   $  (0.33)      $  (0.34)      $  (0.24)      $  (0.19)
Cumulative effect of a change in accounting principle...         --             --             --          (0.05)
                                                           --------       --------       --------       --------
Net loss per common share, basic and diluted ...........   $  (0.33)      $  (0.34)      $  (0.24)      $  (0.24)
                                                           ========       ========       ========       ========
Shares used in computing net loss per common share .....   $ 52,371       $ 52,496       $ 59,475       $ 62,794
</TABLE>

                                     F-19
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION
-----------                                     -----------
<S>          <C>
   3.1   --  Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's
             Registration Statement on Form S-1 (Registration No. 333-96469) and incorporated by
             reference herein).

   3.2   --  Restated Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement on
             Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

   4.1   --  Amended and Restated Registration Rights Agreement, dated May 7, 1998, with the
             stockholders named therein (filed as Exhibit 4.1 to the Company's Registration
             Statement on Form S-3 (Registration No. 333-67294) and incorporated by reference
             herein).

  10.1   --  Employment Agreement with Arthur T. Sands, M.D., Ph.D. (filed as Exhibit 10.1 to
             the Company's Registration Statement on Form S-1 (Registration No. 333-96469) and
             incorporated by reference herein).

  10.2   --  Employment Agreement with James R. Piggott, Ph.D. (filed as Exhibit 10.2 to the
             Company's Registration Statement on Form S-1 (Registration No. 333-96469) and
             incorporated by reference herein).

  10.3   --  Employment Agreement with Jeffrey L. Wade, J.D. (filed as Exhibit 10.3 to the
             Company's Registration Statement on Form S-1 (Registration No. 333-96469) and
             incorporated by reference herein).

  10.4   --  Employment Agreement with Brian P. Zambrowicz, Ph.D. (filed as Exhibit 10.4 to the
             Company's Registration Statement on Form S-1 (Registration No. 333-96469) and
             incorporated by reference herein).

  10.5   --  Employment Agreement with Julia P. Gregory (filed as Exhibit 10.5 to the Company's
             Registration Statement on Form S-1 (Registration No. 333-96469) and incorporated by
             reference herein).

  10.6   --  Employment Agreement with Alan Main, Ph.D. (filed as Exhibit 10.1 to the Company's
             Quarterly Report on Form 10-Q for the period ended September 30, 2001 and
             incorporated by reference herein).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT NO.                                    DESCRIPTION
 -----------                                    -----------
<S>          <C>

  10.7   --  Consulting Agreement with Alan S. Nies, M.D. dated February 19, 2003, as amended
             (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
             period ended March 31, 2004 and incorporated by reference herein).

  10.8   --  Consulting Agreement with Robert J. Lefkowitz, M.D. dated March 31, 2003 (filed as
             Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
             March 31, 2003 and incorporated by reference herein).

  10.9   --  Form of Indemnification Agreement with Officers and Directors (filed as Exhibit
             10.7 to the Company's Registration Statement on Form S-1 (Registration No.
             333-96469) and incorporated by reference herein).

*10.10   --  2000 Equity Incentive Plan

 10.11   --  2000 Non-Employee Directors' Stock Option Plan (filed as Exhibit 10.9 to the
             Company's Registration Statement on Form S-1 (Registration No. 333-96469) and
             incorporated by reference herein).

 10.12   --  Coelacanth Corporation 1999 Stock Option Plan (filed as Exhibit 99.1 to the
             Company's Registration Statement on Form S-8 (Registration No. 333-66380) and
             incorporated by reference herein).

 10.13   --  Form of Stock Option Agreement with Officers under the 2000 Equity Incentive Plan
             (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
             period ended September 30, 2004 and incorporated by reference herein).

 10.14   --  Form of Stock Option Agreement with Directors under the 2000 Non-Employee
             Directors' Stock Option Plan (filed as Exhibit 10.3 to the Company's Quarterly
             Report on Form 10-Q for the period ended September 30, 2004 and incorporated by
             reference herein).

+10.15   --  Amended and Restated Collaboration and License Agreement, dated November 19, 2003,
             with Genentech, Inc. (filed as Exhibit 10.14 to the amendment to the Company's
             Annual Report on Form 10-K/A for the period ended December 31, 2003, as filed on
             July 16, 2004, and incorporated by reference herein).

+10.16   --  Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers
             Squibb Company (filed as Exhibit 10.15 to the amendment to the Company's Annual
             Report on Form 10-K/A for the period ended December 31, 2003, as filed on July 16,
             2004, and incorporated by reference herein).

+10.17   --  Collaboration Agreement, dated July 27, 2004, with Takeda Pharmaceutical Company
             Limited (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
             the period ended September 30, 2004 and incorporated by reference herein).

*10.18   --  Loan and Security Agreement, dated April 21, 2004, between Lex-Gen Woodlands, L.P.
             and iStar Financial Inc.

 10.19   --  Lease Agreement, dated May 23, 2002, between Lexicon Pharmaceuticals (New Jersey),
             Inc. and Townsend Property Trust Limited Partnership (filed as Exhibit 10.2 to the
             Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 and
             incorporated by reference herein).

 *21.1   --  Subsidiaries

 *23.1   --  Consent of Independent Registered Public Accounting Firm

 *24.1   --  Power of Attorney (contained in signature page)

 *31.1   --  Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 *31.2   --  Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT NO.                                    DESCRIPTION
 -----------                                    -----------
<S>           <C>
 *32.1  --    Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
              2002
</TABLE>

--------------
*     Filed herewith.

+     Confidential treatment has been requested for a portion of this exhibit.
      The confidential portions of this exhibit have been omitted and filed
      separately with the Securities and Exchange Commission.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>2
<FILENAME>h23229exv10w10.txt
<DESCRIPTION>2000 EQUITY INCENTIVE PLAN
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.10

                          LEXICON GENETICS INCORPORATED
                           2000 EQUITY INCENTIVE PLAN

                    (RESTATED TO REFLECT SPLIT PRIOR TO IPO)

1.   PURPOSES.

     (a) AMENDMENT AND RESTATEMENT OF INITIAL PLAN. The Plan initially was
established as the 1995 Stock Option Plan, effective as of September 13, 1995
(the "Initial Plan"). The Initial Plan, as amended hereby, is amended and
restated in its entirety and renamed the 2000 Equity Incentive Plan, effective
as of its adoption. The terms of this Plan shall supersede the Initial Plan in
its entirety; provided, however, that nothing herein shall operate or be
construed as modifying the terms of an incentive stock option granted under the
Initial Plan in a manner that would treat the option as being a new grant for
purpose of Section 424(h) of the Code (as hereafter defined).

     (b) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.

     (c) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.

     (d) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the
services of the group of persons eligible to receive Stock Awards, 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 of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).

     (e) "COMMON STOCK" means the common stock, par value $.001 per share, of
the Company.

     (f) "COMPANY" means Lexicon Genetics Incorporated, a Delaware corporation.

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

<PAGE>

     (h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director 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 (i) before the Listing Date, 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 of the Company because of the sickness or injury of the person and
(ii) after the Listing Date, the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.

     (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:

          (i) If the Common Stock is listed on any established stock exchange or
     traded on the Nasdaq National Market or the Nasdaq SmallCap Market, 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 or market (or the exchange or market with the
     greatest volume of trading in the Common Stock) on the last market trading
     day prior to the day of determination, as reported in The Wall Street
     Journal or such other source as the Board deems reliable.

          (ii) In the absence of such markets for the Common Stock, the Fair
     Market Value shall be determined in good faith by the Board.

     (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) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system.

     (q) "NON-EMPLOYEE DIRECTOR" means a Director 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
for 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


                                        2

<PAGE>

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.

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

     (s) "OFFICER" means (i) before the Listing Date, any person designated by
the Company as an officer and (ii) on and after the Listing Date, 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.

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

     (u) "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.

     (v) "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.

     (w) "OUTSIDE DIRECTOR" means a Director 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.

     (x) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.

     (y) "PLAN" means this Lexicon Genetics Incorporated 2000 Equity Incentive
Plan.

     (z) "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.

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

     (bb) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.

     (cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.

     (dd) "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

<PAGE>

3.   ADMINISTRATION.

     (a) ADMINISTRATION BY BOARD. The Board shall 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 Stock Awards; when and how each Stock Award shall
     be granted; what type or combination of types of Stock Award shall be
     granted; the provisions of each Stock Award granted (which need not be
     identical), including the time or times when a person shall be permitted to
     receive Common Stock pursuant to a Stock Award; and the number of shares of
     Common Stock with respect to which a Stock Award shall be granted to each
     such person.

          (ii) To construe and interpret the Plan and Stock Awards 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 Stock Award
     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 a Stock Award as provided in Section 12.

          (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 that 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 (1) 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. Within the scope of
     such authority, the Board or the Committee may (1) delegate to a committee
     of one or more members of the Board who are not Outside Directors the
     authority to grant Stock Awards 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 Stock Award or (b) not
     persons with respect to whom the Company wishes to comply with Section
     162(m) of the Code, and/or (2) delegate to a committee of one or more
     members of the Board who are not Non-Employee Directors the authority to
     grant Stock Awards to eligible persons who are not then subject to Section
     16 of the Exchange Act.


                                        4

<PAGE>

     (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.

4.   SHARES SUBJECT TO THE PLAN.

     (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate Eleven Million, Two
Hundred Fifty Thousand (11,250,000) shares.

     (b) EVERGREEN SHARE RESERVE INCREASE.

          (i) Notwithstanding subsection 4(a) hereof on each January 1 (the
     "Calculation Date") for a period of ten (10) years, commencing on January
     1, 2001, the aggregate number of shares of Common Stock that is available
     for issuance under the Plan shall automatically be increased by that number
     of shares equal to the greater of (1) five percent (5%) of the Diluted
     Shares Outstanding or (2) the number of shares of Common Stock subject to
     Stock Awards granted during the prior 12-month period; provided, however,
     that the Board, from time to time, may provide for a lesser increase in the
     aggregate number of shares of Common Stock that is available for issuance
     under the Plan.

          (ii) Subject to the provisions of Section 11 hereof relating to
     adjustments upon changes in securities, the increase in the maximum
     aggregate number of shares of Common Stock that is available for issuance
     pursuant to Stock Awards granted under the Plan shall not exceed Thirty
     Million (30,000,000) shares.

          (iii) "Diluted Shares Outstanding" shall mean, as of any date, (1) the
     number of outstanding shares of Common Stock of the Company on such
     Calculation Date, plus (2) the number of shares of Common Stock issuable
     upon such Calculation Date assuming the conversion of all outstanding
     Preferred Stock and convertible notes, plus (3) the additional number of
     dilutive Common Stock equivalent shares outstanding as the result of any
     options or warrants outstanding during the fiscal year, calculated using
     the treasury stock method.

     (c) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the shares of Common Stock not acquired under such Stock
Award shall revert to and again become available for issuance under the Plan.

     (d) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.

5.   ELIGIBILITY.

     (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.

     (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be
granted an Incentive 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.

     (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than Three Million
(3,000,000) shares during any calendar year. This subsection


                                        5

<PAGE>

5(c) shall not apply prior to the Listing Date and, following the Listing Date,
this subsection 5(c) shall not apply until (i) the earliest of: (1) the first
material modification of the Plan (including any increase in the number of
shares of Common Stock reserved for issuance under the Plan in accordance with
Section 4); (2) the issuance of all of the shares of Common Stock reserved for
issuance under the Plan; (3) the expiration of the Plan; or (4) the first
meeting of stockholders at which Directors are to be elected that occurs after
the close of the third calendar year following the calendar year in which
occurred the first registration of an equity security under Section 12 of the
Exchange Act; or (ii) such other date required by Section 162(m) of the Code and
the rules and regulations promulgated thereunder.

     (d) CONSULTANTS.

          (i) Prior to the Listing Date, a Consultant shall not be eligible for
     the grant of a Stock Award if, at the time of grant, either the offer or
     the sale of the Company's securities to such Consultant is not exempt under
     Rule 701 of the Securities Act ("Rule 701") 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 Rule 701,
     unless the Company determines that such grant need not comply with the
     requirements of Rule 701 and will satisfy another exemption under the
     Securities Act as well as comply with the securities laws of all other
     relevant jurisdictions.

          (ii) From and after the Listing Date, a Consultant shall not be
     eligible for the grant of a Stock Award 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.

          (iii) Rule 701 and Form S-8 generally are 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.   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, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock 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 granted prior to the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted,
and no Incentive Stock Option granted on or after the Listing Date 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 Common 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


                                        6

<PAGE>

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 granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock subject to the Option on the date the Option is granted. The
exercise price of each Nonstatutory Stock Option granted on or after the Listing
Date shall be not less than eighty-five percent (85%) of the Fair Market Value
of the Common 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 Common 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) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise specifically
provided in the Option, the purchase price of Common Stock acquired pursuant to
an Option that is paid by delivery to the Company of other Common Stock
acquired, directly or indirectly from the Company, shall be paid only by shares
of the Common Stock of the Company that have been held for more than six (6)
months (or such longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). 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.

     (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, 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 granted prior to the Listing Date shall not be transferable except by
will or by the laws of descent and distribution, and to the extent provided in
the Option Agreement and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or
after the Listing Date shall be transferable to the extent provided in the
Option Agreement. 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, 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 that 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


                                        7

<PAGE>

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 of Common Stock as to which an Option may
be exercised.

     (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 such Option 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 shall not be less than thirty (30) days for Options
granted prior to the Listing Date 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.

     (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 of Common Stock 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 that 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 such Option 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 shall not be less than six (6) months for
Options granted prior to the Listing Date) 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 such 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 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 eighteen (18) months
following the date of death (or such longer or shorter period specified in the
Option Agreement, which period shall not be less than six (6) months for Options
granted prior to the Listing Date) 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 of Common Stock subject to the Option prior to the full vesting of
the Option. Subject to the "Repurchase Limitation" in subsection 10(g), any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate. Provided that the "Repurchase Limitation" in subsection 10(g)
is not violated, 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.


                                        8

<PAGE>

     (m) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(g), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares of Common Stock acquired by the Optionholder pursuant to the
exercise of the Option. Provided that the "Repurchase Limitation" in subsection
10(g) is not violated, 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.

     (n) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares of Common Stock received
upon the exercise of the Option. Except as expressly provided in this subsection
6(n), such right of first refusal shall otherwise comply with any applicable
provisions of the Bylaws of the Company.

     (o) RE-LOAD OPTIONS.

          (i) Without in any way limiting the authority of the Board to make or
     not to make grants of Options hereunder, the Board shall have the authority
     (but not an obligation) to include as part of any Option Agreement a
     provision entitling the Optionholder to a further Option (a "Re-Load
     Option") in the event the Optionholder exercises the Option evidenced by
     the Option Agreement, in whole or in part, by surrendering other shares of
     Common Stock in accordance with this Plan and the terms and conditions of
     the Option Agreement. Unless otherwise specifically provided in the Option,
     the Optionholder shall not surrender shares of Common Stock acquired,
     directly or indirectly from the Company, unless such shares have been held
     for more than six (6) months (or such longer or shorter period of time
     required to avoid a charge to earnings for financial accounting purposes).

          (ii) Any such Re-Load Option shall (1) provide for a number of shares
     of Common Stock equal to the number of shares of Common Stock surrendered
     as part or all of the exercise price of such Option; (2) have an expiration
     date which is the same as the expiration date of the Option the exercise of
     which gave rise to such Re-Load Option; and (3) have an exercise price
     which is equal to one hundred percent (100%) of the Fair Market Value of
     the Common Stock subject to the Re-Load Option on the date of exercise of
     the original Option. Notwithstanding the foregoing, a Re-Load Option shall
     be subject to the same exercise price and term provisions heretofore
     described for Options under the Plan.

          (iii) Any such Re-Load Option may be an Incentive Stock Option or a
     Nonstatutory Stock Option, as the Board may designate at the time of the
     grant of the original Option; provided, however, that the designation of
     any Re-Load Option as an Incentive Stock Option shall be subject to the one
     hundred thousand dollar ($100,000) annual limitation on the exercisability
     of Incentive Stock Options described in subsection 10(d) and in Section
     422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option.
     Any such Re-Load Option shall be subject to the availability of sufficient
     shares of Common Stock under subsection 4(a) and the "Section 162(m)
     Limitation" on the grants of Options under subsection 5(c) and shall be
     subject to such other terms and conditions as the Board may determine which
     are not inconsistent with the express provisions of the Plan regarding the
     terms of Options.

7.   PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

     (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:


                                        9

<PAGE>

          (i) CONSIDERATION. A stock bonus may be awarded in consideration for
     past services actually rendered to the Company or an Affiliate for its
     benefit.

          (ii) VESTING. Subject to the "Repurchase Limitation" in subsection
     10(h), shares of Common Stock awarded under the stock bonus agreement may,
     but need not, be subject to a share repurchase option in favor of the
     Company in accordance with a vesting schedule to be determined by the
     Board.

          (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the
     "Repurchase Limitation" in subsection 10(g), in the event a Participant's
     Continuous Service terminates, the Company may reacquire any or all of the
     shares of Common Stock held by the Participant which have not vested as of
     the date of termination under the terms of the stock bonus agreement.

          (iv) TRANSFERABILITY. For a stock bonus award made before the Listing
     Date, rights to acquire shares of Common Stock under the stock bonus
     agreement shall not be transferable except by will or by the laws of
     descent and distribution and shall be exercisable during the lifetime of
     the Participant only by the Participant. For a stock bonus award made on or
     after the Listing Date, rights to acquire shares of Common Stock under the
     stock bonus agreement shall be transferable by the Participant only upon
     such terms and conditions as are set forth in the stock bonus agreement, as
     the Board shall determine in its discretion, so long as Common Stock
     awarded under the stock bonus agreement remains subject to the terms of the
     stock bonus agreement.

     (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. The terms and conditions of the restricted stock purchase
agreements may change from time to time, and the terms and conditions of
separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:

          (i) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
     regarding Ten Percent Stockholders, the purchase price under each
     restricted stock purchase agreement shall be such amount as the Board shall
     determine and designate in such restricted stock purchase agreement. Such
     purchase price shall not be less than eighty-five percent (85%) of the
     Common Stock's Fair Market Value on the date such award is made or at the
     time the purchase is consummated.

          (ii) CONSIDERATION. The purchase price of Common Stock acquired
     pursuant to the restricted stock purchase agreement shall be paid either:
     (i) in cash at the time of purchase; (ii) at the discretion of the Board,
     according to a deferred payment or other similar arrangement with the
     Participant; or (iii) in any other form of legal consideration that may be
     acceptable to the Board in its discretion; provided, however, that at any
     time that the Company is incorporated in Delaware, then payment of the
     Common Stock's "par value," as defined in the Delaware General Corporation
     Law, shall not be made by deferred payment.

          (iii) VESTING. Subject to the "Repurchase Limitation" in subsection
     10(g), shares of Common Stock acquired under the restricted stock purchase
     agreement may, but need not, be subject to a share repurchase option in
     favor of the Company in accordance with a vesting schedule to be determined
     by the Board.

          (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the
     "Repurchase Limitation" in subsection 10(g), in the event a Participant's
     Continuous Service terminates, the Company may repurchase or otherwise
     reacquire any or all of the shares of Common Stock held by the Participant
     which have not vested as of the date of termination under the terms of the
     restricted stock purchase agreement.


                                       10

<PAGE>

          (v) TRANSFERABILITY. For a restricted stock award made before the
     Listing Date, rights to acquire shares of Common Stock under the restricted
     stock purchase agreement shall not be transferable except by will or by the
     laws of descent and distribution and shall be exercisable during the
     lifetime of the Participant only by the Participant. For a restricted stock
     award made on or after the Listing Date, rights to acquire shares of Common
     Stock under the restricted stock purchase agreement shall be transferable
     by the Participant only upon such terms and conditions as are set forth in
     the restricted stock purchase agreement, as the Board shall determine in
     its discretion, so long as Common Stock awarded under the restricted stock
     purchase agreement remains subject to the terms of the restricted stock
     purchase agreement.

8.   COVENANTS OF THE COMPANY.

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

     (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 Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. 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 Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.

9.   USE OF PROCEEDS FROM STOCK.

     Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.

10.  MISCELLANEOUS.

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

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

     (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award 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 Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year


                                       11

<PAGE>

(under all plans of the Company and its Affiliates) exceeds one hundred thousand
dollars ($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 a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant'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 Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (1) the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (2) 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 Common Stock.

     (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock
Award Agreement, the Participant may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of Common Stock
under a Stock Award by any of the following means (in addition to the Company's
right to withhold from any compensation paid to the Participant by the Company)
or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of Common Stock.

     (g) REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price.

11.  ADJUSTMENTS UPON CHANGES IN STOCK.

     (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock
subject to the Plan, or subject to any Stock Award, 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 Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination 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) CHANGE IN CONTROL -- DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.


                                       12

<PAGE>

     (c) CHANGE IN CONTROL -- ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the 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 Stock Awards outstanding under the Plan or shall substitute similar stock
awards (including an award to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 11(c) for those
outstanding under the Plan). In the event any surviving corporation or acquiring
corporation refuses to assume such Stock Awards or to substitute similar stock
awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated, the vesting of
such Stock Awards (and, if applicable, the time during which such Stock Awards
may be exercised) shall be accelerated in full, and the Stock Awards shall
terminate if not exercised (if applicable) at or prior to such event. With
respect to any other Stock Awards outstanding under the Plan, such Stock Awards
shall terminate if not exercised (if applicable) prior to such event.

12.  AMENDMENT OF THE PLAN AND STOCK AWARDS.

     (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common 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 Stock Award 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 Participant and (ii) the Participant
consents in writing.

     (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.

13.  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 the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.


                                       13

<PAGE>

     (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.

14.  EFFECTIVE DATE OF PLAN.

     The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
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.

15.  CHOICE OF LAW.

     The law of the State of Delaware shall govern all questions concerning the
construction, validity and interpretation of this Plan, without regard to such
state's conflict of laws rules.


                                       14
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>3
<FILENAME>h23229exv10w18.txt
<DESCRIPTION>LOAN AND SECURITY AGREEMENT
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.18

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

                                   $34,000,000

                           LOAN AND SECURITY AGREEMENT

                                     BETWEEN

                            LEX-GEN WOODLANDS, L.P.,
                         A DELAWARE LIMITED PARTNERSHIP
                                   AS BORROWER

                                       AND

                              ISTAR FINANCIAL INC.,
                                    AS LENDER

                           DATED AS OF APRIL 21, 2004

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

<PAGE>

                           LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT") dated as of April 21,
2004, by LEX-GEN WOODLANDS, L.P., a Delaware limited partnership ("BORROWER"),
having an address at c/o Lexicon Genetics Incorporated, 8800 Technology Forest
Place, The Woodlands, Texas 77381-1160 and iSTAR FINANCIAL INC., a Maryland
corporation (together with its successors and assigns, hereinafter referred to
as "LENDER"), with offices at 1114 Avenue of the Americas, 27th Floor, New York,
New York 10036.

                                    RECITALS

     A. The Mortgaged Property.  Borrower is the fee owner of the Land and
Improvements (as such terms are defined herein).

     B. The Loan.  Borrower desires to borrow from Lender and Lender desires to
lend to Borrower, a loan in the amount of $34,000,000.

     NOW, THEREFORE, in consideration of the foregoing and of the covenants,
conditions and agreements contained herein, Borrower and Lender agree as
follows:

                                    SECTION 1
                                   DEFINITIONS

1.1  GENERAL DEFINITIONS.

     In addition to any other terms defined in this Agreement, the following
terms shall have the following meanings:

     "ACCEPTABLE FINANCIAL INSTITUTION" means a depository institution or trust
company incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by federal or state banking
authorities, so long as (a) at all times the short-term commercial paper,
certificates of deposit or other debt obligations of such depository institution
or trust company are rated at least A-1 by S&P and P-1 by Moody's and the
long-term unsecured debt obligations of which are rated at least A by S&P and
the equivalent thereof by Moody's or (b) such depository institution or trust
company has otherwise been approved by Lender, such approval not to be
unreasonably withheld.

     "ACCOUNTING CHANGES" means (a) changes in accounting principles required by
GAAP consistently applied and implemented by Borrower; and (b) changes in
accounting principles recommended or approved by Borrower's certified public
accountant, with the approval of Lender, which approval shall not be
unreasonably withheld; provided that Lender's approval shall not be required so
long as (i) Borrower's financial statements are prepared on a consolidated basis
with the financial statements of Guarantor, (ii) Guarantor is a reporting
company under the Exchange Act, and (iii) Guarantor's financial statements are
audited by a so-called "Big-4" accounting firm.

<PAGE>

     "ACCOUNTS" means Borrower's present and future rights to payment of money,
accounts and accounts receivable including (a) rights to payment of money,
accounts and accounts receivable arising from or relating to the construction,
use, leasing, occupancy or operation of the Mortgaged Property, the rental of,
or payment for, space, goods sold or leased or services rendered, whether or not
yet earned by performance, and all other "accounts" (as defined in the UCC), (b)
rights to payment, accounts, and accounts receivable arising from any consumer
credit, charge, entertainment or travel card or service organization or entity,
(c) all reserves, deferred payments, refunds, cost savings payments and deposits
no matter how evidenced and whether now or later to be received from third
parties (including all earnest money sales deposits) or deposited with, or by,
Borrower by, or with, third parties (including all utility deposits), (d) all
chattel paper, instruments, documents, notes, drafts and letters of credit
(other than any letters of credit in favor of Lender), (e) the Reserve Accounts
and any and all other accounts held by or on behalf of Lender and/or Borrower
pursuant to this Agreement, (f) all "deposit accounts" (as defined in the UCC),
(g) all "securities accounts" (as defined in the UCC), and (h) all contracts and
agreements which relate to any of the foregoing.

     "AFFILIATE" means any Person: (A) directly or indirectly controlling,
controlled by, or under common control with, another Person; (B) directly or
indirectly owning or holding ten percent (10%) or more of any equity interest in
another Person; or (C) ten percent (10%) or more of whose voting stock or other
equity interest is directly or indirectly owned or held by such other Person.
When used with respect to Borrower, the term "Affiliate" shall also include the
spouse, ancestors, descendants and siblings of an Affiliate of Borrower (such
Persons being sometimes referred to as "FAMILY MEMBERS"), Affiliates of such
Family Members and trusts for the benefit of another Affiliate of Borrower.

     "AGREEMENT" means this Loan and Security Agreement (including all
schedules, exhibits, annexes and appendices hereto), as amended, modified or
supplemented from time to time.

     "ALTERATION" is defined in Section 7.14.

     "ANNUAL BUDGET" is defined in Section 5.1(D) hereof.

     "APPROVED BUDGET" means the Budget and Capital Plan approved by Lender from
time to time as described in Section 5.1(D) hereof.

     "APPROVED CAPITAL PLAN" means the Capital Plan approved by Lender as part
of the Approved Budget.

     "APPROVED OPERATING EXPENSES" means Expenses set forth in an Approved
Budget.

     "ASSIGNMENT(S)" means individually and collectively, the assignment of
leases and rents, assignments of contracts, agreements and equipment leases, the
assignments of licenses, permits and approvals, the assignments of management
agreement, if any, the assignment of trademarks, tradenames and copyrights, if
any, and such other assignments of even date herewith from Borrower to or for
the benefit of Lender, each granting a security interest in collateral for the
Loan.


                                      -2-

<PAGE>

     "BANKRUPTCY CODE" means Title 11 of the United States Code entitled
"Bankruptcy," as amended from time to time and all rules and regulations
promulgated thereunder.

     "BANK(S)" means the Acceptable Financial Institution at which the Reserve
Accounts are maintained.

     "BASE RATE" means a fixed rate per annum equal to eight and 23/100ths
percent (8.23%).

     "BORROWER ACCOUNT" means a demand, time or deposit account maintained by
the Borrower at the Bank or other financial institution selected by the
Borrower, as required under the Loan Agreement.

     "BORROWER REPRESENTATIVE" means Lex-Gen Woodlands GP, LLC, a Delaware
limited liability company, the sole general partner in Borrower.

     "BUDGET" means a budget setting forth the projected revenues and budgeted
costs and expenses for the ownership, operation and management for the Mortgaged
Property for each calendar year commencing with calendar year 2004.

     "BUSINESS DAY" means any day excluding Saturday, Sunday and any day which
is a legal holiday under the laws of the State of New York or is a day on which
banking institutions located in such state is closed.

     "CAPITAL LEASE" means any lease of any property (whether real, personal or
mixed) that, in conformity with GAAP, should be accounted for as a capital
lease.

     "CAPITAL PLAN" means Borrower's budget for capital improvements and
equipment for the Mortgaged Property for each calendar year.

     "CASH MANAGEMENT AGREEMENT" shall mean the Cash Management Agreement dated
as of the date hereof, among Borrower, Lender and Bank.

     "CHANGE IN CONTROL" means the occurrence of any one or more of the
following: (i) a sale of all or substantially all of the assets of Guarantor, in
a single transaction or series of transactions, (ii) a Person or Group shall
have acquired, in one or more transactions, ownership or control of forty-nine
percent (49%) or more of the voting Securities of Guarantor, (iii) Guarantor
shall cease to directly or indirectly Control the business and affairs of the
Borrower or (iv) Guarantor shall cease to directly or indirectly own fifty-one
percent (51%) or more of the voting Securities of Borrower.

     "CLAIMS" is defined in Section 5.3(A).

     "CLOSING" means that all conditions for disbursement of the proceeds of the
Loan to or for the benefit of Borrower have been satisfied or waived in writing
by Lender and the disbursement of the proceeds of the Loan shall have been made
to, or upon the order of, Borrower.

     "CLOSING CHECKLIST" means the closing checklist attached hereto as Exhibit
F.


                                      -3-

<PAGE>

     "CLOSING DATE" means the date on which the Closing occurs.

     "CODE" means the United States Internal Revenue Code of 1986, and any rule
or regulation promulgated thereunder from time to time.

     "COLLATERAL" means the Mortgaged Property, the Reserve Account Collateral
and all other real and personal property of Borrower or any other Person pledged
or mortgaged to Lender as collateral security for repayment of the Loan, if any.

     "CONFIDENTIAL INFORMATION" is defined in Section 11.12.

     "CONSTRUCTION" means the Restoration, the Alterations, the construction,
equipping and fixturing of the Required Capital Improvements or any other
construction, equipping, fixturing and furnishing, approved (or deemed approved)
by Lender.

     "CONSTRUCTION LEGAL COMPLIANCE" means Borrower's satisfaction of all of the
following: (A) (i) the applicable Construction through the applicable date of
determination, has been constructed substantially in accordance with the
applicable Plans and Specifications (other than deviations therefrom that are
immaterial individually and in the aggregate); and (ii) the applicable
Construction has been, or will be, constructed in substantial compliance with
all Legal Requirements; (B) all material entitlements, approvals, allocations,
certificates, authorizations, permits and licenses required through the
then-current stage of construction have been obtained from all appropriate
Governmental Authorities and have been validly and irrevocably obtained without
qualification, appeal or existence of unexpired appeal periods; (C) all
conditions to the issuance of, and the requirements under, all permits,
conditional use permits and licenses required through the current stage of
construction have been satisfied in all material respects; and (D) no appeals,
suits or other actions are pending or threatened in writing by any Governmental
Authority which, if determined adversely to the interests of Borrower or the
Mortgaged Property, would result in the revocation, suspension or qualification
of any of such permits or approvals.

     "CONTINGENT OBLIGATION," as applied to any Person, means any direct or
indirect liability, contingent or otherwise, of that Person: (A) with respect to
any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; (B) with
respect to any letter of credit issued for the account of that Person or as to
which that Person is otherwise liable for reimbursement of drawings; (C) under
any interest rate swap agreement, interest rate cap agreement, interest rate
collar agreement or other similar agreement or arrangement designed to protect
the applicable Person against fluctuations in interest rates; or (D) under any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect that Person against fluctuations in currency
values. Contingent Obligations shall include (1) the direct or indirect
guaranty, endorsement (other than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with recourse
by such Person of the obligation of another, (2) the obligation to make
take-or-pay or similar payments if required regardless of nonperformance by any
other party or parties to an agreement, and (3) any liability of such Person for
the obligations of


                                      -4-

<PAGE>

another through any agreement to purchase, repurchase or otherwise acquire such
obligation or any property constituting security therefor, to provide funds for
the payment or discharge of such obligation or to maintain the solvency,
financial condition or any balance sheet item or level of income of another. The
amount of any Contingent Obligation shall be equal to the amount of the
obligation so guaranteed or otherwise supported or, if not a fixed and
determined amount, the maximum amount so guaranteed.

     "CONTRACTOR" means the contractor(s) or construction manager(s) for the
Construction as Lender may, from time to time approve, which approval shall not
be unreasonably withheld, conditioned or delayed.

     "CONTRACTS" means all contracts, agreements, warranties and representations
relating to or governing the use, occupancy, design, construction, operation,
management, repair and service of any other component of the Mortgaged Property,
as amended, modified or supplemented from time to time.

     "CONTRACTUAL OBLIGATION," as applied to any Person, means any indenture,
mortgage, deed of trust, contract, undertaking, agreement or other instrument to
which that Person is a party or by which it or any of its properties is bound or
to which it or any of its properties is subject including the Loan Documents.

     "CONTROL" (including with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with") means the possession directly
or indirectly of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.

     "CREDIT RATING" means the senior unsecured debt rating issued by S&P and
Moody's or if either or both no longer exist or no longer issue ratings then,
for either or both as so applicable, another Rating Agency. All references to
specific levels of a Credit Rating mean such rating with a "stable" or
"positive" outlook, but not a "negative" outlook or "on watch" associated with
such rating.

     "DEFAULT" means a condition or event that, after notice or lapse of time or
both, would constitute an Event of Default if that condition or event were not
cured or removed within any applicable grace or cure period.

     "DEFAULT INTEREST" is defined in Section 2.2(A).

     "DEFAULT RATE" means a rate per annum equal to the Base Rate plus five
percent (5%).

     "DISTRIBUTION" is defined in Section 7.12.

     "DOLLARS" and the sign "$" mean the lawful money of the United States of
America.

     "EBITDA INTEREST COVERAGE" means, at any reporting date, for a Person, the
ratio calculated by dividing (A) the earnings from continuing operations
(including interest income and equity earnings, but excluding nonrecurring
items) before interest, taxes, depreciation and


                                      -5-

<PAGE>

amortization for such Person by (B) gross interest incurred by such Person
before subtracting (i) capitalized interest and (ii) interest income.

     "ELIGIBLE ACCOUNT" means a segregated account maintained at an Acceptable
Financial Institution. An Eligible Account will not be evidenced by a
certificate of deposit, passbook or other instrument.

     "EMPLOYEE BENEFIT PLAN" means an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Part 3 of Title I of ERISA or Section 412 of the Code and is either (a)
maintained by any Person or any ERISA Affiliate for employees of such Person or
any ERISA Affiliate or (b) maintained pursuant to a collective bargaining
agreement or any other arrangement under which more than one employer makes
contributions and to which such Person or any ERISA Affiliate is then making or
has any obligation to make contributions or, within the preceding five (5) plan
years, has made or has had any obligation to make contributions.

     "ENVIRONMENTAL CLAIMS" is defined in Section 4.13.

     "ENVIRONMENTAL INDEMNITY AGREEMENT" means the Environmental Indemnity
Agreement, dated of even date herewith, executed by Borrower and Guarantor in
favor of Lender, together with all amendments, modifications, renewals,
substitutions and extensions thereto.

     "ENVIRONMENTAL LAWS" means all present and future federal, state and/or
local laws, statutes, ordinances, codes, rules, regulations, orders, decrees,
licenses, decisions, orders, injunctions, requirements and/or directives of
Governmental Authorities, as well as common law, imposing liability, standards
of conduct or otherwise pertains or relates to, or for, for the environment,
industrial hygiene, the regulation of Hazardous Substances, natural resources,
pollution or waste management.

     "ENVIRONMENTAL REPORTS" means those reports and audits itemized on Schedule
1.1(B) hereto.

     "EQUIPMENT, FIXTURES AND PERSONALTY" means all fixtures and all of the
equipment and personalty listed on Exhibit B hereto, together with all
accessions, replacements and substitutions thereto and the proceeds thereof.

     "ERISA" means the Employee Retirement Income Security Act of 1974, and all
rules and regulations promulgated thereunder.

     "ERISA AFFILIATE" means any Person who is a member of a group which is
under common control with another Person, who together with such other Person is
treated as a single employer within the meaning of Sections 414(b), (c), (m) and
(o) of the IRC or Sections 4001 of ERISA. Guarantor shall be deemed to be an
ERISA Affiliate of Borrower for purposes of this Agreement, irrespective of
whether it and Borrower would be treated as a single employer.

     "EVENT OF DEFAULT" is defined in Section 9.1.

     "EXCESS INTEREST" is defined in Section 2.2(C).


                                      -6-

<PAGE>

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

     "EXISTING INDEBTEDNESS" means the synthetic lease encumbering the Mortgaged
Property immediately prior to the Closing.

     "EXPENSES" means the costs and expenditures accrued or incurred by
Borrower, without duplication, in connection with the ownership, operation and
management of the Mortgaged Property, specifically including in Expenses (1)
periodic deposits required to be made into the Reserves; (2) capital
expenditures incurred pursuant to an Approved Budget to the extent not paid from
any Reserves or the proceeds of the Loan; and (3) management fees and
specifically excluding from Expenses, however, (i) all expenditures to the
extent funded from any Reserves, (ii) principal, interest and all other payments
made by Borrower to Lender under the Loan Documents, (iii) federal or state
income taxes, and (iv) depreciation and other non-cash expenses of the Mortgaged
Property.

     "FINANCING STATEMENTS" means the UCC-1 Financing Statements naming
Borrower, as debtor, and Lender, as secured party, and filed with such filing
offices as Lender may require.

     "FIRREA" means The Financial Institutions Reform, Recovery and Enforcement
Act of 1989, Pub. L. No. 101-73 Stat. 183 (1989) and the regulations adopted
pursuant thereto, as the same may be amended from time to time.

     "GAAP" means generally accepted accounting principles in the United States
of America, consistently applied, as of the date in question.

     "GENERAL INTANGIBLES" means all of the items listed on Exhibit C hereto. In
addition, the General Intangibles also include all of Borrower's right, title
and interest in and to all Contracts.

     "GOVERNMENTAL AUTHORITY" means the United States of America, any state, any
foreign governments and any political subdivision or regional division of the
foregoing, and any agency, department, court, regulatory body, commission,
board, bureau or instrumentality of any of them.

     "GROSS REVENUES" means, for the applicable period, all Rents and all other
income, rents, revenues, issues, profits, deposits, proceeds of rent loss
insurance, lease termination or similar payments and all other payments actually
received by or for the benefit of Borrower in cash or current funds or other
consideration from any source whatsoever from or with respect to the Mortgaged
Property; provided, however, that Gross Revenues shall exclude Proceeds (other
than insurance proceeds in respect of rent loss insurance), litigation proceeds,
sale or refinancing proceeds and any other non-recurring income from
extraordinary events.

     "GROUP" means any Person or Persons acting together which would constitute
a "group" for purposes of Section 13(d) of the Exchange Act, as in effect on the
date hereof, together with all affiliates and associates (as defined in Rule
12b-2 under the Exchange Act, as in effect on the date hereof) thereof.

     "GUARANTOR" means Lexicon Genetics Incorporated, a Delaware corporation and
its successors.


                                      -7-

<PAGE>

     "GUARANTOR LEASE" means that Lease Agreement dated as of even date
herewith, by and between Borrower and Guarantor for the Lease by Guarantor of
the Improvements.

     "GUARANTY" means that certain Guaranty of Guarantor in favor of Lender of
even date herewith.

     "HAZARDOUS MATERIALS" means (a) any pollutants, toxic pollutants, oil,
gasoline, petroleum products, asbestos, materials or substances containing
asbestos, explosives, chemical liquids or solids, radioactive materials,
polychlorinated biphenyls or related or similar materials, or any other solid,
liquid or other emission, substance, material, product or by-product, in each
case defined, listed or regulated as a hazardous, noxious, toxic or solid
substance, material or waste or defined, listed or regulated as causing cancer
or reproductive toxicity, or otherwise defined, listed or regulated as hazardous
or toxic in, pursuant to, or by any federal, state or local law, ordinance,
rule, or regulation, now or hereafter enacted, amended or modified, in each case
to the extent applicable to the Mortgaged Property including the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601,
et seq.); the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et
seq.); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et
seq.); any so-called "Superfund" or "Superlien" law; the Toxic Substance Control
Act of 1976 (15 U.S.C. Section 2601 et seq.); the Clean Water Act (33 U.S.C.
Section 1251 et seq.); and the Clean Air Act (42 U.S.C. Section 7901 et seq.);
(b) any substance which is or contains asbestos, radon, polychlorinated
biphenyl, urea formaldehyde foam insulation, explosive or radioactive material,
lead paint, motor fuel or other petroleum hydrocarbons, and/or (c) fungus, mold,
mildew, or other biological agents the presence of which may adversely affect
the health of individuals or other animals or materially adversely affect the
value or utility of the Mortgaged Property.

     "IMPOSITIONS" means all real estate and personal property taxes, and vault
charges and all other taxes, levies, assessments and other similar charges,
general and special, ordinary and extraordinary, foreseen and unforeseen, of
every kind and nature whatsoever, which at any time prior to, at or after the
execution hereof may be assessed, levied or imposed by, in each case, (i) a
Governmental Authority or (ii) The Woodlands Community Association or The
Woodlands Commercial Owners Association (or their respective successor entities)
upon the Mortgaged Property or upon the ownership, use, occupancy or enjoyment
thereof, and any interest, cost or penalties imposed by such entity with respect
to any of the foregoing. Impositions shall not include any sales or use taxes or
any income taxes payable by Borrower.

     "IMPROVEMENTS" means all buildings, improvements, alterations or
appurtenances now, or at any time hereafter, located upon, in, under or above
the Land or any part thereof. The term "Improvements" also includes all
buildings, improvements, alterations or appurtenances not located on, in, under
or above the land to the extent of Borrower's right, title and interest therein.

     "INDEBTEDNESS" means with respect to any Person, without duplication, (a)
any indebtedness of such Person for borrowed money (whether by loan, the
issuance and sale of debt securities or the sale of any property or asset of
such Person to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such property from such Person), (b) any
obligations of such Person for the deferred purchase price of property or
services, (c) any obligations of such Person evidenced by notes, bonds,
debentures or other


                                      -8-

<PAGE>

similar instruments, (d) any obligations of such Person created or arising under
any conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (e) any obligations of such Person as lessee under
leases that have been or should be, in accordance with GAAP, recorded as capital
leases, (f) any obligations of such Person as a result of any final judgment
rendered against such Person or any settlement agreement entered into by such
Person with respect to any litigation unless such obligations are stayed upon
appeal (for so long as such appeal shall be maintained) or are fully discharged
or bonded within thirty (30) days after the entry of such judgment or execution
of such settlement agreement, (g) any obligations, contingent or otherwise, of
such Person in respect of acceptances, letters of credit or similar extensions
of credit, (h) any Contingent Obligations, (i) any Indebtedness of others
referred to in clauses (a) through (h) above or clause (j) below guaranteed
directly or indirectly in any manner by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (1) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (2) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Indebtedness or to assure the holder
of such Indebtedness against loss, (3) to supply funds to or in any other manner
invest in the debtor (including any agreement to pay for property or services
irrespective of whether such property is received or such services are rendered)
or (4) otherwise to assure a creditor against loss, and (j) any Indebtedness
referred to in clauses (a) through (i) above secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on property (including accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness.

     "INDEMNIFIED LIABILITIES" is defined in Section 11.3.

     "INDEMNITEES" is defined in Section 11.3.

     "INDEPENDENT ARCHITECT" is defined in Section 7.14.

     "INDEPENDENT PERSON" has the meaning ascribed to it in Schedule 7.13.

     "INSPECTION CERTIFICATE" means a certificate from an architect or other
design professional approved by Lender in form and substance reasonably
acceptable to Lender.

     "INSURANCE RESERVE" is the reserve for insurance premiums established
pursuant to Section 5.5.

     "INSURANCE RESERVE ACCOUNT" is defined in Section 6.1.

     "INTEREST PERIOD" means the period of time beginning on the 10th day of a
Loan Month and ending on the 9th day of the following Loan Month, provided,
however, the first Interest Period shall commence on the date the Loan commences
to bear interest and continues to and includes May 9, 2004.

     "INTEREST RATE" means the applicable of the Base Rate or the Default Rate.


                                      -9-

<PAGE>

     "INVENTORY" means "inventory" (as defined in the UCC), including any and
all goods, merchandise and other personal property, whether tangible or
intangible, now owned or hereafter acquired by Borrower which is held for sale,
lease or license to customers, furnished to customers under any contract or
service or held as raw materials, work in process, or supplies or materials used
or consumed in Borrower's business, if any.

     "INVESTMENT" means (A) any direct or indirect purchase or other acquisition
by Borrower of any beneficial interest in, including stock, partnership interest
or other Securities of, any other Person or (B) any direct or indirect loan,
advance or capital contribution by Borrower to any other Person, including all
indebtedness and accounts receivable from that other Person that are not current
assets or did not arise from sales to that other Person in the ordinary course
of business.

     "LAND" means the real estate comprising the Mortgaged Property, as more
specifically described in the Mortgage, including all of Borrower's right, title
and interest in and to all oil, gas and mineral rights, oil, gas and minerals
(whether before or after extraction), easements, appurtenances, water rights,
water stock, rights in and to streets, roads and highways (whether before or
after vacation thereof), hereditaments and privilege relating, in any manner
whatsoever, to the Land. The Land is legally described on Exhibit A.

     "LATE CHARGE" is defined in Section 2.2(D).

     "LEASES" means any and all leases, subleases, occupancy agreements or
grants of other possessory interests, whereby Borrower acts as the lessor,
sublessor, licensor, grantor or in another similar capacity, now or hereafter in
force, oral or written, covering or affecting the Land or Improvements, or any
part thereof, together with all rights, powers, privileges, options and other
benefits of Borrower thereunder and any and all guaranties of the obligations of
the lessees, sublessees, occupants, and grantees thereunder, as such leases,
subleases, occupancy agreements or grants may be extended, renewed, modified or
replaced from time to time (exclusive of any ground lease having Borrower as
ground lessee).

     "LEGAL REQUIREMENTS" means all applicable laws, statutes, ordinances,
rulings, regulations, codes, decrees, orders, judgments, covenants, conditions,
restrictions, approvals, permits and requirements under any Permitted
Encumbrances or of, from or by any Governmental Authority, including zoning,
subdivision, land use, environmental, building, safety, health, wetlands and
landmark preservation, housing and fire laws and the Americans with Disabilities
Act.

     "LENDER'S REPRESENTATIVE" means an independent consulting architect,
inspector and/or engineering designated by Lender in Lender's sole discretion.

     "LIEN" means (a) any lien, mortgage, pledge, security interest, charge or
monetary encumbrance of any kind, whether voluntary or involuntary (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest) and (b) any negative
pledge or analogous agreement including any agreement not to directly or
indirectly convey, assign, sell, mortgage, pledge, hypothecate, grant a security
interest in, grant options with respect to, transfer or otherwise dispose of,
voluntarily or


                                      -10-

<PAGE>

involuntarily, by operation of law or otherwise, any direct or indirect interest
in an asset or direct or indirect interest in the ownership of an asset.

     "LOAN" means the loan in the aggregate amount of $34,000,000 from Lender to
Borrower as evidenced by the Note.

     "LOAN DOCUMENTS" means this Agreement, the Note, the Mortgage, the
Assignments, the Environmental Indemnity Agreement, the Cash Management
Agreement, the Financing Statements, the Guaranty and all other documents,
instruments, certificates and other deliveries made by Borrower or Guarantor to
Lender in accordance herewith or which otherwise evidence, secure and/or govern
the Loan.

     "LOAN MONTH" means a calendar month.

     "LOAN QUARTER" means a calendar quarter.

     "LOCKOUT EXPIRATION DATE" means the third anniversary of the Closing.

     "MANAGEMENT AGREEMENT" means the property management agreement for the
Mortgaged Property between Borrower and Manager, if any.

     "MANAGER" means the Person which is the manager of the Mortgaged Property
from time to time, which Person must be a Qualified Manager.

     "MATERIAL ADVERSE EFFECT" means (A) a material adverse effect upon the
business, operations, properties, assets or condition (financial or otherwise)
of Borrower, Guarantor or the Mortgaged Property taken as a whole, or (B) the
impairment, in any material respect, of the ability of Borrower or Guarantor to
perform its respective obligations under any of the Loan Documents or of Lender
to enforce any of the Obligations. In determining whether any individual event
would result in a Material Adverse Effect, notwithstanding that such event does
not of itself have such effect, a Material Adverse Effect shall be deemed to
have occurred if the cumulative effect of such event and all other then existing
events would result in a Material Adverse Effect.

     "MATERIAL CONTRACTS" means (a) the Permitted Encumbrances (not otherwise
referred to in this definition of Material Contracts), and (b) those (i)
Contracts set forth on Schedule 4.6(C) attached hereto and (ii) other Contracts
which, if not complied with by Borrower, could reasonably be expected to have a
Material Adverse Effect.

     "MATURITY DATE" means the Maturity Date, as defined in Section 2.4(B), or
such earlier date as the Loan is prepaid in full or accelerated.

     "MAXIMUM RATE" is defined in Section 2.2(C).

     "MOODY'S" means Moody's Investors Services, Inc. and its successors and
assigns.


                                      -11-

<PAGE>

     "MORTGAGE" means the Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing of even date herewith from Borrower to or
for the benefit of Lender, constituting a first Lien on the Mortgaged Property
as collateral for the Loan.

     "MORTGAGED PROPERTY" means the Land, the Improvements and the Equipment,
Fixtures and Personalty, and all of Borrower's now and/or hereafter existing
right, title and interest in and to the Inventory, the Accounts, the General
Intangibles, the Leases, the Rents and other Gross Revenues, the Proceeds, the
Plans and Specifications and all other property of every kind and description
used or useful in connection with the ownership, occupancy, operation and
maintenance of the other components of the Mortgaged Property and all
substitutions therefor, replacements and accessions thereto, and proceeds
including "proceeds" (as defined in the UCC) derived therefrom, all as more
specifically described in the Mortgage.

     "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which Borrower or any ERISA Affiliate is making, or is
accruing an obligation to make, contributions or has made, or been obligated to
make, contributions within the preceding six (6) years, or for which Borrower or
any ERISA Affiliate has any liability, including contingent liability.

     "NET WORTH" means, at any reporting date, for a Person, which shall include
such Person's subsidiaries, if any, on either a combined or consolidated basis
pursuant to and determined in accordance with GAAP (such combined or
consolidated entities are collectively herein called the "SUBJECT PERSON") the
total assets of the Subject Person less (i) intangible assets of such Subject
Person (including, goodwill, anticipated future benefits of tax loss carry
forwards, and organization or developmental expenses and specifically excluding
from the definition of intangible assets solely for purposes of this definition,
patents, trademarks, service marks, trade names and copyrights) otherwise
determined in accordance with GAAP, and less (ii) the total liabilities of such
Subject Person, all on either a combined or consolidated basis, as applicable,
determined in accordance with GAAP, in each case without duplication.

     "NOTE" means the Promissory Note, together with the Substitute Notes and
all future advances, extensions, renewals, substitutions, modifications and
amendments of the Promissory Note and Substitute Notes.

     "OBLIGATIONS" means, in the aggregate, all obligations, liabilities and
indebtedness of every nature of Borrower from time to time owed to Lender under
the Loan Documents, including the principal amount of all debts, claims and
indebtedness, accrued and unpaid interest and all fees, costs and expenses,
whether primary, secondary, direct, contingent, fixed or otherwise, heretofore,
now and/or from time to time hereafter owing, due or payable to Lender under the
Loan Documents whether before or after the filing of a proceeding under the
Bankruptcy Code by or against Borrower. The term "Obligations" shall also
include any judgment against Borrower or the Mortgaged Property with respect to
such obligations, liabilities and indebtedness of Borrower.

     "OFAC" is defined in Section 4.9.


                                      -12-

<PAGE>

     "OFFICER'S CERTIFICATE" means the certificate of a president, vice
president, or other officer or representative with knowledge of the matters
addressed in such certificate.

     "ORGANIZATIONAL DOCUMENTS" means, as applicable, for any Person, such
Person's articles or certificate of incorporation, by-laws, partnership
agreement, trust agreement, certificate of limited partnership, articles of
organization, certificate of formation, shareholder agreement, voting trust
agreement, operating agreement, limited liability company agreement and/or
analogous documents, as amended, modified or supplemented from time to time.

     "ORIGINATION FEE" means an amount of money equal to $510,000.

     "PAYMENT DATE" means the 10th day of each calendar month commencing on June
10, 2004.

     "PERMITTED CONTEST" is defined in Section 5.3(B).

     "PERMITTED ENCUMBRANCES" means the matters identified on Exhibit D .

     "PERMITTED INDEBTEDNESS" means (a) ordinary and customary trade payables
incurred in the ordinary course of business of ownership and operation of the
Mortgaged Property which are payable not later than thirty (30) days after
receipt of the original invoice which are in fact not more than sixty (60) days
overdue, and do not at any one time exceed $500,000 in the aggregate (not
including any payables for Impositions or insurance premiums for which amounts
have been deposited by Borrower in the Reserve Accounts) and (b) the Loan.

     "PERMITTED INVESTMENTS" means any of the investments identified on Schedule
6.4, and any other investments that are approved by Lender in its sole
discretion, provided that at all times Lender has a perfected first priority
security interest in such investment, and Borrower has provided evidence of
such, in form and substance satisfactory to Lender, and provided further that
the Lender has approved the maturity of such investments.

     "PERSON" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or not
legal entities, and governments and agencies and political subdivisions thereof
and their respective permitted successors and assigns (or in the case of a
governmental person, the successor functional equivalent of such Person).

     "PHYSICAL CONDITION REPORT" means the report(s) regarding the physical
inspection of the Land and Improvements listed on Schedule 1.1(C).

     "PLANS AND SPECIFICATIONS" means the final drawings and specifications for
the development and construction of each component part of the applicable
Construction (as the same may be amended in accordance with the provisions
permitted by this Agreement), as applicable, which plans and specifications and
all amendments thereto shall be (i) subject to Lender's approval, which approval
shall not be unreasonably withheld or delayed, and (ii) in accordance with all
applicable Legal Requirements.


                                      -13-

<PAGE>

     "PREPAYMENT PREMIUM" means the Yield Maintenance Amount. However, if an
Event of Default occurs on or before the Lockout Expiration Date and the Loan is
accelerated to a date on or before the Lockout Expiration Date, the Prepayment
Premium shall be equal to the sum of (a) the Yield Maintenance Amount and (b)
five percent (5%) of the principal balance of the Loan.

     "PROCEEDS" is defined in Section 8.1.

     "PROMISSORY NOTE" means the Promissory Note dated of even date herewith
made by Borrower to the order of Lender in the original principal amount of
$34,000,000.

     "PROPRIETARY RIGHTS" is defined in Section 4.11.

     "PUNCH-LIST ITEMS" means details of construction, decoration and mechanical
and electrical adjustment which in the aggregate are minor in character and do
not materially interfere with the intended use and operation of the applicable
Construction.

     "QUALIFIED MANAGER" shall mean any property manager reasonably acceptable
to Lender that, as of the date of such designation, is a nationally recognized
management firm engaged in the business, operation and management of office
buildings, laboratories, vivariums, life service facilities or facilities for
other similar uses containing in the aggregate at least 1,000,000 square feet of
gross leaseable office space which are located in the United States and which is
approved by Lender and with respect to which a Rating Agency Confirmation is
provided.

     "RATING AGENCY CONFIRMATION" shall mean, collectively, an affirmation from
each of the Rating Agencies that the credit rating by such Rating Agency of the
securities issued in connection with a securitization of the Loan or otherwise
secured by a pledge of the Note immediately prior to the occurrence of the event
with respect to which such Rating Agency Confirmation is sought will not be
qualified, downgraded or withdrawn as a result of the occurrence of such event,
which affirmation may be granted or withheld in such Rating Agency's sole and
absolute discretion provided, however if the Loan has not been securitized in
connection with a Securitization in which some or all of the securities have
been rated by one or more of the Rating Agencies, Rating Agency Confirmation
means Lender's approval, which approval is not to be unreasonably withheld or
delayed.

     "RATING AGENCIES" shall mean S&P and Moody's or, if any of such firms shall
for any reason no longer perform the functions of a securities rating agency,
any other nationally recognized statistical rating agency reasonably designated
by Lender; provided, however, that at any time during which the Loan is an asset
of a securitization, "Rating Agencies" shall mean the rating agencies that from
time to time rate the securities issued in connection with such securitization.
If the Loan is not an asset in a securitization, Rating Agency shall mean those
rating agencies designated by Lender from time to time.

     "RENTS" shall mean all of Borrower's right, title and interest in and to
rents, income, receipts, royalties, profits, issues, service reimbursements,
fees, termination payments receivables, accounts receivable and payments from or
related to the Land and/or Improvements from time to time accruing from the
operation of the Land and/or Improvements.


                                      -14-

<PAGE>

     "REQUEST FOR RELEASE" means a request from Borrower to Lender in connection
with a request for disbursement from the applicable Reserve accompanied by the
following items, which request and items are subject to the approval of Lender
not to be unreasonably withheld, conditioned or delayed: (a) currently dated
certificate approved by Borrower from a Contractor, the Independent Architect,
if any, and Lender's Representative, if any, on a form to be reasonably approved
by Lender; (b) the Required Lien Waivers in form and substance reasonably
satisfactory to Lender; (c) if requested by Lender, from time to time, the
requisitions for payment then the subject of such Request for Release from
subcontractors and material suppliers engaged in the construction of the
applicable Construction in form and content reasonably satisfactory to Lender;
(d) an Inspection Certificate of an architect approved by Lender based upon an
on-site inspection of the applicable Construction made by the Independent
Architect and confirmed by Lender's Representative, if any, which shall certify
to all work for which such Request for Release has been completed; (e) evidence
reasonably satisfactory to Lender of Construction Legal Compliance in the form
of (i) a certificate of an Independent Architect as to items (a), (b) and (c) of
the definition of Construction Legal Compliance (together with copies of the
applicable entitlements, approvals, allocations, permits, licenses and
conditional use permits), (ii) a certificate from the Borrower Representative as
to item (d) of the definition of Construction Legal Compliance (which
certificate may, as to "threatened" matters, be qualified to "such Person's
knowledge following due inquiry") and (iii) such other showings, certificates,
reports and items as Lender or Lender's Representative, if any, may reasonably
request to confirm Construction Legal Compliance; (f) a date-down endorsement to
the Title Policy dating the Title Policy down to the date and time of the
requested disbursement; and (g) such other information and documents as may be
reasonably requested or required by Lender or Lender's Representative, if any,
including, but not limited to, certificates, inspections, date-down and other
title policy endorsements, invoices, receipts, estoppel certificates, permits,
licenses and certificates of occupancy, affidavits and other documents,
appropriate for the applicable stage of Construction.

     "REQUIRED CAPITAL IMPROVEMENTS" is defined in Section 5.12.

     "REQUIRED COMPLETION DATE" means with respect to the Required Capital
Improvements the applicable date for the applicable component of the Required
Capital Improvements identified on Exhibit E.

     "REQUIRED LIEN WAIVERS" means, waivers of liens executed by (a) for each
Request for Release, Contractor and each design professional with whom Borrower
has a direct agreement, respectively, waiving their respective rights, if any,
and any right of a subcontractor claiming through or under any of them, to file
or maintain any construction liens or claims, all in such form containing such
provisions as may be reasonably required by Lender and in accordance with
applicable law and (b) for each Request for Release that includes a request for
final payment to any subcontractor, such subcontractor, waiving its right to
file or maintain any construction liens or claims, all in such form and
containing such provisions as may be reasonably required by Lender executed with
respect to and applicable to the extent such subcontractor has received payment.
Such waivers may be conditioned upon payment for work performed and materials
supplied; provided, that the Request for Release that includes the request
described in clause (b) above shall include (and in the case of the final
Request for Release, within ten (10) days after the funding of such final
Request for Release, Borrower shall


                                      -15-

<PAGE>

deliver to Lender) a duly executed, unconditional waiver for each Person
described in clauses (a) or (b) above.

     "REQUIRED RESTORATION DATE" is defined in Section 8.1.

     "RESERVE ACCOUNT COLLATERAL" is defined in Section 6.5.

     "RESERVE ACCOUNTS" means the Insurance Reserve Account, the Tax Reserve
Account and any other securities or deposit accounts required to be maintained
pursuant to this Agreement or the other Loan Documents.

     "RESERVES" means the Tax Reserve and the Insurance Reserve.

     "RESTORATION" is defined in Section 8.1.

     "S&P" means Standard & Poor's Rating Service and its successors and
assigns.

     "SECURE AREAS" means the restricted access areas located within (i) that
certain building containing approximately 29,600 square feet of rentable area,
commonly referred to as the "Original Vivarium" and (ii) that certain building
containing approximately 60,000 square feet of rentable area, commonly referred
to as the "New Vivarium" in which access to such areas is restricted in order to
provide a specific pathogen free environment, such restricted access areas being
commonly referred to as the "area behind the barrier."

     "SECURITIES" means any stock, shares, voting trust certificates, bonds,
debentures, options, warrants, notes, or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in temporary or interim certificates for the purchase
or acquisition of, or any right to subscribe to, purchase or acquire, any of the
foregoing.

     "SECURITIZATION" is defined in Section 10.1.

     "SERVICER" is defined in Section 10.1.

     "SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY" is defined in Schedule 7.13.

     "SUBSIDIARY" means, with respect to any Person (the "PARENT") at any date,
any corporation, limited liability company, partnership, association or other
entity the accounts of which would be consolidated with those of the parent in
the parent's consolidated financial statements if such financial statements were
prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other entity
(a) of which securities or other ownership interests representing more than
fifty percent (50%) of the equity or more than fifty percent (50%) of the
ordinary voting power or, in the case of a partnership, more than fifty percent
(50%) of the general partnership interests are, as of such date, owned,
controlled or held, or (b) that is, as of such date, otherwise Controlled, by
the parent or one or more Subsidiaries of the parent or by the parent and one or
more Subsidiaries of the parent.


                                      -16-

<PAGE>

     "SUBSTANTIAL COMPLETION AND SUBSTANTIALLY COMPLETED" means the satisfaction
of all of the following conditions: (a) the date when the applicable
Construction shall have been completed (except for Punch List Items and minor
items which can be fully completed without material interference with the use
and operation of the Mortgaged Property) in accordance with the applicable Plans
and Specifications as certified by the Independent Architect on standard
AIA-G702 forms and approved by Lender's Representative, if any, and Lender, such
approval not to be unreasonably withheld or delayed; (b) all material permits
and approvals required for the normal use and occupancy of the applicable
Construction (including a certificate of occupancy if required for occupancy
under applicable Legal Requirements) shall have been issued by the appropriate
Governmental Authority and shall be in full force and effect; and (c) the
applicable Construction shall have been equipped with all fixtures and equipment
required for the intended use and operation of the Required Capital
Improvements.

     "SUBSTITUTE NOTE" means all notes given in substitution or exchange for the
Promissory Note or another Substitute Note.

     "TAX ABATEMENT AGREEMENTS" means, collectively, the Tax Abatement Agreement
dated as of December 1, 2000, by and among Wells Fargo Bank Northwest, National
Association (formerly First Security Bank, National Association), not in its
individual capacity but solely as the Owner Trustee under the LEXI TRUST 2000-1,
Guarantor and Montgomery County, Texas, as amended, and that certain Assessment
Abatement Agreement dated as of December 4, 2000, by and between Wells Fargo
Bank Northwest, National Association (formerly First Security Bank, National
Association), not in its individual capacity but solely as the Owner Trustee
under the LEXI TRUST 2000-1, Guarantor and The Woodlands Commercial Owners
Association, as amended.

     "TAX RESERVE" is the reserve for Impositions established pursuant to
Section 5.5.

     "TAX RESERVE ACCOUNT" shall have the meaning provided in Section 6.1.

     "TENANT IMPAIRMENT EVENT" means any one or more of the following has
occurred: (a) the tenant under the Guarantor Lease has commenced or is the
subject of a proceeding under the Bankruptcy Code; or (b) a default by the
tenant under the Guarantor Lease shall have occurred which is not cured prior to
the expiration of the applicable grace or curative period, if any, in such
Lease.

     "TITLE COMPANY" means Commonwealth Land Title Insurance Company.

     "TITLE POLICY" means a the mortgagee's policy of title insurance issued on
the standard Texas form by the Title Company, together with such reinsurance and
direct access agreements as Lender may require, insuring that the Mortgage is a
valid first and prior enforceable lien on Borrower's fee simple interest in the
Mortgaged Property (including any easements appurtenant thereto but excluding
any non-real estate property interests included in the definition of Mortgaged
Property) subject only to the Permitted Encumbrances. The Title Policy shall
contain such endorsements as Lender may require.

     "TOTAL DEBT/CAPITALIZATION" means, at any reporting date, for a Person, the
percentage equal to (A) the sum of the long term debt (including any amounts for
operating lease debt


                                      -17-

<PAGE>

equivalents) of such Person plus the amount of any current maturities,
commercial paper and other short-term borrowings (the "TOTAL DEBT") divided by
(B) the sum of the Total Debt plus the amount of shareholder's equity (including
any preferred stock) plus minority interests.

     "TOTAL LOSS" means (i) a casualty, damage or destruction of the Mortgaged
Property, the cost of restoration of which (as reasonably determined by Lender)
would exceed $40,000,000, (ii) a permanent taking of fifty percent (50%) or more
of the gross leasable area of the Land or Improvements, (iii) a permanent taking
of fifty percent (50%) or more of the automobile parking spaces located on the
Land or such number of parking spaces as would cause the Borrower or the
Mortgaged Property to cease to comply with applicable Legal Requirements or
Material Contracts, or (iv) a permanent taking of so much of the Land or
Improvements, in either case, such that it would be impracticable, in Lender's
reasonable discretion, even after restoration, to operate the Mortgaged Property
as an economically viable whole.

     "TRANSFER" means, (a) when used as a verb, to, directly or indirectly,
lease, sell, assign, convey, give, exchange, devise, mortgage, encumber, pledge,
hypothecate, alienate, grant a security interest, or otherwise create or suffer
to exist any Lien, transfer or otherwise dispose, or to contract or agreement to
do any of the foregoing, whether by operation of law, voluntarily, involuntarily
or otherwise as well as any other action or omission which has the practical
effect of initiating or completing the foregoing and (b) when used as a noun, a
direct or indirect, lease, sale, assignment, conveyance, gift, exchange, devise,
mortgage, encumbrance, pledge, hypothecation, alienation, grant of a security
interest or other creation or sufferance of a Lien, transfer of other
disposition, or contract or agreement by which any of the foregoing may be
effected, whether by operation of law, voluntary or involuntary and any other
action or omission which has the practical effect of initiating or completing
the foregoing.

     "TREASURY RATE" means the annualized yield on securities issued by the
United States Treasury having a maturity corresponding to the remaining term to
the originally scheduled Maturity Date, as quoted in Federal Reserve Statistical
Release H. 15(519) under the heading "U.S. Government Securities - Treasury
Constant Maturities" for the Treasury Rate Determination Date (as defined
below), converted to a monthly equivalent yield. If yields for such securities
of such maturity are not shown in such publication, then the Treasury Rate shall
be determined by Lender by linear interpolation between the yields of securities
of the next longer and next shorter maturities. If said Federal Reserve
Statistical Release or any other information necessary for determination of the
Treasury Rate in accordance with the foregoing is no longer published or is
otherwise unavailable, then the Treasury Rate shall be reasonably determined by
Lender based on comparable data.

     "TREASURY RATE DETERMINATION DATE" means the date which is five (5)
Business Days prior to the scheduled prepayment date.

     "UCC" means the Uniform Commercial Code as in effect in the State of New
York.

     "UCC COLLATERAL" is defined in Section 2.9.

     "U.S. GOVERNMENT OBLIGATIONS" means any direct obligations of, or
obligations guaranteed as to principal and interest by, the United States
Government or any agency or


                                      -18-

<PAGE>

instrumentality thereof, provided that such obligations are backed by the full
faith and credit of the United States. Any such obligation must be limited to
instruments that have a predetermined fixed dollar amount of principal due at
maturity that cannot vary or change. If any such obligation is rated by S&P, it
shall not have an "r" highlighter affixed to its rating. Interest must be fixed
or tied to a single interest rate index plus a single fixed spread (if any), and
move proportionately with said index. U.S. Government Obligations include, but
are not limited to: U.S. Treasury direct or fully guaranteed obligations,
Farmers Home Administration certificates of beneficial ownership, General
Services Administration participation certificates, U.S. Maritime Administration
guaranteed Title XI financing, Small Business Administration guaranteed
participation certificates or guaranteed pool certificates, U.S. Department of
Housing and Urban Development local authority bonds, and Washington Metropolitan
Area Transit Authority guaranteed transit bonds. In no event shall any such
obligation have a maturity in excess of one hundred eighty (180) days.

     "YIELD MAINTENANCE AMOUNT" means (A) the net present value of all future
payments of principal and interest due for the remainder of the Term,
discounted, each from the date such payments are due to the date of the
prepayment, at the result of the Treasury Rate divided by 12, less (B) the then
outstanding principal balance of the Loan; such Yield Maintenance Amount can
never be less than zero; provided, however, for purposes of any partial
prepayment, all references to the remaining outstanding principal balance of the
Loan shall instead refer to the amount of such partial prepayment. For purposes
of computing the Yield Maintenance Amount with regard to Section 2.4(C)(iii),
the date of prepayment shall be deemed the date the Loan is accelerated.

1.2  TERMS; UTILIZATION OF GAAP FOR PURPOSES OF FINANCIAL STATEMENTS UNDER
     AGREEMENT.

     For purposes of this Agreement, all accounting terms not otherwise defined
herein shall have the meanings assigned to such terms in conformity with GAAP.
Financial statements and other information furnished to Lender pursuant to
subsection 5.1 shall be prepared in accordance with GAAP as in effect at the
time of such preparation. No Accounting Changes shall affect financial
covenants, standards or terms in this Agreement; provided, that Borrower shall
prepare footnotes to the financial statements required to be delivered hereunder
that show the differences between the financial statements delivered (which
reflect such Accounting Changes) and the basis for calculating financial
covenant compliance (without reflecting such Accounting Changes).

1.3  OTHER DEFINITIONAL PROVISIONS.

     References to "SECTIONS," "EXHIBITS" and "SCHEDULES" shall be to Sections,
Exhibits and Schedules, respectively, of this Agreement unless otherwise
specifically provided. Any of the terms defined in Section 1.1 may, unless the
context otherwise requires, be used in the singular or the plural depending on
the reference. In this Agreement, "HEREOF," "HEREIN," "HERETO," "HEREUNDEr" and
the like mean and refer to this Agreement as a whole and not merely to the
specific section, paragraph or clause in which the respective word appears;
words importing any gender include the other genders; references to "WRITING"
include printing, typing, lithography and other means of reproducing words in a
tangible visible form; the words "INCLUDING,"


                                      -19-

<PAGE>

"INCLUDES" and "INCLUDE" shall be deemed to be followed by the words "WITHOUT
LIMITATION"; the phrase "AND/OR" shall mean that either "and" or "or" may apply;
the phrases "ATTORNEYS' FEES," "LEGAL FEES" and "COUNSEL FEES" shall include any
and all attorneys', paralegal and law clerk fees and disbursements, including
court costs, fees and disbursements at the pre-trial, trial and appellate levels
incurred or paid by Lender in protecting its interest in the Mortgaged Property
and the Collateral and enforcing its rights hereunder and/or the other Loan
Documents; references to agreements and other contractual instruments shall be
deemed to include subsequent amendments, assignments, and other modifications
thereto, but only to the extent such amendments, assignments and other
modifications are not prohibited by the terms of this Agreement or any other
Loan Document; references to Persons include their respective permitted
successors and assigns or, in the case of governmental Persons, Persons
succeeding to the relevant functions of such Persons; references to a Person's
"KNOWLEDGE" in this Agreement or the other Loan Documents refers to the actual
knowledge of the Person in question and such knowledge as a reasonably prudent
Person would have acquired by virtue of such inquiry and due diligence as a
reasonably prudent Person would have undertaken and all references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.

                                   SECTION 2
                          AMOUNTS AND TERMS OF THE LOAN

2.1 LOAN DISBURSEMENT AND NOTE.  Subject to the terms and conditions of this
Agreement, Lender shall lend the Loan to Borrower on the Closing Date. The
proceeds of the Loan shall be used to (i) satisfy the Existing Indebtedness
encumbering the Mortgaged Property; and (ii) satisfy actual, documented closing
costs related to the Loan and approved by Lender. The disbursement of the Loan
in accordance with the foregoing shall be made on the Closing Date. The Loan
shall be evidenced by the Note. The Obligations of Borrower under this
Agreement, the Note and the other Loan Documents are secured by, among other
things, the Mortgage and the Liens created or arising under the other Loan
Documents.

2.2  INTEREST.

     (A) INTEREST RATE.  Subject to the provisions of Section 2.2(C) hereof, the
outstanding principal balance of the Loan shall bear interest at the Base Rate.
However, (a) during the existence of any Event of Default, or (b) after the
Maturity Date or earlier upon acceleration of the Loan, the principal amount of
the Loan shall bear interest ("DEFAULT INTEREST") at the Default Rate. With
respect to any scheduled payments of principal and interest (excluding the
payment due on the Maturity Date), Borrower will be entitled to a grace period
of five (5) days from such date before Default Interest is imposed by reason of
such late payment; provided, however, such grace period will not be available
more than once in any twelve (12) Loan Month period and if Borrower fails to
make the required payment within said five (5) day period, Default Interest will
be calculated from the original due date. Except as set forth in the preceding
sentence, the Default Interest shall commence, without notice, immediately upon
and from the occurrence of (a) or (b) above, as the case may be, and shall
continue until all Events of Default are cured and all sums then due and payable
under the Loan Documents are paid in full; provided that in the event of any
monetary Event of Default, Default Interest shall be calculated from the date
the


                                      -20-

<PAGE>

applicable Default actually occurred. Default Interest shall be payable upon
demand, and, to the extent unpaid, shall be compounded monthly at the Default
Rate.

     (B) COMPUTATION AND PAYMENT OF INTEREST.  Interest on the Loan and all
other Obligations owing to Lender shall be computed on the daily principal
balance of the Note on the basis of actual days elapsed and a three hundred
sixty (360)-day year. Interest on the Loan is payable in arrears. Payments of
interest shall be paid to Lender as specified in Section 2.3. In addition, all
accrued and unpaid interest shall be paid to Lender on the earlier of the date
of prepayment (to the extent prepayment is permitted under Section 2.4) and
maturity, whether by acceleration or otherwise. The Loan shall commence to bear
interest on the date the proceeds of the Loan are to be disbursed to or for the
order of Borrower, provided, however, if the proceeds are disbursed to an
escrowee, the Loan shall commence to bear interest from and including the date
of disbursement to such escrowee regardless of the date such proceeds are
disbursed from escrow.

     (C) INTEREST LAWS.  Notwithstanding any provision to the contrary contained
in this Agreement or the other Loan Documents, Borrower shall not be required to
pay, and Lender shall not be permitted to collect, any amount of interest in
excess of the maximum amount of interest permitted by law ("EXCESS INTEREST").
If any Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Agreement or in any of the other
Loan Documents, then in such event: (1) the provisions of this Section shall
govern and control; (2) Borrower shall not be obligated to pay any Excess
Interest; (3) any Excess Interest that Lender may have received hereunder shall
be, at Lender's option, (a) applied as a credit against the outstanding
principal balance of the Obligations due and owing to Lender (without any
prepayment penalty or premium therefor) or for accrued and unpaid interest
thereunder (not to exceed the maximum amount permitted by law), (b) refunded to
the payor thereof, or (c) any combination of the foregoing; (4) the interest
rate(s) provided for herein shall be automatically reduced to the maximum lawful
rate allowed from time to time under applicable law (the "MAXIMUM RATE"), and
this Agreement and the other Loan Documents shall be deemed to have been and
shall be, reformed and modified to reflect such reduction; and (5) Borrower
shall not have any action against Lender for any damages arising out of the
payment or collection of any Excess Interest. Notwithstanding the foregoing, if
for any period of time interest on any Obligation due and owing to Lender is
calculated at the Maximum Rate rather than the applicable rate under this
Agreement, and thereafter such applicable rate becomes less than the Maximum
Rate, the rate of interest payable on such Obligations due and owing to Lender
shall, to the extent permitted by law, remain at the Maximum Rate until Lender
shall have received or accrued the amount of interest which Lender would have
received or accrued during such period on Obligations due and owing to Lender
had the rate of interest not been limited to the Maximum Rate during such
period. All sums paid or agreed to be paid to Lender for the use, forbearance or
detention of the Obligations of Borrower to Lender shall, to the extent
permitted by applicable law, (i) be amortized, prorated, allocated and spread
throughout the full term of such Obligations until payment in full so that the
actual rate of interest on account of such Obligations does not exceed the
Maximum Rate throughout the term thereof, (ii) be characterized as a fee,
expense or other charge other than interest, and/or (iii) exclude any voluntary
prepayments and the effects thereof.


                                      -21-

<PAGE>

     (D) LATE CHARGES.  If any scheduled payment of principal and/or interest or
other amount owing pursuant to this Agreement or the other Loan Documents
(excluding the payment due on the Maturity Date) is not paid when due, Borrower
shall pay to Lender, in addition to all sums otherwise due and payable, a late
charge ("LATE CHARGE") in an amount equal to five percent (5%) of the unpaid
amount. With respect to regular monthly payments of principal and/or interest,
Borrower will be entitled to a grace period of five (5) days (five (5) Business
Days with respect to any non-scheduled payment due pursuant to this Agreement or
the other Loan Documents) from the date due before a late charge is imposed by
reason of such late payment; provided, however, such grace period will not be
available more than once in any consecutive twelve (12) month period. Any unpaid
late charge shall bear interest at the Default Rate until paid.

2.3  PAYMENTS.

     Interest for the period commencing on the date of disbursement of the Loan
and ending on May 9, 2004 shall be paid on the Closing Date. On each Payment
Date thereafter commencing with the Payment Date occurring on June 10, 2004,
Borrower shall pay to Lender interest on the outstanding principal of the Loan
accrued from and including the immediately preceding Payment Date, to, but not
including, the Payment Date on which such payment is to be made. Commencing on
June 10, 2004, and on each Payment Date thereafter, principal of the Loan
evidenced by the Note shall be paid to Lender in monthly installments of
principal and interest in an amount equal to Two Hundred Eighty-Nine Thousand
Two Hundred Seventy-Five and 64/100 Dollars ($289,275.64) per month, which
amount shall be sufficient to amortize the full principal amount outstanding as
of the date of disbursement of the Loan over a twenty (20) year term (such
amortization schedule is attached hereto as Schedule 2.3). A balloon payment
will be required on the Maturity Date as set forth on Schedule 2.3.

2.4  PAYMENTS AND PREPAYMENTS ON THE LOAN.

     (A) MANNER AND TIME OF PAYMENT.  Borrower agrees to pay all of the
Obligations relating to the Loan as such amounts become due or are declared due
pursuant to the terms of this Agreement and the other Loan Documents. All
payments shall be made without deduction, defense, setoff or counterclaim by the
wire transfer of good immediately available wire transferred federal funds to
Lender's account at JP Morgan Chase Bank for the account of Lender, Reference:
The Lexicon Campus, or at such other place as Lender may direct from time to
time by five (5) days' advance written notice to Borrower. Borrower shall
receive credit for such funds on the date received if such funds are received by
Lender by 1:00 P.M. (New York time) on such day. In the absence of timely
receipt, such funds shall be deemed to have been paid by Borrower on the
following Business Day. Whenever any payment to be made under the Loan Documents
shall be stated to be due on a day that is not a Business Day, or any time
period relating to a payment to be made hereunder is stated to expire on a day
that is not a Business Day, the payment may be made on the following Business
Day and the period will not expire until the following Business Day.

     (B) MATURITY.  The outstanding principal balance of the Loan, all accrued
and unpaid interest thereon and all other sums owing to Lender pursuant to the
Loan Documents, shall be due and payable on April 21, 2014 (the "MATURITY
DATE").


                                      -22-

<PAGE>

     (C) PREPAYMENTS.

          (i) Except as otherwise provided in Section 5.3(C), Section 8.1 or
     Section 11.17 herein, no prepayment of the Loan shall be allowed in whole
     or in part, on or prior to the Lockout Expiration Date other than principal
     payments required pursuant to Section 2.3. Thereafter, the Loan may be
     prepaid, in whole, but not in part, upon not less than thirty (30) days'
     prior notice to Lender. Any prepayments on the principal balance of the
     Loan evidenced by the Note whether voluntary or involuntary, shall be
     accompanied by payment of interest accrued to the date of prepayment,
     together with the applicable Prepayment Premium.

          (ii) In the event of (a) the payment of any principal of any Loan
     other than on the last day of an Interest Period applicable thereto
     (including as a result of an Event of Default) or (b) the failure to borrow
     or prepay the Loan on the date specified in any notice delivered pursuant
     to this Agreement or the other Loan Documents (regardless of whether such
     notice was revoked by Borrower prior to such prepayment), then, in any such
     event and, in addition to the payments to be made to Lender pursuant to
     2.4(C)(i), Borrower agrees to compensate Lender for all out-of-pocket
     losses, costs, expenses and damages Lender may incur attributable to such
     event. A certificate of Lender setting forth any amount or amounts that
     Lender is entitled to receive pursuant to this Section shall be delivered
     to Borrower and shall be conclusive absent manifest error. Borrower shall
     pay Lender the amount shown as due on any such certificate within ten (10)
     days after receipt thereof.

          (iii) If, following an Event of Default, payment of all or any part of
     the Loan is tendered by Borrower or otherwise recovered by Lender, such
     tender or recovery shall be deemed a voluntary prepayment by Borrower in
     violation of the prohibition against prepayment set forth in Section
     2.4(C)(i) and Borrower shall pay to Lender, in addition to the other
     Obligations, the Prepayment Premium. If the Maturity Date is accelerated,
     due to an Event of Default or otherwise, or if any prepayment of all or any
     portion of the Loan hereunder occurs, whether in connection with Lender's
     acceleration of the Loan or otherwise, or if the Mortgage is satisfied or
     released by foreclosure (whether by power of sale or judicial proceeding),
     deed in lieu of foreclosure or by any other means, then the Prepayment
     Premium shall become immediately due and owing and Borrower shall
     immediately pay the Prepayment Premium to Lender. Nothing contained in this
     Section 2.4(C)(iii) shall create any right of prepayment.

2.5 LENDER'S RECORDS; MUTILATED, DESTROYED OR LOST NOTES.  The balance on
Lender's books and records shall be presumptive evidence (absent manifest error)
of the amounts due and owing to Lender by Borrower; provided that any failure to
so record or any error in so recording shall not limit or otherwise affect
Borrower's obligation to pay the Obligations. In case any Note shall become
mutilated or defaced, or be destroyed, lost or stolen, Borrower shall, upon
request from Lender, execute and deliver a new Note of like principal amount in
exchange and substitution for the mutilated or defaced Note, or in lieu of and
in substitution for the destroyed, lost or stolen Note. In the case of a
mutilated or defaced Note, the mutilated or defaced Note shall be surrendered to
Borrower upon delivery to Lender of the new Note. In the case of any destroyed,
lost or stolen Note, Lender shall furnish to Borrower, upon delivery to Lender
of the


                                      -23-

<PAGE>

new Note (i) certification of the destruction, loss or theft of such Note and
(ii) such security or indemnity as may be reasonably required by Borrower to
hold Borrower harmless.

2.6 TAXES.  Any and all payments or reimbursements made under the Agreement, the
Note or the other Loan Documents shall be made free and clear of and without
deduction for any and all taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto arising out of or in
connection with the transactions contemplated by the Loan Documents; excluding,
however, the following: taxes imposed on the income of Lender by any
jurisdiction or any political subdivision thereof; taxes that are not directly
attributable to the Loan; and any "doing business" taxes, however denominated,
charged by any state or other jurisdiction (all such taxes, levies, imposts,
deductions, charges or withholdings and all liabilities with respect thereto,
excluding such taxes imposed on income, taxes not directly attributable to the
Loan and any "doing business" taxes, herein "TAX LIABILITIES"). If Borrower
shall be required by law to deduct any such amounts from or in respect of any
sum payable hereunder to Lender, then the sum payable hereunder shall be
increased as may be necessary so that, after making all required deductions,
Lender receives an amount equal to the sum it would have received had no such
deductions been made. In the event that, subsequent to the Closing Date, (1) any
changes in any existing law, regulation, treaty or directive or in the
interpretation or application thereof, (2) any new law, regulation, treaty or
directive enacted or any interpretation or application thereof, or (3)
compliance by Lender with any new request or directive (whether or not having
the force of law) from any governmental authority, agency or instrumentality
does or shall subject Lender to any tax of any kind whatsoever with respect to
this Agreement, the other Loan Documents or the Loan, or change the basis of
taxation of payments to Lender of principal, fees, interest or any other amount
payable hereunder (except for income taxes, or franchise taxes imposed in lieu
of income taxes, imposed generally by federal, state or local taxing authorities
with respect to interest or commitment or other fees payable hereunder or
changes in the rate of interest or tax on the overall income of Lender, taxes
that are not directly attributable to the Loan and any "doing business" taxes,
however denominated, charged by any state or other jurisdiction) and the result
of any of the foregoing is to increase the cost to Lender of making or
continuing its Loan hereunder, as the case may be, or to reduce any amount
receivable hereunder, then, in any such case, Borrower shall promptly pay to
Lender, within thirty (30) days after its demand, any additional amounts
necessary to compensate Lender, on an after-tax basis, for such additional cost
or reduced amount receivable, as determined by Lender with respect to this
Agreement or the other Loan Documents. If Lender becomes entitled to claim any
additional amounts pursuant to this Section 2.6, it shall promptly notify
Borrower of the event by reason of which Lender has become so entitled.

2.7 APPLICATION OF PAYMENTS.  Except as otherwise expressly provided in the last
sentence of this Section 2.7, all payments made hereunder shall be applied
first, to the payment of any Late Charges and other sums (other than principal
and interest) due from Borrower to Lender under the Loan Documents, second, to
any interest then due at the Default Rate, third to interest then due at the
Base Rate, and last to the principal amount. Following and during the
continuance of an Event of Default, all sums collected by Lender shall be
applied in such order of priority to such items set forth below as Lender shall
determine in its sole discretion: (i) to the costs and expenses, including
reasonable attorneys' and paralegals' fees and costs of appeal, incurred in the
collection of any or all of the Loan due or the realization of any collateral
securing any or all

                                      -24-

<PAGE>

of the Loan; and (ii) to any or all unpaid amounts owing pursuant to the Loan
Documents in any order of application as Lender, in its sole discretion, shall
determine.

2.8 ORIGINATION FEE.  Borrower shall pay the Origination Fee to Lender on the
Closing Date.

2.9 SECURITY AGREEMENT.  To secure the payment, performance and discharge of the
Obligations, Borrower hereby grants, assigns, transfers, conveys and sets over
unto Lender, and hereby grants to Lender a continuing first priority, perfected
security interest in all of Borrower's right, title and interest in, to and
under any and all of the following, whether now and/or existing and/or now owned
and/or hereafter acquired and/or arising:

     (1)  the Accounts;

     (2)  the Contracts;

     (3)  the Reserve Accounts and other Reserve Account Collateral;

     (4)  the Equipment, Fixtures and Personalty;

     (5)  the General Intangibles;

     (6)  the Leases;

     (7)  the Inventory;

     (8)  the Management Agreement(s);

     (9)  the Rents and other Gross Revenues;

     (10) the Proceeds; and

     (11) together with all accessions to, substitutions for, and replacements
of, any of the foregoing and any and all products and cash and non-cash proceeds
of any of the foregoing (collectively, the "UCC COLLATERAL").

With respect to all UCC Collateral constituting a part of the Mortgaged
Property, including, without limitation, the Accounts, this Agreement shall
constitute a "security agreement" within the meaning of, and shall create a
security interest under, the UCC. Borrower hereby acknowledges and agrees that
Lender shall be permitted to file one or more financing statements naming
Borrower as debtor and Lender as secured party identifying "the Accounts, the
Contracts, the Reserve Accounts and other Reserve Account Collateral, the
Equipment, Fixtures and Personalty, the General Intangibles, the Leases, the
Inventory, the Management Agreements, the Rents and other Gross Revenues and the
Proceeds" of Borrower in the collateral description thereon. As to the UCC
Collateral, the grant, transfer, and assignment provisions of this Section 2.9
shall control over the grant provision of Section 2.1 of the Mortgage. Borrower
represents and warrants that, except for any financing statement filed by
Lender, no presently effective financing statement covering the Collateral or
any part thereof has been filed with any filing officer, and no other security
interest has attached to or has been perfected in the Collateral or any part
thereof. Borrower shall from time to time within fifteen (15) days after request
by Lender, execute, acknowledge and deliver, or authorize the filing of any
financing statement, renewal, affidavit, certificate, continuation statement or
other document as Lender may reasonably request in order to evidence, perfect,
preserve, continue, extend or maintain this security agreement and the security
interest created hereby as a first priority Lien on the UCC Collateral, subject
only to the Permitted Encumbrances.

2.10 CERTAIN SECURED PARTY REMEDIES.  If an Event of Default shall have occurred
and be continuing, Lender shall have all the remedies of a secured party under
the UCC and all other


                                      -25-

<PAGE>

rights and remedies now or hereafter provided or permitted by law, including,
without limitation, the right to take immediate and exclusive possession of the
UCC Collateral, or any part thereof, and for that purpose Lender may, as far as
Borrower can give authority therefor, with or without judicial process, enter
(if this can be done without breach of the peace) upon any premises on which any
of the Collateral or any part thereof may be situated. Without limitation of the
foregoing, Lender shall be entitled to hold, maintain, preserve and prepare all
of the Collateral for sale and to dispose of said Collateral, if Lender so
chooses, from the Mortgaged Property provided that Lender may require Borrower
to assemble such UCC Collateral and make it available to Lender for disposition
at a place to be designated by Lender from which the UCC Collateral would be
sold or disposed of, and provided further that, for a reasonable period of time
prior to the disposition of such UCC Collateral, Lender shall have the right to
use same in the operation of the Mortgaged Property. Borrower will execute and
deliver to Lender any and all forms, documents, certificates and registrations
as may be necessary or appropriate to enable Lender to sell and deliver good and
clear title to the UCC Collateral to the buyer at the sale as herein provided.
Unless the UCC Collateral is of the type customarily sold on a recognized
market, Lender will give Borrower at least ten (10) days' written notice of the
time and place of any public sale of such UCC Collateral or of the time after
which any private sale or any other intended disposition thereof is to be made.
The requirements of reasonable notice shall be met if such notice is given to
Borrower in writing at least ten (10) days before the time of the sale or
disposition. Lender may buy at any public sale and, if the UCC Collateral is of
a type customarily sold in a recognized market or is a type which is the subject
of widely distributed standard price quotations, it may buy at private sale.
Unless Lender shall otherwise elect, any sale of the UCC Collateral shall be
solely as a unit and not in separate lots or parcels, it being expressly agreed,
however, that Lender shall have the absolute right to dispose of such UCC
Collateral in separate lots or parcels. Lender shall further have the absolute
right to elect to sell the UCC Collateral as a unit with, and not separately
from, the Land and Improvements constituting a portion of the Mortgaged
Property. The net proceeds realized upon any disposition of the UCC Collateral,
after deduction for the expenses of retaining, holding, preparing for sale,
selling and the like and the attorneys' fees and legal expenses incurred by
Lender shall be applied towards satisfaction of such of the Obligations secured
hereby, and in such order of application, as Lender may elect. If all of the
Obligations are satisfied, Lender will account to Borrower for any surplus
realized on such disposition.

                                   SECTION 3
                               CONDITIONS TO LOAN

3.1  CONDITIONS TO FUNDING OF THE LOAN ON THE CLOSING DATE.

     The obligation of Lender to disburse the Loan is subject to the prior or
concurrent satisfaction of the conditions set forth below.

     (A) PERFORMANCE OF AGREEMENTS; TRUTH OF REPRESENTATIONS AND WARRANTIES; NO
INJUNCTION.  Borrower, Guarantor and all other Persons executing any Loan
Document on behalf of Borrower and Guarantor shall have performed in all
material respects all agreements which any of the Loan Documents provide shall
be performed on or before the Closing Date. The representations and warranties
contained in the Loan Documents shall be true, correct and complete in all
material respects on and as of the Closing Date to the same extent as though


                                      -26-

<PAGE>

made on and as of that date. No Legal Requirements shall have been adopted, no
order, judgment or decree of any Governmental Authority shall have been issued
or entered, and no litigation shall be pending or threatened, which in the
reasonable judgment of Lender would enjoin, prohibit or restrain, or impose or
result in an adverse effect upon the making, borrowing or repayment of the Loan
or the execution, delivery or performance of the Loan Documents. No Default or
Event of Default shall have occurred and then be continuing.

     (B) OPINION OF COUNSEL.  Lender shall have received and approved written
opinions of counsel for Borrower, Guarantor and Borrower Representative, in form
and substance reasonably satisfactory to Lender and its counsel, dated as of the
Closing Date. By execution of this Agreement, Borrower authorizes and directs
its counsel to render and deliver such opinions to Lender.

     (C) LOAN DOCUMENTS.  On or before the Closing Date, Borrower shall execute
and deliver and cause to be executed and delivered, to Lender all of the Loan
Documents, each, unless otherwise noted, dated the Closing Date, duly executed,
in form and substance satisfactory to Lender and in quantities designated by
Lender (except for the Promissory Note, of which only the original shall be
executed). Borrower hereby authorizes Lender to file the financing statements in
such filing offices as Lender elects.

     (D) [Intentionally Omitted.]

     (E) INSURANCE POLICIES AND ENDORSEMENTS.  Lender shall have received and
approved the original policies of insurance required to be maintained under this
Agreement and the other Loan Documents, together with endorsements satisfactory
to Lender naming Lender as additional insured under such policies. If such
policies are not delivered to Lender, Lender must receive and approve a copy of
the insurance policies in question and evidence of such insurance required to be
maintained in connection with this Agreement.

     (F) ORGANIZATIONAL AND AUTHORIZATION DOCUMENTS.  Lender shall have received
all documents reasonably requested by Lender, including all Organizational
Documents, with regard to the due organization, existence, internal governance,
power and authority, due authorization, execution and delivery, authorization to
do business and good standing of Borrower, Guarantor and the Borrower
Representative, the validity and binding effect of the Loan Documents and other
matters relating thereto, in form and substance reasonably satisfactory to
Lender.

     (G) CLOSING STATEMENT.  Lender shall have received and approved a closing
and disbursement statement executed by Borrower with respect to the disbursement
of the proceeds of the Loan.

     (H) FINANCIAL STATEMENTS.  Lender shall have received financial statements
of Guarantor as of December 31, 2003. Lender shall have received (a) audited
historical operating statements for the Mortgaged Property (such statements may
be unaudited, to the extent audited statements are not available), for the
calendar years 2002 and 2003, and unaudited financial statements for 2004 (to
date); (b) audited financial statements for Guarantor for the calendar years
2002 and 2003, and unaudited financial statements for the calendar year 2004 (to
date); and (c) a pro forma balance sheet of Borrower dated the Closing Date
giving effect to the making of


                                      -27-

<PAGE>

the Loan and the transactions occurring on the Closing Date, each accompanied by
an Officer's Certificate of the Borrower Representative.

     (I) BUDGET AND CAPITAL PLAN.  Lender shall have received and approved the
initial Budget and initial Capital Plan for Borrower.

     (J) APPOINTMENT OF AGENT FOR SERVICE OF PROCESS.  Lender shall have
received and approved a letter appointing (and accepted by) CT Corporation
System as Borrower's and Guarantor's agent for service of process.

     (K) MATERIAL CONTRACTS AND OTHER AGREEMENTS.  Lender shall have received
and approved true, correct and complete certified copies of each Material
Contract, all other operating agreements, service contracts and equipment leases
and all permits, licenses and documents pertaining to the Proprietary Rights
relating to the Mortgaged Property. Lender shall have received executed estoppel
certificates from all Parties to the Material Contracts designated by Lender
(and not otherwise addressed in this Section 3.1).

     (L) ENVIRONMENTAL ASSESSMENTS, PHYSICAL CONDITION REPORTS AND LENDER'S
INSPECTION AND PLANS AND SPECIFICATIONS.  Lender shall have received and
approved the Environmental Reports and Physical Condition Reports relating to
the Mortgaged Property, together with letters from the preparer(s) thereof
permitting Lender to rely upon the Environmental Reports and Physical Condition
Reports. To the extent in the possession of, or reasonably obtainable by, the
Borrower, a true, correct and complete copy of "as-built" plans and
specifications for the Improvements.

     (M) TITLE POLICY, SURVEY, SEARCHES, PERFECTION AND PRIORITY.  Lender shall
have received and approved (i) the Title Policy and (ii) a plat of survey of the
Land, Improvements and other components of the Mortgaged Property constituting
real estate certified to such Persons as Lender may designate and prepared in
accordance with Lender's requirements. Lender shall have received and approved
copies of Uniform Commercial Code financing statement, judgment, tax lien,
bankruptcy and litigation search reports of such jurisdictions and offices as
Lender may reasonably designate with respect to Borrower, Guarantor, Borrower
Representative and such other Persons as Lender may reasonably require. Lender
shall have received such other evidence as Lender may require confirming that
Lender has a perfected first priority security interests and Lien upon the
Collateral.

     (N) LICENSES, PERMITS AND APPROVALS, ZONING AND LAND USE COMPLIANCE.
Lender shall have received and approved (i) a copy of the certificate of
compliance issued by The Community Standards Committee of The Woodlands
Commercial Owners Association and The Woodlands Community Association issued
with respect to the Mortgaged Property and all other applicable licenses,
permits and approvals required to own, use, occupy, operate and maintain the
Mortgaged Property, including all necessary licenses and permits relating to
wetlands compliance, and use of water; (ii) evidence satisfactory to Lender of
the existence, ownership and status of all Proprietary Rights and Material
Contracts; and (iii) evidence satisfactory to Lender as to the compliance of the
Mortgaged Property with all applicable Legal Requirements.


                                      -28-

<PAGE>

     (O) RESERVE ACCOUNTS AND DEPOSITS.  The Reserve Accounts shall have been
established in a manner satisfactory to Lender. The initial deposits into the
Reserves on the Closing Date, shall have been made (which amounts may, with
Lender's approval, be made from the proceeds of the Loan).

     (P) ORIGINATION FEE.  Lender shall have received its Origination Fee.

     (Q) LEASES.  Lender shall have received (a) an estoppel certificate and
subordination, nondisturbance and attornment agreement executed by each tenant
of the Mortgaged Property and (b) true, correct and complete certified copies of
each of the Leases.

     (R) OTHER DOCUMENTS AND DELIVERIES.  Borrower shall have delivered such
other documents and deliveries as are set forth on the Closing Checklist
attached hereto as Schedule 1.1(A).

     (S) LEGAL FEES; CLOSING EXPENSES.  Borrower shall have paid any and all
legal fees and expenses of counsel to Lender, together with all recording fees
and taxes, title insurance premiums, and other costs and expenses related to the
Loan.

     (T) GUARANTY.  Guarantor shall have executed and delivered the Guaranty.

                                   SECTION 4
                         REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants to Lender that, after giving effect to the
Loan, as of the Closing Date:

4.1 ORGANIZATION, POWERS, QUALIFICATION AND ORGANIZATION CHART.  Borrower is a
limited partnership duly formed, validly existing and in good standing under the
laws of its state of formation. Each of Borrower and Borrower Representative has
all requisite power and authority to own and operate its properties, to carry on
its business as now conducted and proposed to be conducted, and to enter into
each Loan Document to which it is a party and to perform the terms thereof.
Guarantor is a corporation, duly organized, validly existing and in good
standing under the laws of its state of formation and has all requisite power
and authority to own and operate its properties, to carry on its business as now
conducted, and to enter into each Loan Document to which it is a party and to
perform the terms thereof. Borrower's U.S. taxpayer identification number is set
forth on Schedule 4.1(A)-1. Borrower and Guarantor are each duly qualified and
in good standing wherever necessary to carry on its present business and
operations. Borrower Representative is a limited liability company, duly
organized and validly existing under the laws of the State of Delaware and is
the sole general partner in Borrower. Guarantor owns one hundred percent (100%)
of the ownership interests in Borrower Representative. Guarantor owns,
indirectly, one hundred percent (100%) of the ownership interests in Borrower.
The organization chart attached hereto as Schedule 4.1(A)-2 correctly identifies
each Subsidiary of Borrower and each Person directly owning (and/or indirectly
owning five percent (5%) or more of) the ownership interests in Borrower and
Borrower Representative; provided that such organizational chart shall not
identify any Person owning, directly or in directly, any ownership interests of
Guarantor. The principal place of business and chief executive office of
Borrower is set forth on


                                      -29-

<PAGE>

Schedule 4.1(A)-3. Borrower has filed in a timely manner all reports, documents
and other materials required to be filed by it with any Governmental Authorities
and the information contained in each of such filings is true, correct and
complete in all respects). Borrower has retained all records and documents
required to be retained by it pursuant to any law, ordinance, rule, regulation,
order, policy, guideline or other requirement of any Governmental Authority.
Borrower has no Subsidiaries and has not made an Investment in any Person.
Borrower Representative's sole asset is its interest in Borrower.

4.2 AUTHORIZATION OF BORROWING; NO CONFLICTS; GOVERNMENTAL CONSENTS; BINDING
OBLIGATIONS AND LICENSE AND SECURITY INTERESTS OF LOAN DOCUMENTS.  Borrower has
the power and authority to incur the Obligations evidenced by the Note and other
Loan Documents to which it is a party, to execute and deliver the Loan Documents
to which it is a party and to perform its Obligations, to own the Mortgaged
Property and to continue its businesses and affairs as presently conducted.
Guarantor has the power and authority to execute and deliver the Guaranty, the
Environmental Indemnification Agreement and the other Loan Documents to which it
is a party. The incurring of the Obligations and the execution, delivery and
performance by Borrower and Guarantor of each of the Loan Documents to which
either is a party and the consummation of the transactions contemplated thereby
have been duly authorized by all necessary partnership, corporate or limited
liability company action, as the case may be. The incurring of the Obligations
and the execution, delivery and performance by Borrower and Guarantor of the
Loan Documents to which either is a party and the consummation of the
transactions contemplated thereby do not and will not: (1) violate any provision
of law applicable to Borrower, Guarantor or the Mortgaged Property, the
respective other Organizational Documents of, or applicable to, Borrower or
Guarantor, as the case may be, or any order, judgment or decree of any court or
other agency of government binding on Borrower or Guarantor or their respective
properties including the Mortgaged Property; (2) conflict with, result in a
breach of, or constitute (with due notice or lapse of time or both) a default
under any Material Contracts or any other agreement or document to which such
Person is a party or by which such Person or its property may be bound; (3)
result in or require the creation or imposition of any Lien upon the Mortgaged
Property or assets of Borrower or Guarantor (other than the Liens of Lender); or
(4) require any approval or consent of any Person under any Material Contracts
or any other agreement or document to which such Person is a party or by which
such Person or its property may be bound (except to the extent such approvals or
consents have been unconditionally obtained on or before the Closing Date). The
incurring of the Obligations, the execution, delivery and performance by
Borrower and Guarantor of the Loan Documents and the consummation of the
transactions contemplated thereby do not and will not require any registration
with, consent or approval of, or notice to, or other action to, with or by, any
federal, state or other Governmental Authority or regulatory body (except to the
extent unconditionally obtained on or before the Closing Date). The Loan
Documents, when executed and delivered by Borrower and Guarantor, as applicable,
will be the legally valid and binding obligations of Borrower and Guarantor, as
applicable, enforceable against Borrower and Guarantor, subject to bankruptcy,
insolvency, moratorium, reorganization and other similar laws affecting
creditors' rights generally and to the application of general equitable
principles in connection with the enforcement thereof. The Mortgage, together
with the Financing Statements to be filed in connection therewith, create a
valid, enforceable and perfected first priority lien and security interest in
the Mortgaged Property subject to no other interests, Liens or encumbrances,
other than the Permitted Encumbrances. Article 6 of this Agreement creates a
valid, enforceable


                                      -30-

<PAGE>

and perfected first priority security interest in the Reserve Account
Collateral. Borrower is a "registered organization" (as defined in the UCC)
organized under the laws of the State of Delaware.

4.3 FINANCIAL STATEMENTS.  All financial statements concerning Borrower and
Guarantor which have been or will hereafter be furnished by Borrower and
Guarantor to Lender pursuant to this Agreement have been or will be prepared in
accordance with GAAP consistently applied (except as disclosed therein, to the
extent Lender approves such disclosure) and do or will, in all material
respects, present fairly the financial condition of the Persons covered thereby
as at the dates thereof and the results of their operations for the periods then
ended.

4.4 INDEBTEDNESS.  As of the Closing Date, after giving effect to the
transactions contemplated hereby, Borrower does not have any Indebtedness except
for Permitted Indebtedness. Other than ordinary operating expenses pertaining to
the Mortgaged Property, all Expenses owing or accrued as of the Closing Date,
have been paid in full or have been reserved for by deposit into the Reserves.
No claim of any creditor of Borrower exists which would have a Material Adverse
Effect.

4.5 NO MATERIAL ADVERSE CHANGE.  Since December 31, 2003, no event or change has
occurred that has caused or evidences, either individually or together with such
other events or changes, a Material Adverse Effect.

4.6 TITLE TO PROPERTY; LIENS; ZONING; CONTRACTS; CONDITION OF THE MORTGAGED
PROPERTY.

     (A) Borrower has good and indefeasible fee simple title to the Land, the
Improvements and the other components of the Mortgaged Property, subject only to
the Permitted Encumbrances. Borrower owns all real and personal property
necessary for the operation of the Mortgaged Property subject only to the
Permitted Encumbrances. Except for the Permitted Encumbrances, the Mortgaged
Property is free and clear of Liens and other encumbrances. Except as otherwise
identified on Schedule 4.6(a), there are no outstanding Claims and all work,
services or materials the provision of which might ripen into a Claim have been
fully paid for. There are no assessments for improvements or other similar
outstanding charges or Impositions affecting the Mortgaged Property. Except as
otherwise identified on the survey provided to Lender, no Improvements lie
outside the boundaries and building restriction lines of the Land or encroach
onto any easements to any extent (unless affirmatively insured by the Title
Policy), and no improvements on adjoining properties encroach upon the Land to
any extent which would materially impair the Mortgaged Property. The Title
Policy premium has been fully paid. Except for the affidavit as to debts, liens
and possession provided by Borrower to the Title Company at Closing, neither
Borrower, nor, to Borrower's knowledge, any other Person, has provided any title
indemnities (or analogous documentation) or deposits of cash or other security
to the title insurer to obtain the Title Policy. The Permitted Encumbrances do
not and will not materially interfere with the security intended to be provided
by the Mortgage, the use or operation of the Mortgaged Property or the
marketability or value of the Mortgaged Property. Borrower will preserve its
right, title and interest in and to the Mortgaged Property for so long as the
Obligations remain outstanding and will warrant and defend same and the validity
and priority of the Mortgage and the Liens arising pursuant to the Loan
Documents from and against any and all claims whatsoever other than the
Permitted Encumbrances.


                                      -31-

<PAGE>

     (B) The Mortgaged Property is restricted for use as an office, laboratory,
vivarium, research, marketing, sales, storage, experimentation and production of
laboratory animals, which restriction is in full force and effect, and is beyond
all applicable appeal periods. Borrower is not in violation of, and, the
Mortgaged Property is in full compliance with all applicable zoning,
subdivision, land use and other Legal Requirements. No legal proceedings are
pending or, to Borrower's knowledge threatened, with respect to the compliance
of the Mortgaged Property with Legal Requirements. Neither the zoning nor any
other right to construct, use or operate the Mortgaged Property is in any way
dependent upon or related to any real estate other than the Mortgaged Property
and validly created, existing appurtenant perpetual easements insured in the
Title Policy or use of public rights of way. In the event that all or any part
of the Improvements are destroyed or damaged, said Improvements can be legally
reconstructed to their condition prior to such damage or destruction, and
thereafter exist for the same use without violating any zoning or other Legal
Requirements applicable thereto and without the necessity of obtaining any
variances or special permits. The Mortgaged Property contains not less than 468
parking spaces, which is enough permanent parking spaces to satisfy all
requirements imposed by applicable Legal Requirements with respect to parking.
All licenses, permits and other Proprietary Rights necessary to operate the
Mortgaged Property as it is currently operated are in full force and effect
including all water permits and approvals. Borrower has not received any written
notice of any violation of any such licenses, permits, authorizations,
registrations or approvals that materially impair the value of the Mortgaged
Property for which such notice was given or which would affect the use or
operation of the Mortgaged Property in any material respect, which noticed
violation remains uncured.

     (C) Borrower has provided Lender with true and complete copies of all
Material Contracts, all of which are specifically listed on Schedule 4.6(C)
hereof, other than the Permitted Encumbrances. Except for the Loan Documents and
as set forth on Schedule 4.6(C), Borrower is not a party to and neither it nor
the Mortgaged Property is bound by any material agreement, document or
instrument which is binding upon the Mortgaged Property other than the Loan
Documents, the Permitted Encumbrances, the other Material Contracts, if any, and
such party's organizational documents, true, correct and complete copies of
which have been delivered to Lender. Except for the Loan Documents and the
Material Contracts, none of Borrower, Borrower Representative and Guarantor are
parties to or bound by, nor is any of their respective property subject to or
bound by, any contract or other agreement which restricts its ability to conduct
its business at the Mortgaged Property in the ordinary course or, either
individually or in the aggregate, has a Material Adverse Effect or could
reasonably be expected to have a Material Adverse Effect. Borrower, Borrower
Representative and Guarantor are not in default in the performance, observance
or fulfillment of any of the obligations, covenants or conditions contained in
any Material Contract of any such Person which could have a Material Adverse
Effect. No Default or Event of Default exists.

     (D) All of the Improvements are in good condition and repair except with
respect to the Required Capital Improvements. To Borrower's knowledge, except as
disclosed in the Physical Condition Report, there are no latent or patent
structural or other significant defects or deficiencies in the Improvements or
Equipment, Fixtures and Personalty. Municipal or private water supply, storm and
sanitary sewers, and electrical, gas and telephone facilities are available to
the Mortgaged Property to the boundary lines of the Mortgaged Property through
publicly dedicated streets or highways or perpetual appurtenant easements
insured on the Title Policy as


                                      -32-

<PAGE>

appurtenant easements, are sufficient to meet the reasonable needs of the
Mortgaged Property as now used or as otherwise presently contemplated to be
used, and are connected to, and is in full unimpaired operation with respect to
the Improvements and no other utility facilities are necessary to meet the
reasonable needs of the Mortgaged Property as now used. The design and as-built
conditions of the Mortgaged Property are such that surface and storm water does
not accumulate on the Mortgaged Property and does not drain from the Mortgaged
Property across land of adjacent property owners or others in any manner which
would have a Material Adverse Effect or which require any approvals or easements
not already obtained. Except as set forth on Schedule 4.6(D) or on the plat of
survey delivered to Lender, no part of the Mortgaged Property is within a flood
plain or in a flood hazard area as currently shown on the most recent Flood
Hazard Boundary Maps prepared by the Department of Housing and Urban Development
and (except to the extent validly created and existing perpetual appurtenant
easements insured in the Title Policy have been created therefor) none of the
Improvements create encroachments over, across or upon any of the Mortgaged
Property's boundary lines, rights of way or easements, and no building or other
improvements on adjoining land create such an encroachment. All irrigation lines
servicing the Mortgaged Property are entirely located on the Mortgaged Property
or are located on adjacent property pursuant to validly created and existing
perpetual appurtenant easements insured as appurtenant easements in the Title
Policy. The Land and Improvements have legally adequate contiguous rights of
access to public ways. All roads necessary for the full utilization of the Land
and Improvements for their current purpose have been completed and dedicated to
public use and accepted by all Governmental Authorities. No offsite improvements
are necessary or used for the ownership, use or operation of the Mortgaged
Property, other than public utilities. The Improvements, the Land, the
Equipment, Fixtures and Personalty and the Inventory located on the Land
constitutes all of the real property, equipment, fixtures and other tangible
property currently owned or leased by Borrower or used in the operation of the
Mortgaged Property and the Equipment, Fixtures and Personalty owned by the
Borrower are sufficient to own, operate and use the Land and Improvements as
currently operated. Except as identified in the Permitted Encumbrances, Borrower
has not entered into any agreement or option, and is not otherwise bound, to
sell the Mortgaged Property (or any part thereof). Borrower has not entered into
any agreement or option, and is not otherwise bound, to acquire any additional
real estate or Investments. As of the date hereof, no portion of the
Improvements constituting part of the Mortgaged Property or on the Land has been
materially damaged, destroyed or injured by fire or other casualty which has not
been fully restored.

4.7 LITIGATION.  Except as set forth on Schedule 4.7, there are no judgments
outstanding against Borrower or Guarantor or are binding upon the Mortgaged
Property or any property of, Borrower Representative or Guarantor, nor is there
any litigation, governmental investigation or arbitration pending or, to
Borrower's knowledge, threatened against Borrower, Borrower Representative or
Guarantor. The judgments, litigation, investigations and arbitrations set forth
on Schedule 4.7 will not result, if adversely determined, and could not
reasonably be expected to result, either individually or in the aggregate, in
any Material Adverse Effect and do not relate to and will not affect the
consummation of the transactions contemplated hereby. No petition in bankruptcy,
whether voluntary or involuntary, or assignment for the benefit of creditors, or
any other action involving debtors' and creditors' rights has ever been filed
under the laws of the United States of America or any state thereof, or
threatened, by or against, Borrower, Guarantor or Borrower Representative.
Except as set forth on Schedule 4.7, there are no mechanics' or materialmen's
liens, alienable bills or other claims constituting or that may constitute a
Lien on


                                      -33-

<PAGE>

the Mortgaged Property or any part thereof, and no work for which any such Lien
could be asserted has been performed which has not been fully paid for. Borrower
has not received any notice from any governmental or quasi-governmental body or
agency or from any person or entity with respect to (and Borrower does not know
of) any actual or threatened taking of the Land or Improvements, or any portion
thereof, for any public or quasi-public propose or of any moratorium which may
affect the use, operation or ownership of the Mortgaged Property.

4.8 PAYMENT OF TAXES.  All tax returns and reports of Borrower, Borrower
Representative and Guarantor required to be filed by such Persons have been
timely filed, and all taxes, assessments, fees and other governmental charges
upon such Person and upon the Mortgaged Property, assets, income and franchises
which are due and payable have been paid in full. To Borrower's knowledge, no
tax returns of Borrower, Borrower Representative or Guarantor is under audit. No
tax liens have been filed and, to Borrower's knowledge no claims are being
asserted with respect to any such taxes. The charges, accruals and reserves on
the books of Borrower, Borrower Representative and Guarantor in respect of any
taxes or other governmental charges are in accordance with GAAP. Except as
described in Schedule 4.8, none of Borrower, Guarantor and Borrower
Representative has given or been requested to give waivers or extensions (or is
or would be subject to a waiver or extension given by any other Person) of any
statute of limitations relating to the payment of taxes of Borrower, Guarantor
and Borrower Representative or for which Borrower, Guarantor and Borrower
Representative may be liable. All taxes that Borrower, Guarantor and Borrower
Representative is or was required by Legal Requirements to withhold or collect
have been duly withheld or collected and, to the extent required, have been paid
to the applicable Governmental Authority. All tax returns filed by (or that
include on a consolidated basis) Borrower, Guarantor and Borrower Representative
are true, correct and complete. There is no tax sharing agreement that will
require any payment by Borrower, Guarantor and Borrower Representative after the
date of this Agreement.

4.9 GOVERNMENTAL REGULATION; MARGIN LOAN.  Borrower, Borrower Representative and
Guarantor are not, nor after giving effect to the Loan, will be, subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940 or to any federal or state
statute or regulation limiting its ability to incur indebtedness for borrowed
money. Borrower shall use the proceeds of the Loan only for the purposes set
forth in this Agreement and consistent with all applicable laws, statutes, rules
and regulations. No portion of the proceeds of the Loan shall be used by
Borrower in any manner that might cause the borrowing or the application of such
proceeds to violate Regulation U, Regulation T or Regulation X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the Exchange Act or any other Legal Requirements. The Loan is an exempt
transaction under the Truth-in-Lending Act (15 U.S.C.A. Sections 1601 et seq.).
Borrower is not a non-resident alien for purposes of U.S. income taxation and
neither Borrower nor Borrower Representative is a foreign corporation,
partnership, foreign trust or foreign estate (as said terms are defined in the
United States Internal Revenue Code). Borrower, Borrower Representative,
Guarantor or any of their respective Subsidiaries are not, and shall not become,
a Person with whom Lender is restricted from doing business with under
regulations of the Office of Foreign Asset Control ("OFAC") of the Department of
the Treasury (including, but not limited to, those named on OFAC's Specially
Designated and Blocked Persons list) or under any statute, executive order
(including, but not limited to, the September 24, 2001 Executive Order Blocking
Property and Prohibiting Transactions With Persons Who Commit, Threaten to
Commit, or


                                      -34-

<PAGE>

Support Terrorism) or other governmental action relating to terrorism financing,
terrorism support and/or otherwise relating to terrorism and are not and shall
not engage in any dealings or transaction or otherwise be associated with
Persons named on OFAC's Specially Designated and Blocked Persons list.

4.10 EMPLOYEE BENEFIT PLANS; ERISA; EMPLOYEES.  Except for the Employee Benefit
Plans set forth on Schedule 4.10, neither Borrower nor any ERISA Affiliate of
Borrower maintains or contributes to, or has any obligation under, any Employee
Benefit Plans. Borrower is not an "employee benefit plan" (within the meaning of
section 3(3) of ERISA) to which ERISA applies and the Mortgaged Property and
Borrower's assets do not constitute plan assets. No actions, suits or claims
under any laws and regulations promulgated pursuant to ERISA are pending or, to
Borrower's knowledge, threatened against Borrower. Borrower has no knowledge of
any material liability incurred by Borrower which remains unsatisfied for any
taxes or penalties with respect to any Employee Benefit Plan or any
Multiemployer Plan, or of any lien which has been imposed on Borrower's assets
pursuant to section 412 of the Code or section 302 or 4068 of ERISA. The Loan,
the execution, delivery and performance of the Loan Documents and the
transactions contemplated by this Agreement do not constitute a non-exempt
prohibited transaction under ERISA. Borrower is not a party to any collective
bargaining or other employment agreement other than the agreements identified on
Schedule 4.10.

4.11 INTELLECTUAL PROPERTY.  Schedule 4.11 sets forth a true, correct and
complete list of all of the patents, trademarks, tradenames, technology, other
intellectual property rights and other Proprietary Rights owned by Borrower and
used in connection with the ownership, operation and management of the Mortgaged
Property. Borrower possesses, owns or has valid licenses, permits, certificates
of public convenience, service marks, authorizations, licenses, patents, patent
rights or licenses, trademarks, trademark rights, trade name rights, trade
styles, trade dress, logos and other source or business affiliation identifiers,
and copyrights, certificates, consents, orders, approvals and other
authorizations from, and have made all declarations and filings with, all
federal, state, local and other Governmental Authority, all self-regulatory
organizations and all courts and other tribunals (collectively, together with
the goodwill associated therewith, "PROPRIETARY RIGHTS") presently required or
necessary to own or lease, as the case may be, and to operate, the Mortgaged
Property and to carry on its business as now conducted in accordance with the
Approved Budget and Approved Capital Plan, except where the failure to obtain
same would not, individually or in the aggregate, have a Material Adverse
Effect. Borrower has fulfilled and performed all of its obligations with respect
to such permits, and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or could result in
any other material impairment of the rights of the holder of any such permit;
and Borrower has not received any notice of any proceeding relating to
unenforceability, invalidity, revocation or modification of any Proprietary
Rights, except where such revocation, unenforceability, invalidity, or
modification would not, individually or in the aggregate, have a Material
Adverse Effect. Borrower has not received any notice that any Proprietary Rights
have been declared unenforceable or otherwise invalid by any court or
Governmental Authority other than notices relating to Proprietary Rights the
loss of which would not, individually or in the aggregate, have a Material
Adverse Effect. Borrower has not received any notice of infringement of, or
conflict with, and Borrower does not know of any such infringement of or
conflict with, asserted rights of others with respect to any Proprietary Rights


                                      -35-

<PAGE>

which, if such assertion of infringement or conflict were sustained, would have
a Material Adverse Effect.

4.12 BROKER'S FEES.  No broker's or finder's fee, commission or similar
compensation will be payable with respect to the Loan, the issuance of the Note
or any of the other transactions contemplated hereby or by any of the Loan
Documents based upon any broker or lender engaged by Borrower, Guarantor or any
affiliate of Borrower. Borrower shall indemnify and hold Lender harmless from
and against any and all claims of all brokers or finders claiming by, through or
under Borrower and in any way related to the Loan or any of the transactions
contemplated hereby.

4.13 ENVIRONMENTAL COMPLIANCE.  There are no claims, liabilities,
investigations, litigation, administrative proceedings, whether pending or, to
Borrower's knowledge threatened, or judgments or orders relating to any
Hazardous Materials (collectively called "ENVIRONMENTAL CLAIMS") asserted or
threatened against Borrower, any predecessor owner, tenant or operator or
relating to any real property currently or formerly owned, leased or operated by
Borrower including the Mortgaged Property. Except as disclosed in the
Environmental Reports, to Borrower's knowledge, neither Borrower nor any other
Person has caused or permitted any Hazardous Material to be used, generated,
reclaimed, transported, released, treated, stored or disposed of in a manner
which could form the basis for an Environmental Claim against Borrower. Except
as disclosed in the Environmental Reports, to Borrower's knowledge, no Hazardous
Materials in violation of applicable Environmental Laws are or were stored or
otherwise located, and no underground storage tanks or surface impoundments are
or were located, on real property currently or formerly owned, leased or
operated by Borrower, including the Mortgaged Property, or to the knowledge of
Borrower, on adjacent parcels of real property, and no part of such real
property or, to the knowledge of Borrower no part of such adjacent parcels of
real property, including the groundwater located thereon, is presently
contaminated by Hazardous Materials in violation of applicable Environmental
Laws or to any extent which has, or might reasonably be expected to have, a
Material Adverse Effect. Except as disclosed in the Environmental Reports, to
Borrower's knowledge, Borrower and the Mortgaged Property has been and is
currently in compliance with all applicable Environmental Laws, including
obtaining and maintaining in effect all permits, licenses or other
authorizations required by applicable Environmental Laws.

4.14 SOLVENCY.  As of the date of this Agreement and after giving effect to the
consummation of the transactions contemplated by the Loan Documents, Borrower:
(A) owns and will own assets the fair saleable value of which are (1) greater
than the total amount of liabilities (including Contingent Obligations) of
Borrower, and (2) greater than the amount that will be required to pay the
probable liabilities of Borrower's then existing debts as they become absolute
and matured considering all financing alternatives and potential asset sales
reasonably available to Borrower; (B) has capital that is not insufficient in
relation to its business as presently conducted or any contemplated or
undertaken transaction; and (C) does not intend to incur and does not believe
that it will incur debts beyond its ability to pay such debts as they become
due. Borrower has not entered into the Loan Documents or the transactions
contemplated under the Loan Documents with the actual intent to hinder, delay,
or defraud any creditor. After giving effect to the Loan and the transactions
occurring on the Closing Date, Borrower's net unreimbursed investment in the
Mortgaged Property is not less than $21,000,000. After giving


                                      -36-

<PAGE>

effect to the transactions occurring on the Closing Date, no Default or Event of
Default exists. No material adverse change in the financial conditions or
operation of the business of Borrower and Guarantor has occurred since the
applicable dates of the financial statements of the applicable Person provided
on or before the Closing Date.

4.15 DISCLOSURE.  The representations and warranties of Borrower and Guarantor
contained in the Loan Documents, the financial statements referred to in Section
5.1(A), and any other documents, certificates or written statements furnished to
Lender by or on behalf of Borrower or Guarantor for use in connection with the
Loan do not contain any untrue statement of a material fact or omit or will omit
to state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances in which the same
were made. There is no material fact known to Borrower that has had or will have
a Material Adverse Effect that has not been disclosed in this Agreement or in
such other documents, certificates and statements furnished to Lender by or, on
behalf of, Borrower for use in connection with the Loan.

4.16 INSURANCE.  Schedule 4.16 sets forth a complete and accurate description of
all policies of insurance that will be in effect as of the Closing Date for
Borrower and such policies of insurance satisfy all of the requirements of
Section 5.4. All premiums thereon have been paid in full through December 1,
2004, no notice of cancellation has been received with respect to such policies
and Borrower is in compliance, in all material respects, with all conditions
contained in such policies.

4.17 BUDGET.  The Approved Budget submitted to Lender for the Mortgaged Property
is a true, correct and complete copy of the Budget and Capital Plan in effect on
and as of the Closing Date. A true, correct and complete copy of the initial
Approved Budget for the period ending December 31, 2004 is attached hereto as
Schedule 4.17. The Approved Budget and all of the amounts set forth therein,
present a true, full and complete line itemization (by category for the fiscal
year to which such Annual Budget applies) of all reasonably estimated Gross
Revenues and all reasonably estimated Expenses which Borrower expects to pay or
anticipates becoming obligated to pay relating to the Mortgaged Property. No
material capital expenditures with respect to the Mortgaged Property are being
incurred, contemplated or are reasonably necessary, except as specified in the
Approved Budget.

4.18 ACCOUNTS.  Schedule 4.18 sets forth a complete and accurate itemization of
all of Borrower's time, demand, securities or similar Accounts that are in
existence as of the Closing Date.

4.19 MANAGEMENT AGREEMENT.  Borrower is not party to any Management Agreement
nor has it otherwise contracted with any managing agent to assist Borrower in
the management and operation of the Mortgaged Property.

4.20 SPECIAL ASSESSMENTS; TAXES.  There are no pending or, to the knowledge of
Borrower proposed, special or other assessments for public improvements or
otherwise affecting the Mortgaged Property, nor, to Borrower's knowledge, are
there any contemplated improvements to the Mortgaged Property that may result in
such special or other assessments. Borrower has provided Lender with true,
correct and complete copies of all bills and invoices for Impositions


                                      -37-

<PAGE>

which have been levied or assessed against or are outstanding with respect to
the Mortgaged Property. Borrower has provided Lender with a true, correct and
complete schedule of the assessment of the Mortgaged Property in effect as of
the Closing Date. Borrower has not received any notice that any portion of the
Mortgaged Property has been re-assessed or is currently the subject of a
reassessment. Except for abatements pursuant to the Tax Abatement Agreements, no
portion of the Mortgaged Property is exempt from taxation or constitutes an
"omitted" tax parcel. No Impositions are currently delinquent or outstanding
with respect to the Mortgaged Property. The conveyance of the Mortgaged Property
to Borrower did not, in and of itself, constitute the basis for any reassessment
of all or any part of the Mortgaged Property or the basis for any increase in
any currently outstanding or previously satisfied Impositions which has not
already been imposed and disclosed in writing to Lender by Borrower. No tax
contests of any Impositions or assessments are currently pending. The Land and
Improvements constitute a separate tax lot or lots, with a separate tax
assessment or assessments, independent of any other land or improvements not
constituting a part of the Mortgaged Property and no other land or improvements
is assessed and taxed together with any portion of the Mortgaged Property.

4.21 LEASES.  Except for the Guarantor Lease, there are no Leases or other
arrangements for occupancy of space within the Mortgaged Property that are
currently in effect. Borrower has provided Lender with a true, complete and
correct copy of the Guarantor Lease, including any amendments or modifications
thereto. The Mortgaged Property is occupied solely by Guarantor.

4.22 REPRESENTATIONS REMADE.  Borrower warrants and covenants that the foregoing
representations and warranties will be true and shall be deemed remade as of the
date of the Closing. All representations and warranties made in the other Loan
Document or in any certificate or other document delivered to Lender by or on
behalf of Borrower pursuant to the Loan Documents shall be deemed to have been
relied upon by Lender, notwithstanding any investigation made by or on behalf of
Lender. All such representations and warranties shall survive the making of the
Loan and shall continue in full force and effect until such time as the Loan has
been paid in full.

                                   SECTION 5
                              AFFIRMATIVE COVENANTS

     Borrower covenants and agrees that so long as this Agreement shall remain
in effect or the Note shall remain outstanding, Borrower shall perform and
comply with all covenants in this Section 5.

5.1 FINANCIAL STATEMENTS AND OTHER REPORTS.  Borrower will maintain a system of
accounting in accordance with sound business practices to permit preparation of
financial statements in conformity with GAAP and proper and accurate books,
records and accounts reflecting all of the financial affairs of Borrower with
respect to all items of income and expense in connection with the operation of
the Mortgaged Property.

     (A) FINANCIAL STATEMENTS.  Within one hundred twenty (120) days after the
end of each calendar year, Borrower shall provide to Lender true and complete
annual audited consolidated financial statements for Guarantor and true and
complete annual unaudited financial statements for Borrower and the operation of
the Mortgaged Property, all prepared in accordance


                                      -38-

<PAGE>

with GAAP. All audited financial statements shall be audited by a so-called
"Big-4" accounting firm or another independent certified public accounting firm
reasonably satisfactory to Lender. All financial statements (whether or not
audited) shall include a balance sheet as of the end of such year, profit and
loss statements for such year and a statement of cash flow for such year, with
such detailed supporting schedules covering the operation of the Mortgaged
Property as Lender shall reasonably require including a reconciliation to the
monthly reports and statements delivered to Lender and include an itemized
accounting of all Gross Revenues and Expenses for the Mortgaged Property. As
soon as reasonably practicable (but in any event within forty-five (45) days)
after the end of each calendar quarter, Borrower shall provide to Lender a true
and complete quarterly cash flow, balance sheet, and operating statement for
Borrower, Guarantor and the Mortgaged Property (none of which are required to be
audited) certified by the president or vice president of Borrower Representative
and Guarantor which quarterly statements shall be in form and substance
acceptable to Lender. Such quarterly statements shall be compared to the prior
year's quarter and year-to-date and to the then applicable Approved Budget.
Borrower shall also provide (and cause Guarantor to provide), such other
financial information as Lender may, from time to time, reasonably request
certified (if requested by Lender) by the applicable chief financial officer (or
similar position). Borrower will deliver, concurrently with the annual and
quarterly statements, a certificate of its chief financial officer (or analogous
position) certifying that no Default or Event of Default has occurred. In the
event Borrower enters into a Management Agreement subsequent to the date hereof,
as soon as available, and in any event within twenty (20) days after the end of
each Loan Month, Borrower will deliver to Lender a copy of the periodic
reporting package required to be delivered to Borrower by a Manager pursuant to
such Management Agreement.

     (B) ACCOUNTANTS' CERTIFICATION.  Together with each delivery of annual
financial statements of Borrower and Guarantor pursuant to subsection 5.1(A),
Borrower shall request as part of the engagement of its independent certified
public accountant, and shall use best efforts to obtain, a written statement by
such independent certified public accountant (1) stating that the examination
has included a review of the terms of this Agreement as such terms relate to
accounting matters, (2) stating whether, in connection with the examination, any
condition or event that constitutes a Default or an Event of Default (of which
said accountants may be aware from said review, and without obligation to review
other aspects of this Agreement or to review any of the other Loan Documents)
has come to their attention, and (3) if such a condition or event has come to
their attention, specifying the nature and period of existence thereof; provided
that the requirements set forth in this subsection (B) shall be waived for so
long as (i) Borrower's financial statements are prepared on a consolidated basis
with the financial statements of Guarantor and (ii) Guarantor is a reporting
company under the Exchange Act, and provided further that, for purposes of the
foregoing, "best efforts" shall not require a change in Borrower's independent
certified public accountant.

     (C) ACCOUNTANTS' REPORTS.  Promptly upon receipt thereof, Borrower will
deliver copies of all significant reports submitted to Borrower or Guarantor, as
applicable, by independent public accountants in connection with each annual,
interim or special audit of the financial statements of Borrower or Guarantor,
as applicable, made by such accountants, including the comment letter submitted
by such accountants to management in connection with their annual audit;
provided that the requirements set forth in this subsection (C) shall be waived
for so long as (i) Borrower's financial statements are prepared on a
consolidated basis with the


                                      -39-

<PAGE>

financial statements of Guarantor and (ii) Guarantor is a reporting company
under the Exchange Act.

     (D) ANNUAL BUDGETS AND CAPITAL PLANS.  Not later than November 30th of each
calendar year, Borrower shall deliver a Budget and a Capital Plan for the
following calendar year for the Mortgaged Property to Lender for its review and
approval (the Budget and Capital Plan are collectively referred to as the
"ANNUAL BUDGET" and the Annual Budget approved by Lender is referred to herein
as the "APPROVED BUDGET"), which approval shall not be unreasonably withheld,
conditioned or delayed. Lender shall have fifteen (15) Business Days to approve
or reject each proposed Annual Budget. Concurrently, Borrower shall deliver an
annual business plan for the Mortgaged Property. If Lender disapproves the
Annual Budget, which disapproval shall specify the respects in which it is
unacceptable, Borrower shall resubmit same to Lender for its review until such
time as the Annual Budget is approved by Lender. Borrower shall not modify any
Approved Budget without Lender's approval, which approval shall not be
unreasonably withheld, conditioned or delayed. Borrower shall not incur any
Expenses which are not set forth in the Approved Budget except as otherwise
approved by Lender, which approval shall not be unreasonably withheld,
conditioned or delayed. Borrower shall, within one hundred twenty (120) days
after the end of each calendar year during the term of the Loan, deliver to
Lender an annual summary of any and all capital expenditures made at the
Mortgaged Property during the prior twelve (12)-month period.

     (E) NOTICES, EVENTS OF DEFAULT AND LITIGATION.  Borrower shall promptly
deliver, or cause to be delivered, copies of all notices, demands, reports or
requests given to, or received by Borrower from, any Governmental Authorities or
with respect to any Indebtedness of Borrower or any Material Contracts, and
shall notify Lender within two (2) Business Days after Borrower receives notice
or acquires knowledge of, any violation of Legal Requirements, investigation,
subpoena or audit by any Governmental Authority or default with respect to the
Mortgaged Property or any Indebtedness or Material Contracts. Promptly upon
Borrower obtaining knowledge of any of the following events or conditions,
Borrower shall deliver to Lender a written notice specifying the nature and
period of existence of such condition or event and what action Borrower has
taken, is taking and proposes to take with respect thereto: (1) any condition or
event that constitutes an Event of Default or Default; and/or (2) or any fact,
circumstance, event or condition which has, or would reasonably be expected to
have, a Material Adverse Effect. Promptly upon Borrower obtaining knowledge of
(i) the institution of any action, suit, proceeding, governmental investigation
or arbitration against or affecting Borrower or Guarantor or the Mortgaged
Property, or any other property of Borrower that would reasonably be expected to
have a Material Adverse Effect or (ii) any material development in any action,
suit, proceeding, governmental investigation or arbitration at any time pending
against or affecting Borrower or Guarantor or the Mortgaged Property or any
other property of Borrower that would reasonably be expected to have a Material
Adverse Effect, Borrower will give notice thereof to Lender and provide such
other information as may be available to it to enable Lender and its counsel to
evaluate such matters.

     (F) ERISA.  Borrower shall deliver to Lender such certifications or other
evidence from time to time throughout the term of the Loan, as Lender, in its
sole discretion, may reasonably request, that (A) Borrower is not and does not
maintain an "employee benefit plan" as defined in Section 3(3) of ERISA, which
is subject to Title I of ERISA, or a "governmental


                                      -40-

<PAGE>

plan" within the meaning of Section 3(32) of ERISA; (B) Borrower is not subject
to state statutes regulating investments and fiduciary obligations with respect
to governmental plans; and (C) one or more of the following circumstances is
true: (i) equity interests in Borrower are publicly offered securities, within
the meaning of 29 C.F.R. Section 2510.3-101(b)(2); (ii) less than twenty-five
percent (25%) of each outstanding class of equity interests in Borrower is held
by "benefit plan investors" within the meaning of 29 C.F.R. Section
2510.3-101(f)(2); or (iii) Borrower qualifies as an "operating company" or a
"real estate operating company" within the meaning of 29 C.F.R. Section
2510.3-101(c) or (e).

     (G) TAX RETURNS.  Borrower will deliver to Lender copies of all federal and
state income and other tax returns, schedules, statements and reports to its
owners within ten (10) Business Days after the earlier of filing or delivery of
such tax returns or other items with the Internal Revenue Service or the
applicable Governmental Authority or delivery to its owners.

     (H) ESTOPPEL CERTIFICATES.  Within ten (10) Business Days following a
request by Lender, Borrower shall provide to Lender, a duly acknowledged written
statement confirming the amount of the outstanding Obligations, the terms of
payment and maturity date of the Note, the date to which interest has been paid,
and whether, to Borrower's knowledge, any offsets or defenses exist against the
Obligations, and if any such offsets or defenses are alleged to exist, the
nature thereof shall be set forth in detail.

     (I) OTHER.  With reasonable promptness, Borrower will deliver such other
information and data with respect to Borrower as from time to time may be
reasonably requested by Lender. Borrower shall also provide Lender with a copy
of each 8K, 10Q and 10K (each as defined in the Exchange Act) or their successor
forms under the Exchange Act, filed by Guarantor from time to time with the
United States Securities and Exchange Commission not later than five (5)
Business Days after the filing thereof. Borrower shall deliver, or cause to be
delivered, to Lender annually, concurrently with the renewal of the insurance
policies required hereunder, an Officer's Certificate stating that the insurance
policies required to be delivered to Lender pursuant to Section 5.4 are
maintained with insurers who comply with the terms of Section 5.4, setting forth
a schedule describing all premiums required to be paid by Borrower to maintain
the policies of insurance required under Section 5.4, and confirming full
payment of all such premiums.

     (J) ELECTRONIC FORMAT.  To the extent then available, Borrower will provide
to Lender a copy of any reports, notices, statements or other deliveries
required pursuant to this Section 5.1 in an electronic format reasonably
satisfactory to Lender.

5.2 EXISTENCE; QUALIFICATION.  Borrower will be, and will cause Guarantor to be,
and continue to be, qualified in the jurisdiction in which the Mortgaged
Property is located and keep in full force and effect its existence in the
jurisdiction in which the Mortgaged Property is located.

5.3 PAYMENT OF IMPOSITIONS AND LIEN CLAIMS; PERMITTED CONTESTS.

     (A) Subject to Section 5.3(B), Borrower will pay, or cause payment of, (i)
all Impositions before in each instance any penalty or fine is incurred with
respect thereto, (ii) all


                                      -41-

<PAGE>

claims ("CLAIMS") (including claims for labor, services, materials and supplies)
for sums that have become due and payable and that by law have or may become a
Lien upon the Mortgaged Property or Borrower, before in each instance any
penalty or fine is incurred with respect thereto, and (iii) all federal, state
and local income taxes, sales taxes, excise taxes and all other taxes and
assessments levied, imposed, confirmed or assessed against Borrower, its
business, income, liabilities or assets or the Mortgaged Property, before in
each instance any penalty or fine is incurred with respect thereto.

     (B) With prior notice to Lender, Borrower shall have the right to pay
Impositions, in full, under "protest." Notwithstanding Section 5.3(A), Borrower
shall not be required to pay, discharge or remove or cause payment, discharge or
removal of any Imposition or Claims pertaining to labor, services, materials and
supplies supplied to the Land and Improvements so long as Borrower contests
(each such contest, a "PERMITTED CONTEST") in good faith such Imposition or
Claims or the validity, applicability or amount thereof by an appropriate legal
proceeding which operates to prevent the collection of such amounts and the sale
of the Mortgaged Property or any portion thereof so long as: (a) at least thirty
(30) days prior to the date on which such Imposition or Claims would otherwise
have become delinquent, Borrower shall have given Lender notice of its intent to
contest said Imposition, (b) at least thirty (30) days prior to the date on
which such Imposition would otherwise have become delinquent, Borrower shall
have deposited with Lender (or with a court of competent jurisdiction or other
appropriate Person approved by Lender) such additional amounts or other security
as are necessary to keep on deposit at all times, an amount equal to at least
one hundred twenty-five percent (125%) (or such higher amount as may be required
by applicable law) of the total of (x) the balance of such Imposition or Claims
then remaining unpaid, and (y) all interest, penalties, costs and charges
accrued or accumulated thereon, (c) no risk of sale, forfeiture or loss of any
interest in the Mortgaged Property or any part thereof arises, in Lender's
reasonable judgment, during the pendency of such contest, (d) such contest does
not, in Lender's reasonable discretion, have a Material Adverse Effect and (e)
in the case of Claims, the liens, if any, securing the Claims in question have
been defeased or bonded against in a manner satisfactory to Lender. Each
Permitted Contest shall be prosecuted, at Borrower's sole cost and expense, with
reasonable diligence, and Borrower shall promptly pay, or cause payment of, the
amount of such Imposition or Claims as finally determined, together with all
interest and penalties payable in connection with such Permitted Contest.
Lender, in its sole discretion, may apply any amount or other security deposited
with Lender under this subsection or otherwise to the payment of any unpaid
Imposition or Claims to prevent the sale, loss or forfeiture of the Mortgaged
Property or any portion thereof. Lender shall not be liable for any failure to
so apply any amount or other security deposited. Any surplus retained by Lender
after payment of the Imposition or Claims for which a deposit was made shall be
repaid to Borrower unless an Event of Default exists, in which case the surplus
may be applied by Lender to the Obligations. Notwithstanding any provision of
this Section 5.3 to the contrary, Borrower shall promptly pay any Imposition or
Claims which it might otherwise be entitled to contest if, in reasonable
determination of Lender, the Mortgaged Property or any portion thereof is in
jeopardy or in danger of being forfeited or foreclosed. If Borrower refuses to
pay any such Imposition or Claims, Lender may (but shall not be obligated to)
make such payment and Borrower shall reimburse Lender within five (5) Business
Days of written notice by Lender for all such advances which advances will bear
interest at the Default Rate.


                                      -42-

<PAGE>

     (C) Subject to Section 2.6, Borrower shall pay any and all taxes, charges,
filing, registration and recording fees, excises and levies imposed upon Lender
by reason of its interests in, or measured by amounts payable under, the Note,
this Agreement, the Mortgage or any other Loan Document (other than income,
franchise and doing business taxes), and shall pay all stamp taxes and other
taxes required to be paid on the Note or any of the other Loan Documents. If
Borrower fails to make such payment within five (5) days after notice thereof
from Lender, Lender may (but shall not be obligated to) pay the amount due, and
Borrower shall reimburse Lender within five (5) Business Days of written notice
by Lender for all such advances which will bear interest at the Default Rate. If
applicable law prohibits Borrower from paying such taxes, charges, filing,
registration and recording fees, excises, levies, stamp taxes or other taxes,
then Lender may declare Borrower's Obligations to be immediately due and
payable, upon ninety (90) days' prior written notice.

5.4 INSURANCE.

     (A) Borrower shall at all times provide, maintain and keep in force or
cause to be provided, maintained and kept in force, at no expense to Lender, the
following policies of insurance with respect to the Mortgaged Property and
Borrower, as applicable:

          (i) Property insurance on an "all risk" and "special perils" basis
     (special form cause of loss) for one hundred percent (100%) of the
     replacement value of the Mortgaged Property with customary deductibles as
     approved by Lender. The policy should contain the following endorsements:
     (a) Replacement Cost (without any deduction made for depreciation), (b)
     Agreed Amount (waiving co-insurance penalties), (c) Building Ordinance and
     Law coverage and (d) a standard mortgagee clause acceptable to Lender. Such
     policy will also include the following coverage: (i) comprehensive boiler
     and machinery coverage in amounts as reasonably determined by Lender; (ii)
     earthquake and earth movement coverage with a $2,500,000 limit; however if
     in Lender's reasonable judgment, the risks associated with such coverage
     have increased whereby additional coverage would be maintained by a prudent
     operator of property similar in use and locale, in sufficient amount as
     reasonably determined by Lender; and (iii) flood insurance coverage with a
     $2,500,000 limit; however, if the Improvements are located in a special
     flood hazard area as designated by the Director of the Federal Emergency
     Management Agency, in sufficient amount as reasonably determined by Lender.

          (ii) Insurance against rent loss for not less than eighteen months
     gross rent or gross income from the Mortgaged Property including stabilized
     management fees and applicable reserve deposits plus debt service. The
     perils covered by this policy shall be the same as those accepted on the
     Mortgaged Property including flood, earthquake and earth movement.

          (iii) Commercial general liability insurance covering bodily injury
     and property damage occurring on, in or about the Mortgaged Property and
     any adjoining streets, sidewalks, and passageways arising out of or
     connected with the possession, use, leasing, operation, or condition of the
     Mortgaged Property. Policy limits will be not less than $1,000,000 per
     occurrence, $2,000,000 per location in the aggregate with respect to the
     Mortgaged Property and $1,000,000 per occurrence, $2,000,000 per location
     in the


                                      -43-

<PAGE>

     aggregate with respect to Borrower. Such coverage shall include but not be
     limited to premises/ operations, personal injury and liquor liability (if
     applicable).

          (iv) Umbrella excess liability insurance for not less than $10,000,000
     in the aggregate with respect to the Mortgaged Property and Borrower.

          (v) During the course of construction of Improvements, Borrower will
     obtain (1) commercial general liability insurance including contractual
     liability, in the amount of $1,000,000 primary and $10,000,000 excess
     liability in the aggregate (the policy shall provide coverage on an
     occurrence basis against claims for personal injury, bodily injury and
     death or property damage occurring on, in or about the Mortgaged Property
     and the adjoining streets, sidewalks and passageways). In addition,
     Borrower shall require all contractors and subcontractors, architects and
     engineers to provide appropriate insurance coverage); and (2) Builder's
     risk completed value form insurance against "all risks" of physical loss,
     including collapse, water damage, flood, earthquake and transit coverage
     (coverage should be on a non-reporting form, covering the total value of
     work performed and equipment, supplies and materials furnished (with an
     appropriate limit for soft costs in the case of construction) with
     deductibles approved by Lender). Borrower agrees to consult with Lender
     prior to commencing the construction of any Improvements and to comply with
     all reasonable special insurance requirements of Lender pertaining to any
     construction.

     (B) No policies shall contain any exclusion for terrorism, terrorist
activities or similar activities defined under the Terrorism Risk Insurance Act
of 2002 ("TRIA") and will be endorsed to insure such risks. Notwithstanding the
foregoing, should the cost of TRIA coverage and/or endorsements for the full
replacement cost of the Mortgaged Property be greater than 10% of the premium
for the applicable all risk property policy, then Borrower shall purchase the
maximum terrorism insurance available for 10% of the then applicable all risk
property insurance premium.

     (C) All insurance policies required pursuant to this Agreement shall be
endorsed to provide that: (i) Lender, its successors, and/or assigns, is named
as mortgagee with respect to the all risk property; as a loss payee with respect
to all rent loss coverage; as additional named insured on all liability
coverage, with the understanding that any obligation imposed upon the insureds
(including the liability to pay premiums) shall be the sole obligation of
Borrower and not of any other insured; (ii) the interests of Lender shall not be
invalidated by any action or inaction of Borrower or any other Person, and such
policies shall insure Lender regardless of any breach or violation by Borrower
or any other Person of any warranties, declaration or conditions in such
policies; (iii) the insurer under each such policy shall waive all rights of
subrogation against Lender, any right to set-off and counterclaim and any other
right to deduction, whether by attachment or otherwise; (iv) such insurance
shall be primary and without right of contribution of any other insurance
carried by or on behalf of Lender with respect to its interest in the Mortgaged
Property; (v) if such insurance is canceled for any reason whatsoever, including
nonpayment of premium or, if any substantial modification, change or reduction
is made in the coverage which affects the interests of Lender, such
cancellation, modification, change or reduction in coverage shall not be
effective as to Lender until thirty (30) days after receipt by Lender of written
notice sent by registered mail from such insurer; (vi) any such


                                      -44-

<PAGE>

insurance shall be endorsed to provide in as much as the policy is written to
cover more than one insured, all terms, conditions, insuring agreements and
endorsements with the exception of limits of liability, shall operate in the
same manner as if there were a separate policy covering each insured; and (vii)
if required by Lender, such insurance shall contain "cut-through" endorsements
providing Lender with direct access to any re-insurers.

     (D) Borrower shall deliver to Lender a copy of each insurance policy with
further evidence of such insurance acceptable to Lender, together with a copy of
the declaration page for each such policy. Renewal certificates should be
provided no later than five (5) days prior to the expiration of each policy.
Upon request of Lender, Borrower shall deliver a renewed policy or policies, or
duplicate original or originals thereof, marked "premium paid," or accompanied
by such other evidence of payment satisfactory to Lender with standard
non-contributory mortgagee clause in favor of and acceptable to Lender. Borrower
shall comply promptly with and conform to (i) all provisions of each such
insurance policy and (ii) all requirements of the insurers applicable to
Borrower as respects use, occupancy, possession, operation, maintenance,
alteration or repair of the Mortgaged Property. Borrower shall not use or permit
the use of the Mortgaged Property in any manner that would permit any insurer to
cancel any insurance policy or void coverage required to be maintained by this
Agreement. No insurance policy may provide for assessments to be made against
Lender or Lender's servicer, if any. The insurance coverage required under this
Section 5.4 may be effected under a blanket policy or policies covering the
Mortgaged Property and other properties and assets not constituting a part of
the Mortgaged Property; provided that any such blanket policy shall specify the
portion of the total coverage of such policy that is allocated to the Mortgaged
Property, and any sublimits in such blanket policy applicable to the Mortgaged
Property, which amounts shall not be less than the amounts required pursuant to
this Section 5.4 and which shall in any case comply in all other respects with
all of the requirements of this Section 5.4. Borrower shall comply with all
insurance requirements and shall not bring or keep or permit to be brought or
kept any article upon the Mortgaged Property or cause or permit any condition to
exist thereon which would be prohibited by any insurance requirement, or would
invalidate insurance coverage required hereunder to be maintained by Borrower on
or with respect to any part of the Mortgaged Property pursuant to this Section
5.4. Notwithstanding anything to the contrary contained herein, it is expressly
understood and agreed that any insurance which Borrower shall cause any tenant
to provide that shall otherwise be in compliance with all of the terms and
conditions of this Section 5.4 shall satisfy Borrower's obligations with respect
thereto hereunder. Borrower shall cause each tenant to provide business
interruption, products/completed operations and workers compensation coverage in
amounts reasonably acceptable to Borrower to insure risks of each tenant's
business. Borrower will not take out separate insurance contributing in the
event of loss with that required to be maintained pursuant to this Section 5.4
unless such insurance complies with this Section 5.4. All insurance policies
shall be in form, with endorsements, risk coverage, deductibles and amounts and
maintained with companies approved by Lender, such approval not to be
unreasonably withheld, conditioned or delayed. Without limiting Lender's ability
to approve the aforementioned, an insurance company shall not be reasonably
satisfactory unless such insurance company (a) has a rating of a least A with
financial size of Class X or better as specified in Best's Key Rating Guide, (b)
is licensed or authorized to do business, as required under applicable law, in
the State where the Mortgaged Property is located and (c) a claims-paying
ability rating by S&P of not less than "A" and an equivalent rating by another
Rating Agency. All insurance policies insuring against casualty, rent loss and
other appropriate policies shall provide that no claims be paid


                                      -45-

<PAGE>

thereunder without twenty (20) days' advance written notice to Lender. Such
notice may be given by Borrower. Lender shall not, by the fact of approving,
disapproving, accepting, preventing, obtaining or failing to obtain any
insurance, incur any liability for or with respect to the amount of insurance
carried, the form or legal sufficiency of insurance contracts, solvency of
insurance companies, or payment or defense of lawsuits, and Borrower hereby
expressly assumes full responsibility therefore and all liability, if any, with
respect thereto. If Borrower fails to provide to Lender the policies of
insurance required by this Section 5.4 or any other Loan Documents, Lender may
(but shall have no obligation to) procure such insurance or single-interest
insurance for such risks covering Lender's interest and Borrower will pay all
premiums thereon within five (5) Business Days of written notice by Lender, and
until such payment is made by Borrower, the amount of all such premiums shall
bear interest at the Default Rate and shall constitute additions to the
Obligations.

5.5 TAX RESERVE AND INSURANCE RESERVE.  Borrower shall deposit (or cause to be
deposited) with Lender (or such agent of Lender as Lender may designate in
writing to Borrower from time to time), monthly, on each Payment Date, 1/12th of
the annual charges (as estimated by Lender) for all Impositions relating to the
Mortgaged Property and all insurance premiums with respect to the insurance
required pursuant to Section 5.4(A)(i)-(iv). Borrower shall also deposit with
Lender, simultaneously with such monthly deposits and/or on the Closing Date, a
sum of money which, together with such monthly deposits, will be sufficient to
make the payment of each such charge at least thirty (30) days prior to the date
finally delinquent. Should such charges not be ascertainable at the time any
deposit is required to be made, the deposit shall be made on the basis of
Lender's reasonable estimate. When the charges are fixed for the then current
year or period, Borrower shall deposit any deficiency within fifteen (15) days
following Lender's written demand. Should an Event of Default occur and be
continuing, the funds so deposited may be applied in payment of the charges for
which such funds shall have been deposited or to the payment of the Obligations
or any other charges affecting the Mortgaged Property as Lender in its sole and
absolute discretion may determine, but no such application shall be deemed to
have been made by operation of law or otherwise until actually made by Lender as
herein provided. Borrower shall provide Lender with bills and all other
documents necessary for the payment of the foregoing charges at least ten (10)
days prior to the date on which each payment thereof shall first become
delinquent. So long as (i) no Event of Default exists, (ii) Borrower has
provided Lender with the foregoing bills and other documents in a timely manner,
and (iii) sufficient funds are held by Lender for the payment of the Impositions
and insurance premiums relating to the Mortgaged Property, as applicable, Lender
shall pay said items or allow such funds to be used to pay said items or to
reimburse Borrower for such items upon Lender's receipt of reasonable evidence
documenting Borrower's payment of such items. All refunds of Impositions and
insurance premiums shall be deposited into the applicable of the Tax Reserve
Account or the Insurance Reserve Account.

5.6 MAINTENANCE OF MORTGAGED PROPERTY.  Borrower will maintain or cause the
Mortgaged Property to be maintained in compliance with all Legal Requirements
and in good repair, working order and condition and will make or cause to be
made all appropriate repairs, renewals and replacements thereof. Without regard
as to whether Proceeds are made available to Borrower for such purposes,
Borrower will promptly restore and repair all loss or damage occasioned by (i)
any casualty which has occurred to at least the condition existing prior to any
such casualty or (ii) any condemnation to an economically and structurally
integrated unit.


                                      -46-

<PAGE>

Borrower will prevent any act or thing which might materially impair the value
or usefulness of the Mortgaged Property. Borrower will not commit or permit any
waste of the Mortgaged Property or any part thereof.

5.7 INSPECTION; LENDER MEETING.  Borrower shall, upon request from Lender,
permit (and cause to be permitted) Lender's designated representatives to (a)
visit, examine, audit, and inspect the Mortgaged Property, (b) examine, audit,
inspect, copy, duplicate and abstract Borrower's financial, accounting and other
books and records, and (c) discuss Borrower's and the Mortgaged Property's
affairs, finances and business with Borrower Representative's officers,
representatives, independent public accountants and agents (including the
Manager). Lender acknowledges and agrees that any inspection or entry to the
Mortgaged Property by Lender or Lender's designated representatives shall be
conducted (i) during Borrower's normal business hours, (ii) in accordance with
Borrower's safety and security procedures then applicable to the Mortgaged
Property in general and to the Secure Areas in particular that are, in each
instance, in effect from time to time, (iii) at Borrower's option, accompanied
by an employee or representative of Borrower and/or Guarantor, (iv) in
accordance with the confidentiality requirements of Section 11.12 and (v) in
such a manner so as to minimize any disruption or interference with Borrower's
use or operation of the Mortgaged Property. Borrower shall cause its books and
records to be maintained at Borrower's principal offices located at c/o Lexicon
Genetics Incorporated, 8800 Technology Forest Place, The Woodlands, Texas
77381-1160. Borrower will not change its principal offices or the location where
its books and records are kept without giving at least thirty (30) days' advance
notice to Lender. Borrower shall pay Lender's costs and expenses incurred in
connection with such audit if an Event of Default has occurred and is continuing
or if any audit reveals any material discrepancy, in Lender's reasonable
judgment, in the financial information provided by Borrower. All audits,
inspections and reports shall be made for the sole benefit of Lender. Neither
Lender nor Lender's auditors, inspectors, representatives, agents or contractors
assumes any responsibility or liability (except to Lender) by reason of such
audits, inspections or reports. Borrower will not rely upon any of such audits,
inspections or reports. The performance of such audits, inspections and reports
will not constitute a waiver of any of the provisions of the Loan Documents.
Neither Lender nor any other of Lender's inspectors, representatives, agents or
contractors, shall be responsible for any matters related to design or
construction of the Improvements or any Construction. Borrower shall cooperate,
from time to time, with Lender and use reasonable efforts to assist Lender in
obtaining an appraisal of the Mortgaged Property. Such cooperation and
assistance from Borrower shall include reasonable access to the Mortgaged
Property and books and records pertaining to the Mortgaged Property for Lender
and its appraiser. The appraiser performing any such appraisal shall be engaged
by Lender. Borrower shall not be responsible for the expenses of any such
appraisal, provided, however, Borrower shall pay the fees of such appraiser in
connection with one appraisal of the Mortgaged Property during the term of the
Loan and any such appraisal when conducted following the occurrence and during
the continuation of an Event of Default. Borrower shall cooperate with Lender
with respect to any proceedings before any Governmental Authority which may in
any way affect the rights of Lender under any of the Loan Documents and, in
connection therewith, not prohibit Lender, at its election, from participating
in any such proceedings.

5.8 ENVIRONMENTAL COMPLIANCE.  Borrower shall: (a) comply (or cause compliance)
at all times with all applicable Environmental Laws, and (b) promptly take, or
cause to be taken, any


                                      -47-

<PAGE>

and all necessary remedial actions upon obtaining knowledge of the presence,
storage, use, disposal, transportation, release or discharge of any Hazardous
Materials on, under or about the Mortgaged Property which has a Material Adverse
Effect or is in violation of any Environmental Laws. Borrower shall cause all
remedial action with respect to Hazardous Material on, under or about the
Mortgaged Property, to comply with all applicable Environmental Laws and the
applicable policies, orders and directives of all federal, state and local
Governmental Authorities. If Lender at any time has a reasonable basis to
believe that there may be a violation of any Environmental Law by, or any
liability arising thereunder of, Borrower or related to the Mortgaged Property,
Borrower shall, upon request from Lender, provide Lender with such reports,
certificates, engineering studies and other written material or data as Lender
may reasonably require to confirm compliance by Borrower and the Mortgaged
Property with all applicable Environmental Laws. Borrower shall permit Lender,
its authorized representatives, consultants or other Persons retained by Lender
to enter upon, examine, test and inspect the Mortgaged Property with regard to
compliance with Environmental Laws, the presence of Hazardous Materials and the
environmental condition of the Mortgaged Property and properties adjacent to the
Land. Such entry, examination, testing and inspecting and reporting shall be at
the expense of Borrower if (x) an Event of Default has occurred or (y) Lender
has reasonably determined that there may be a violation of Environmental Law or
any liability arising under Environmental Law, which expense shall be paid by
Borrower to Lender within five (5) Business Days of written notice by Lender.

5.9 ENVIRONMENTAL DISCLOSURE.  Borrower shall immediately upon becoming aware
thereof advise Lender in writing and in reasonable detail of: (1) any release,
disposal or discharge of any Hazardous Material at the Mortgaged Property
required to be reported to any federal, state or local governmental or
regulatory agency under all applicable Environmental Laws; (2) any and all
written communications sent or received by Borrower or its agents with respect
to any Environmental Claims or any release, disposal or discharge of Hazardous
Material required to be reported to any federal, state or local governmental or
regulatory agency; (3) any remedial action taken by Borrower or any other Person
in response to any Hazardous Material on, under or about any real property
owned, leased or operated by Borrower or the Mortgaged Property or its agents,
the existence of which could result in an Environmental Claim; (4) the discovery
by Borrower or its agents of any occurrence or condition on any real property
adjoining or in the vicinity of the Mortgaged Property that could cause such
real property or any part thereof to be classified as "border-zone property" or
to be otherwise subject to any restrictions on the ownership, occupancy,
transferability or use thereof under any Environmental Laws; and (5) any request
for information from any Governmental Authority that indicates such Governmental
Authority is investigating whether Borrower or another present or former
occupant of the Mortgaged Property may be potentially responsible for a release,
disposal or discharge of Hazardous Materials from any of the Mortgaged Property.
Borrower shall promptly notify Lender of any proposed action to be taken by
Borrower to commence any operations that could reasonably be expected to subject
Borrower to additional laws, rules or regulations, including laws, rules and
regulations requiring additional or amended environmental permits or licenses.
Borrower shall, at its own expense, provide copies of such documents or
information as Lender may reasonably request in relation to any matters
disclosed pursuant to this Section 5.9.

5.10 COMPLIANCE WITH LAWS, EMPLOYEE BENEFIT PLANS AND CONTRACTUAL OBLIGATIONS.
Borrower will promptly and faithfully (A) comply and cause the Mortgaged
Property to comply,


                                      -48-

<PAGE>

in all material respects, with the requirements of all Legal Requirements and
the orders and requirements of any Governmental Authority in all jurisdictions
in which it is now doing business or may hereafter be doing business and of
every board of fire underwriters or similar body exercising similar functions,
(B) maintain all licenses, certificates of occupancy, permits and Proprietary
Rights now held or hereafter acquired by it or with respect to which a Material
Adverse Effect will result if same are not existing and held by Borrower and (C)
perform, observe, comply and fulfill all of its obligations, covenants and
conditions contained in the Loan Documents and the Material Contracts. Borrower
shall: (i) promptly notify Lender of any claim made against Borrower that
Borrower is in default under any Material Contract or that any other party is in
default under any Material Contract; (ii) not terminate, or permit termination
of, any Material Contract, and (iii) not enter into, amend or modify any
Material Contract without first obtaining the prior written approval of Lender.
Except for the plans described in Schedule 4.10, Borrower is not a party to, and
will not establish, any Employee Benefit Plan. Except for the plans described in
Schedule 4.10, Borrower will not commence making contributions to (or obligate
itself to make contributions to) any Employee Benefit Plan.

5.11 FURTHER ASSURANCES.  Borrower shall, from time to time, at its sole cost
and expense, execute and/or deliver, or cause execution and/or delivery of, such
documents, agreements and reports, and perform such acts as Lender at any time
may reasonably request to carry out the purposes and otherwise implement the
terms and provisions provided for in the Loan Documents. Borrower shall execute
any documents and take any other actions necessary to provide Lender with a
first priority, perfected security interest in the Reserves and the other
Collateral. Borrower shall, at Borrower's sole cost and expense: (i) upon
Lender's request therefore given from time to time (but not more frequently than
once per calendar year unless an Event of Default then exists) pay for (a)
current reports of Uniform Commercial Code, federal tax lien, state tax lien,
judgment and pending litigation searches with respect to Borrower and Borrower
Representative, (b) current good standing and existence certificates with
respect to Borrower and Borrower Representative and (c) current searches of
title to the Mortgaged Property, each such search to be conducted by search
firms reasonably designated by Lender in each of the locations reasonably
designated by Lender; and (ii) execute and deliver to Lender such documents,
instruments, certificates, assignments and other writings, and do such other
acts necessary, to evidence, preserve and/or protect the Reserve Account
Collateral and the other Collateral at any time securing or intended to secure
the Obligations, as Lender may require in Lender's reasonable discretion.
Borrower shall promptly execute, acknowledge, deliver, file or do, at its sole
cost and expense, all acts, assignments, notices, agreements or other
instruments as Lender may require in order to effectuate, assure, convey,
secure, assign, transfer and convey unto Lender any of the rights granted by
this Agreement and to more fully perfect and protect any assignment, pledge,
lien and security interest confirmed or purported to be created under the Loan
Documents or to enable Lender to exercise and enforce their rights and remedies
hereunder, in respect of the Collateral.

5.12 REQUIRED CAPITAL IMPROVEMENTS.  Each of the capital improvement items
listed on Exhibit E hereto ("REQUIRED CAPITAL IMPROVEMENTS") shall be completed
by the applicable Required Completion Date .

5.13 [Intentionally Omitted.]


                                      -49-

<PAGE>

5.14 [Intentionally Omitted.]

5.15 [Intentionally Omitted.]

5.16 [Intentionally Omitted.]

5.17 [Intentionally Omitted.]

5.18 MANAGEMENT.  Borrower shall provide competent, responsible management for
the Mortgaged Property, which management, Lender acknowledges, is currently
being provided, at no expense or cost to Borrower, by employees of Guarantor. In
the event Borrower enters into a Management Agreement subsequent to the date
hereof, the Manager and such Management Agreement must contain subordination and
termination provisions and must be otherwise satisfactory to Lender. Borrower
shall not enter into any management agreement or arrangement with any Person
with respect to the management of the Mortgaged Property without Lender's prior
written consent. Borrower shall cause management subordination agreements in
form and substance satisfactory to Lender to be executed by the Manager.
Borrower shall not modify, amend or terminate any approved management agreement
without Lender's prior written consent. Borrower shall provide Lender with
written notice of the occurrence of any event of default or condition which with
the giving of notice or passage of time, or both, would constitute an event of
default under any Management Agreement or which would entitle the Manager to
terminate the Management Agreement. Any Management Agreement entered into by
Borrower shall be terminated by Borrower, at Lender's request, upon thirty (30)
days' prior notice to Borrower (i) upon the occurrence of an Event of Default or
(ii) if such Manager commits any act which would permit termination by Borrower
under such Management Agreement. If a Manager is terminated pursuant hereto,
Borrower shall immediately seek to appoint a replacement manager which is a
Qualified Manager, and Borrower's failure to appoint an acceptable Manager
within thirty (30) days after Lender's request of such Borrower to terminate the
Management Agreement shall constitute an immediate Event of Default.

5.19 CONSTRUCTION MATTERS.  Without limitation of Lender's rights and Borrower's
Obligations set forth elsewhere in the Loan Documents, Borrower shall: (1) cause
the Restoration and all other Construction to proceed with reasonable diligence
and continuously, with sufficient workers employed and sufficient materials
supplied for that purpose so that the applicable Construction is substantially
completed by the applicable Required Completion Date, or, if no Required
Completion Date is applicable, as promptly as reasonably practicable or, in the
case of Restoration, the Restoration is Substantially Completed prior to the
Required Restoration Date; (2) cause all Construction to be performed in
accordance with the applicable Plans and Specifications or plans and
specifications for the work in question, in substantial conformity with the
Legal Requirements, the requirements of all insurers and fire underwriters, and
with the requirements set forth herein and in the other Loan Documents, in
compliance with the Material Contracts and in a good, safe and workmanlike
manner; (3) cause all materials acquired or furnished in connection with the
Construction and Restoration to be new and stored under adequate safeguards to
minimize the possibility of loss, theft, damage or commingling with other
materials or projects; (4) utilize, or permit utilization of, only contractors
approved by Lender (such approval not to be unreasonably withheld, conditioned
or delayed); (5) not permit the revision of Plans and Specifications without
consent of Lender (not to be unreasonably withheld,


                                      -50-

<PAGE>

conditioned or delayed); and (6) from time to time upon the reasonable request
of Lender deliver to Lender such certificates and other documentation confirming
the matters set forth in the preceding clauses (1) through (5). Promptly upon
the giving or receipt of such notice, Borrower shall forward to Lender copies of
all material written notices given or received by, or on behalf of, Borrower
with respect to the Construction to or from: (x) Contractor or any subcontractor
or material supplier, or any of the design professionals (including notices
relating to any nonconforming construction, any refusal or inability to pay or
perform pursuant to the terms of any contract or other agreement or any delay,
default or change order) or (y) any claim of default, or relating to any work
stoppage, notice of violation or cease and desist order, stop order,
construction liens, strike, claim, litigation, damage, loss or any other
materially adverse condition, circumstance or event. Borrower shall pay and
discharge or cause to be paid and discharged promptly all payments due for
labor, materials and supplies unless the same shall be contested by Borrower in
accordance with Section 5.3(B). Borrower shall make available for inspection at
all times by Lender and its representatives copies of all contracts for
Construction and, to the extent available to or reasonably obtained by Borrower,
entered into by Contractor and design professionals relating to the
Construction. Within ninety (90) days after Substantial Completion of applicable
Construction activities, Borrower shall (i) complete, or cause to be completed,
all Punch-List Items, (ii) deliver to Lender two (2) copies of the as-built
Plans and Specifications and such other as-built surveys and plans and
specifications as Lender may reasonably require and (iii) obtain all final
permits and approvals required for the normal use and occupancy of the
Improvements in question (including a permanent certificate of occupancy if
required for occupancy under applicable laws or its equivalent for the
Improvements in question, to the extent available) provided, however, to the
extent that applicable Legal Requirements require satisfaction of items (i),
(ii) or (iii) prior to the expiration of such ninety (90)-day period, the date
such items must be satisfied prior to the date satisfaction is required pursuant
to the applicable Legal Requirements.

                                   SECTION 6
                            ACCOUNTS/CASH MANAGEMENT

6.1  ESTABLISHMENT OF ACCOUNTS.

     (A) Accounts.  Borrower and Lender confirm that Lender has established, and
agrees that Borrower and Lender shall maintain at Bank, the following segregated
securities accounts (each a "RESERVE ACCOUNT" and, collective the "RESERVE
ACCOUNTS") shall be maintained by Borrower with Bank:

          (i) Account No. _____, captioned "Lex-Gen Woodlands, L.P./iStar
     Financial Inc./Tax Reserve" for the retention of collateral in respect of
     insurance premiums for the Mortgaged Property as provided in Section 5.5
     (the "INSURANCE RESERVE ACCOUNT"); and

          (ii) Account No. ____, captioned "Lex-Gen Woodlands, L.P./iStar
     Financial Inc./Tax Reserve" for the retention of collateral for the payment
     of Impositions for the Mortgaged Property as provided in Section 5.5 ("TAX
     RESERVE ACCOUNT").

     (B) Type and Control of Accounts.  Borrower represents, warrants, covenants
and agrees that (A) each of the Reserve Accounts are and shall be maintained as
a "securities


                                      -51-

<PAGE>

account" (as in Section 8-501(a) of the UCC); (B) Lender is entitled to exercise
the rights that comprise any financial asset credited to such Reserve Accounts;
(C) Borrower shall have no right to give entitlement orders with respect to such
Reserve Accounts and, except as provided in this Agreement, no Reserve Account
Collateral shall be released to Borrower from such Reserve Accounts; and (D) all
securities or other property underlying any financial assets credited to the
Reserve Accounts shall be registered in the name of Bank or indorsed to Bank or
in blank and in no case will any financial asset credited to the Reserve
Accounts be registered in the name of Borrower, payable to the order of Borrower
or specially indorsed to Borrower.

     (C) Eligible Accounts.  Each of the Reserve Accounts shall be an Eligible
Account.

     (D) Cash Management Agreement.  Borrower agrees that: (i) the Reserve
Accounts shall be maintained in accordance with the terms hereof and of the Cash
Management Agreement; and (ii) prior to the indefeasible re-payment in full of
the Loan and indefeasible satisfaction of the Obligations, the Cash Management
Agreement shall not be amended, supplemented or modified without the prior
written consent of Lender, which consent Lender may grant or withhold in its
sole and absolute discretion.

     (E) No Other Accounts.  Borrower represents and warrants that there are no
deposit, securities or similar Accounts other than the Reserve Accounts
maintained by Borrower or any other Person with respect to the collection of
Gross Revenues. Borrower agrees that, until the Loan is indefeasibly re-paid in
full and the indefeasible satisfaction of the Obligations neither Borrower nor
any other Person shall open any Accounts for the collection or holding of Gross
Revenues, except for the Reserve Accounts. The foregoing shall not prohibit
Borrower from (i) utilizing one or more separate accounts for the disbursement
or retention of funds that have been transferred to Borrower pursuant to Section
6.3 of this Agreement or (ii) maintaining a separate bank account for the
collection of Rents under the Guarantor Lease. Borrower covenants and agrees
that it will not pledge, or create or permit to exist any security interest in,
the foregoing accounts.

     (F) Miscellaneous Account Provisions.  The Reserve Accounts shall be
subject to such applicable laws, and such applicable regulations of the Board of
Governors of the Federal Reserve System and of any other banking or governmental
authority, as may now or hereafter be in effect. Interest accruing on the
Reserve Accounts, if any, shall be periodically added to the principal amount of
the applicable Reserve Account and shall be held, disbursed and applied in
accordance with the provisions of this Agreement. All statements relating to the
Reserve Accounts shall be issued simultaneously by Bank to Lender and Borrower.
Borrower shall be the beneficial owner of the Reserve Accounts for federal and
state income tax purposes and shall report all income on the Reserve Accounts.

6.2  DEPOSITS INTO ACCOUNTS.

     (A) Initial Deposits.  On the Closing Date, Borrower agrees, represents and
warrants that it has deposited or caused to be deposited the following amounts
into the Accounts: (i) $156,000 into the Insurance Reserve Account; and (ii)
$590,000.00 into the Tax Reserve Account.


                                      -52-

<PAGE>

     (B) Continuing Deposits.  Borrower agrees to deposit on each Payment Date
funds in the following amounts:

          (i) funds in an amount equal to the deposit for insurance premiums due
     under Section 5.5 on the applicable Payment Date shall be deposited into
     the Insurance Reserve Account; and

          (ii) funds in an amount equal to the deposit for Impositions due under
     Section 5.5 on the applicable Payment Date shall be deposited into the Tax
     Reserve Account.

6.3  PAYMENTS FROM RESERVE ACCOUNTS.

     (A) No Event of Default.  Borrower hereby irrevocably authorizes Lender to
withdraw, and, Lender shall withdraw or re-allocate, the following payments or
allocations, as applicable, from the applicable Reserve Accounts to the extent
of the monies on deposit in the applicable Reserve Account if no Event of
Default exists:

          (i) funds from the Tax Reserve Account and Insurance Reserve Account
     sufficient to pay (A) Impositions and (B) insurance premiums for the
     insurance required to be maintained pursuant to the terms of the Agreement,
     on the due date therefore, and pay such funds to the Governmental Authority
     or insurance company having the right to receive such funds, provided, that
     Lender shall only be required to make such payments if Borrower has
     delivered to Lender an Officer's Certificate identifying (1) the amount of
     such required payments, (2) the due date of such payments and (3) the
     person entitled to receive such payments, at least five (5) Business Days
     prior to the due date thereof, provided further, if Borrower shall have
     paid Impositions or insurance proceeds directly, the funds will be paid to
     Borrower in reimbursement thereof provided no Event of Default exists and
     Borrower provides evidence reasonably satisfactory to Lender of payment of
     the item in question.

     (B) Event of Default Exists.  If an Event of Default exists, Borrower
hereby irrevocably authorizes Lender to make any and all withdrawals from and
transfers between any Reserve Account, as Lender shall determine in Lender's
sole and absolute discretion.

6.4 ACCOUNTS.  Borrower shall not, without the prior written consent of Lender,
change the account location of any Reserve Account and, as a condition precedent
to any such change, the bank to which Borrower proposes to relocate such Reserve
Account shall have executed an appropriate acknowledgment letter, in accordance
with the provisions set forth above. With respect to the Reserve Account
Collateral, Lender shall not be liable for any acts, omissions, errors in
judgment or mistakes of fact or law, except for those arising as a result of
Lender's investment of such Reserve Account Collateral in other than Permitted
Investments or from gross negligence or willful misconduct. Funds in the
Borrower Account shall (a) be used only to pay Expenses related to the Mortgaged
Property prior to any distributions by Borrower and (b) not be disbursed in
violation of any provision of this Agreement.

6.5 CREATION OF SECURITY INTEREST IN ACCOUNTS.  Borrower hereby pledges,
transfers and assigns to Lender, and grants to Lender, as additional security
for the Obligations, a continuing


                                      -53-

<PAGE>

perfected first priority security interest in and to, and a first lien upon: (i)
the Reserve Accounts and all amounts which may from time to time be on deposit
in each of the Reserve Accounts; (ii) all of Borrower's right, title and
interest in and to all cash, property or rights transferred to or deposited in
each of the Reserve Accounts from time to time; (iii) all certificates and
instruments, if any, from time to time representing or evidencing any such
Reserve Account or any amount on deposit in any thereof, or any value received
as a consequence of possession thereof, including all interest, dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of, or in exchange for, any or all of the
Reserve Accounts; (iv) all monies, chattel paper, checks, notes, bills of
exchange, negotiable instruments, documents of title, money orders, commercial
paper, and other security instruments, documents, deposits and credits from time
to time in the possession of Lender representing or evidencing such Reserve
Accounts; (v) all other property, held in, credited to, or constituting part of
any of the Reserve Accounts; (vi) all earnings and investments held in any
Reserve Account in accordance with this Agreement; and (vii) to the extent not
described above, any and all proceeds of the foregoing, (collectively, the
"RESERVE ACCOUNT COLLATERAL"). This Agreement and the pledge, assignment and
grant of security interest made hereby secures payment of all Obligations in
accordance with the provisions set forth herein. This Agreement shall be deemed
a security agreement within the meaning of the Uniform Commercial Code.

6.6 CERTAIN MATTERS REGARDING LENDER FOLLOWING AN EVENT OF DEFAULT.  Borrower
agrees that the Bank shall pay over to Lender all amounts deposited in the
Reserve Accounts on demand, without notice to Borrower, if, in making such
demand, Lender shall give notice, in writing, signed by Lender or an authorized
agent thereof, that an Event of Default exists. Lender may exercise in respect
of the Reserve Account Collateral all rights and remedies available to Lender
hereunder or under the other Loan Documents, or otherwise available at law or in
equity. If an Event of Default exists, Lender may exercise in respect of the
Reserve Account Collateral, in addition to other rights and remedies provided
for herein or otherwise available to it, all of the rights and remedies of a
secured party upon default under the Uniform Commercial Code then in effect in
the applicable jurisdiction. Without limiting the generality of the foregoing,
Borrower agree(s) that, upon the occurrence and during the continuance of an
Event of Default, it will have no further right to request or otherwise require
Lender to disburse funds from any Account in accordance with the terms of this
Agreement, it being agreed that Lender may, at its option, (i) direct the Bank
to continue to hold the funds in the Reserve Accounts, (ii) continue, from time
to time, to apply all or any portion of the funds held in the Reserve Accounts
to any payment(s) which such funds could have been applied to prior to such
Event of Default (or to pay Expenses directly), to the extent and in such order
and manner as Lender in its sole discretion may determine, and/or (iii) direct
the Bank to disburse all or any portion of the funds held in the Reserve
Accounts or other Reserve Account Collateral then or thereafter held by the Bank
to Lender, in which event Lender may apply the funds held in the Reserve
Accounts or other Reserve Account Collateral to the Obligations, in any order
and in such manner as Lender may determine in its sole discretion. If an Event
of Default exists, Lender may, at any time or from time to time: (1) collect,
appropriate, redeem, realize upon or otherwise enforce its rights with respect
to the Reserve Account Collateral, or any part thereof, without notice to any
Borrower and without the need to institute any legal action, make demand to or
upon any Borrower or any other Person, exhaust any other remedies or otherwise
proceed to enforce its rights; (2) execute (in the name, place and stead of
Borrower) any endorsements, assignments or other instruments of conveyance which
may be required for the withdrawal and negotiation of the Reserve Account


                                      -54-

<PAGE>

Collateral; and/or (3) exercise all other rights and remedies available to
Lender hereunder and under any of the other Loan Documents. Notwithstanding
anything to the contrary contained herein: (w) Borrower shall remain liable
under the Loan Documents to the extent set forth herein and therein to perform
all of its respective obligations thereunder, to the same extent as if this
Agreement had not been executed; (x) the exercise by Lender of any of its rights
hereunder shall not release Borrower from its obligations under any of the Loan
Documents, nor shall it constitute an election of remedies by Lender or a waiver
by Lender of any of its rights and remedies under the Loan Documents; (y) except
as expressly set forth in this Agreement or in any of the other Loan Documents,
Lender shall not have any obligation or liability by reason of this Agreement,
nor shall Lender be obligated to perform any of the obligations or duties of
Borrower hereunder or to take any action, in each case, to collect or enforce
any claim for payment assigned hereunder; and (z) Lender shall not have to
resort to using the Reserve Account Collateral before making demand upon or
bringing an action against Borrower under any Loan Document under any guaranty
given in connection with the Loan. No failure on the part of Lender to exercise,
and no delay in exercising, any right under this Agreement shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right under this Agreement or the other Loan Documents. The remedies provided in
this Agreement, the Note and the other Loan Documents are cumulative and not
exclusive of any remedies provided at law or in equity.

6.7 REPRESENTATIONS AND WARRANTIES REGARDING RESERVE ACCOUNT COLLATERAL.  In
addition to any representations or warranties contained in this Agreement,
Borrower represents and warrants as follows: (a) Borrower is the legal and
beneficial owner of the Reserve Account Collateral, respectively, free and clear
of any Liens, except for the Liens in favor of Lender created by this Agreement
and the other Loan Documents; (b) upon execution by Borrower of this Agreement,
the pledge and assignment of the Reserve Account Collateral pursuant to this
Agreement will create a valid, first priority security interest in the such
Reserve Account Collateral, securing the payment and performance of the
Obligations; and (c) Borrower is not a party to any credit agreement or other
borrowing facility including, but not limited to, a line of credit or overdraft
line, with the Bank.

6.8 COVENANTS REGARDING RESERVE ACCOUNT COLLATERAL.  Borrower will not, without
the prior consent of Lender, (a) sell, assign (by operation of law or
otherwise), pledge, or grant any option with respect to, any of the Gross
Revenues or any interest in the Reserve Account Collateral or (b) create or
permit to exist any assignment, lien, security interest, option or other charge
or encumbrance upon or with respect to any Gross Revenues or any Reserve Account
Collateral, except for the Liens in favor of Lender under this Agreement and the
other Loan Documents. Borrower will give Lender not less than thirty (30) days'
prior written notice of any change in the address of its chief executive office
or its principal office. Borrower agrees that all records of Borrower with
respect to the Reserve Account Collateral will be kept at Borrower's principal
office and will not be removed from such addresses without the prior written
consent of Lender. Borrower will not make or consent to any amendment or other
modification or waiver with respect to any Reserve Account Collateral, or enter
into any agreement, or permit to exist any restriction, with respect to any
Reserve Account Collateral. Borrower will, at its expense, defend Lender's
right, title and security interest in and to the Reserve Account Collateral
against the claims of any Person. Borrower will not take any action which would
in any manner impair the enforceability of this Agreement or the security
interests created hereby. Borrower will not


                                      -55-

<PAGE>

enter into any credit agreement or other borrowing facility including a line of
credit or overdraft line, with Bank. Nothing contained in this Section 6 shall
impair or otherwise limit Borrower's obligations to timely make the payments
(including interest and principal) required by the Note and the other Loan
Documents, it being understood that such payments shall be so timely made in
accordance with the Loan Documents, regardless of the amounts on deposit in any
Account. Lender may, from time to time, at its sole option, perform any act
which Borrower agrees hereunder to perform which Borrower shall fail to perform
after being requested in writing to so perform and Lender may from time to time
take any other action which Lender deems necessary for the maintenance,
preservation or protection of any of the rights granted to Lender hereunder.
With respect to the powers conferred on Lender hereunder, Lender shall not have
any duty as to the Accounts or the other Reserve Account Collateral, or any
responsibility for (i) ascertaining or taking action with respect to any matters
relative to the Accounts or the other Reserve Account Collateral, whether or not
Lender has or is deemed to have knowledge of such matters or (ii) taking any
necessary steps to preserve rights against prior parties or any other rights
pertaining to the Accounts or the other Reserve Account Collateral.

6.9 CASH MANAGEMENT FEES.  All fees, costs and expenses associated with the Cash
Management Agreement and Reserve Account Collateral shall be paid by Borrower
when due.

                                   SECTION 7
                               NEGATIVE COVENANTS

     Borrower covenants and agrees that from the date hereof and so long as this
Agreement shall remain in effect or the Note remains outstanding, Borrower shall
comply with all covenants and agreements in this Section 7.

7.1 INDEBTEDNESS.  Borrower will not directly or indirectly create, incur,
assume, guaranty, or otherwise become or remain directly or indirectly liable
with respect to any Indebtedness except Permitted Indebtedness.

7.2 LIENS AND RELATED MATTERS.  Borrower will not directly or indirectly create,
incur, assume or permit to exist any Lien on or with respect to the Mortgaged
Property or other Collateral whether now owned or hereafter acquired, or any
income or profits therefrom, except the Liens in favor of Lender under this
Agreement and the Permitted Encumbrances. Borrower shall have the right to
contest any such Lien securing Claims in accordance with Section 5.3(B), except
by their own terms or in accordance with a specific termination right granted
thereunder.

7.3 MATERIAL RIGHTS.  Without Lender's consent, which consent shall not be
unreasonably withheld, conditioned or delayed, Borrower shall not (a) amend,
modify or waive the performance of material obligations with regard to the
Material Contracts or Proprietary Rights, (b) request a waiver or consent from,
any party to, or issuer of any of the Material Contracts or Proprietary Rights
or (c) terminate or permit termination of any Material Contracts or Proprietary
Rights.

7.4 RESTRICTION ON FUNDAMENTAL CHANGES.  Neither Borrower nor Borrower
Representative will: (1) amend, modify or waive in any material respect any term
or provision of its Organizational Documents, (2) liquidate, wind-up or dissolve
itself (or suffer any liquidation or


                                      -56-

<PAGE>

dissolution); or (3) acquire by purchase or otherwise all or any part of the
business or assets of, or stock or other evidence of beneficial ownership of,
any Person. Neither Borrower nor Borrower Representative will issue, sell,
assign, pledge, convey, dispose or otherwise encumber any partnership, stock,
membership, beneficial or other ownership interests or grant any options,
warrants, purchase rights or other similar agreements or understandings with
respect thereto. Borrower will not establish any Subsidiaries. Borrower will not
make any Investments in any other Person.

7.5 RESTRICTION ON LEASES.  Except for the Guarantor Lease and as set forth
below, Borrower shall not hereafter enter into any Lease or other rental or
occupancy arrangement or concession agreement with respect to the Mortgaged
Property or any portion thereof or otherwise permit any occupancy of the
Mortgaged Property other than by Guarantor. Borrower shall not modify, amend or
terminate any Lease, give any consents, waive any obligations under any leases
or release any tenant of any Lease, without, in each instance, Lender's consent,
such consent not to be unreasonably withheld, conditioned or delayed. Borrower
shall perform and comply, in all material respects, with all of the landlord's
obligations under each Lease and shall not suffer or permit any material breach
or default on the part of the landlord to occur thereunder. In addition to the
Guarantor Lease, Guarantor shall have the right to enter into subleases with
third parties for occupancy of the Improvements without Lender's consent,
provided that (i) any such sublease shall be subject and subordinate to the
Liens in favor of Lender under this Agreement and (ii) all subleases, in the
aggregate, shall be for (1) less than 50% of the leasable space of any single
building and (2) less than 30% of the aggregate leasable improved space for the
Mortgaged Property. Borrower shall provide Lender with written notice of any
such permitted sublease prior to Guarantor entering into any such sublease. In
no event will Borrower enter into any Capital Leases.

7.6 TRANSACTIONS WITH AFFILIATES.  Except for the Guarantor Lease, Borrower
shall not directly or indirectly enter into or permit to exist any transaction
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any director, officer, employee or Affiliate of
Borrower, Borrower Representative or Guarantor, except transactions in the
ordinary course of and pursuant to the reasonable requirements of the business
of Borrower and upon fair and reasonable terms which are fully disclosed to
Lender and are no less favorable to Borrower than would be obtained in a
comparable arm's length transaction with a Person that is not an Affiliate,
director, officer or employee of Borrower. Each such agreement with any
Affiliate, director, officer or employee of Borrower shall provide that the same
may be terminated by Lender at its option if an Event of Default exists. Other
than pursuant to the Management Agreement approved by Lender, Borrower shall not
pay any management, consulting, director or similar fees to any director,
officer, employee or Affiliate of Borrower or Guarantor.

7.7 MANAGEMENT FEES AND COMPENSATION; CONTRACTS.  Borrower will not enter into
or become obligated under any management (property and asset), brokerage or
other such similar agreement, whether with an Affiliate or any other Person,
with respect to the Mortgaged Property, without Lender's prior written consent,
which consent shall not be unreasonably withheld, conditioned or delayed, and
unless the same may be terminated, without cause and without payment of a
penalty or fee, on not more than thirty (30) days' prior written notice. In no
event will Borrower pay a management fee in excess of the then prevailing market
rates.


                                      -57-

<PAGE>

7.8 CONDUCT OF BUSINESS.  From and after the Closing Date, Borrower will not
engage in any business other than the ownership and operation of the Mortgaged
Property. Borrower shall not use the Mortgaged Property or any part thereof, or
allow the same to be used or occupied, for any purpose other than for the
purposes of an office, laboratory, vivarium or other facility for similar use
and related amenities, or for any unlawful purpose, or in violation of any Legal
Requirement. Borrower will not suffer any act to be done or any condition to
exist on the Mortgaged Property or any part thereof or any article to be brought
thereon, which may be dangerous (unless safeguarded as required by Legal
Requirement) or which may constitute a nuisance, public or private, or which may
void or make voidable any insurance then in force with respect thereto. No tract
map, parcel map, condominium plan, condominium declaration, or plat of
subdivision (or analogous document) will be recorded with respect to the
Mortgaged Property without Lender's consent, which consent shall not be
unreasonably withheld, conditioned or delayed. The Mortgaged Property shall not
be converted to the condominium or "cooperative" form of ownership. Borrower
will not initiate or consent to any change in the zoning of the Mortgaged
Property. Borrower shall at all times maintain good and indefeasible fee title
to the Mortgaged Property free and clear of any encumbrances other than the
Liens in favor of Lender under the Loan Documents and the Permitted
Encumbrances. Borrower shall not change its fiscal year without giving advance
notice thereof to Lender.

7.9 USE OF LENDER'S NAME.  Borrower shall not use the names of Lender or any of
Lender's Subsidiaries or Affiliates in connection with the development,
marketing, leasing, use and operation of the Mortgaged Property. Borrower shall
not disclose or permit any Subsidiary of Guarantor or Borrower, or any officer,
director, partner, manager, member or employee of Borrower to disclose any of
the terms and conditions of the Loan to any Person except (a) to the extent
disclosed in the Mortgage and the Financing Statements, (b) to the extent such
disclosure is required pursuant to the Loan Documents or applicable legal
process, (c) to the extent, and only to the extent, such disclosure is required
pursuant to Guarantor's reporting requirements under the Exchange Act, (d) to
the extent the content of such disclosure is already generally available to the
public, or (e) to the extent Lender consents to such disclosure.

7.10 COMPLIANCE WITH ERISA.  Borrower shall not adopt, modify or terminate any
Employee Benefit Plans except as described in Schedule 4.10. Borrower shall not
fail to maintain and operate each existing Employee Benefit Plan in compliance
in all material respects with the provisions of ERISA, the Code and all other
applicable laws and the regulations and interpretations thereof. Borrower shall
not engage in any transaction which would cause the Obligations or any action
taken or to be taken under this Agreement or the other Loan Documents or
otherwise (or the exercise by Lender of any of its rights under the Loan
Documents) to be a non-exempt prohibited transaction under ERISA. Borrower shall
not become an "employee benefit plan" (within the meaning of Section 3(3) of
ERISA) to which ERISA applies and Borrower shall not permit its assets to be
plan assets.

7.11 DUE ON SALE OR ENCUMBRANCE.  Without Lender's consent, which consent may be
given or withheld in the sole discretion of Lender, neither Borrower nor any
other Person directly or indirectly holding any direct or indirect legal,
beneficial, equitable or other interest in Borrower (at each and every tier or
level of ownership) shall, or permit other Persons to, Transfer (whether or not
for consideration or of record) all or any portion of the Mortgaged Property or
any direct or indirect legal, equitable, beneficial or other interest (1) in all
or any portion of the Mortgaged


                                      -58-

<PAGE>

Property; (2) in Borrower; or (3) at each and every tier or level of ownership,
in Borrower's direct or indirect partners, members, shareholders, beneficial or
constituent owners including Guarantor, Borrower Representative, any owners of
Borrower Representative (or the direct or indirect owners of any direct or
indirect interests in any such constituent owners), including (a) an installment
sales agreement for a price to be paid in installments; (b) except as otherwise
permitted pursuant to Section 7.5, any Leases or a sale, assignment or other
transfer of, or the grant of a security interest in, Borrower's right, title and
interest in and to any Leases or any Rents; (c) any direct or indirect voluntary
or involuntary sale of any ownership interest in Borrower or other Person
directly or indirectly owning any direct or indirect interest in Borrower; (d)
the creation, issuance or redemption of direct or indirect ownership interests
by Borrower or any Person owning a direct or indirect interest in Borrower (at
each every tier or level of ownership); (e) any merger, consolidation,
dissolution or liquidation; and (f) without limitation of any of the foregoing,
any direct or indirect voluntary or involuntary Transfer by any Person which
indirectly controls Borrower (by operation of law or otherwise) of its direct or
indirect controlling interests in Borrower. Notwithstanding the foregoing, the
following shall not be deemed to be prohibited under this Section 7.11: (i) a
Transfer of an indirect ownership interest in Borrower, by the current owner
thereof to a wholly-owned subsidiary of Guarantor and (ii) Transfers of
ownership interests in a Person whose stock is publicly traded, so long as (x)
no such transfers described in parts (i) and (ii) of this sentence result in any
Person or Group acquiring, directly or indirectly, more than a forty-nine
percent (49%) direct or indirect interest in Borrower (if such Person or Group
did not prior to the Transfer, own at least forty-nine percent (49%) of the
direct or indirect ownership interests in Borrower), unless such Person or Group
acquiring, directly or indirectly, more than a forty-nine percent (49%) direct
or indirect interest in Borrower has a Credit Rating of "Baa2" or higher from
Moody's or "BBB" or higher from S&P, or, as applicable, an equivalent rating
from another Rating Agency, or, if such Person or Group is not rated by a Rating
Agency, has (A) a Net Worth of $1,000,000,000 or more, (B) an EBITDA Interest
Coverage of 6.0 or greater and (C) a Total Debt/Capitalization no greater than
40%, and (y) no Change in Control occurs by virtue of such Transfers (other than
pursuant to clause (ii) of the definition of "Change of Control").
Notwithstanding the foregoing, Borrower may sell Inventory in the ordinary
course of business and transfer or dispose of tangible personal property to
Persons that are not Borrower's Affiliates, which tangible personal property is
immediately replaced by an article of equivalent suitability and value or which
is no longer necessary in connection with the operation of the Mortgaged
Property provided that such transfer or disposal will (i) not have a Material
Adverse Effect; (ii) not materially impair the utility of the Mortgaged
Property, and (iii) not result in a reduction or abatement of, or right of
offset against, the Gross Revenues payable under any Lease or otherwise, and
provided that any tangible personal property acquired by Borrower (and not so
disposed of) shall be subject to the Lien of the Mortgage. Borrower acknowledges
that Lender has examined and relied on the experience of Borrower and Guarantor
in owning and operating properties such as the Mortgaged Property in agreeing to
make the Loan and will continue to rely on such ownership of the Mortgaged
Property and Borrower and Guarantor as a means of maintaining the value of the
Mortgaged Property as security for repayment of the Loan and the performance of
the other Obligations. Borrower acknowledges that Lender has a valid interest in
maintaining the value of the Mortgaged Property so as to ensure that, should
Borrower default in the repayment of the Loan or the performance of the other
Obligations, Lender can recover the Loan by a sale of the Mortgaged Property.
Lender shall not be required to demonstrate any actual impairment of its


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security or any increased risk of default hereunder in order to declare the Loan
immediately due and payable upon any Default under this Section 7.11.

7.12 PAYMENTS; DISTRIBUTIONS.  Except for payments of management fees otherwise
permitted to be paid to Manager under this Agreement pursuant to a Management
Agreement approved by Lender at a time when no Event of Default exists, Borrower
shall not pay any distributions, dividends or other payments or return any
capital to any of its respective partners, members, owners or shareholders or
any other Affiliate or make any distribution of assets, rights, options,
obligations or securities to any of its respective partners, members,
shareholders or owners or any other Affiliate (individually, or collectively, a
"DISTRIBUTION") unless (a) on the date of the proposed Distribution, and after
giving effect to the subsequent Distribution, no Default or Event of Default
exists; (b) funds are not then required to be deposited into any Reserves; (c)
Borrower is not "insolvent" (as defined in the Bankruptcy Code) and will not be
rendered insolvent by virtue of such Distribution; (d) Borrower shall deliver,
at least ten (10) days in advance of the proposed Distribution, to Lender, an
Officer's Certificate executed by the chief financial officer or similar officer
of Borrower, stating that the foregoing conditions (a), (b) and (c) have been
satisfied.

7.13 SINGLE PURPOSE BANKRUPTCY REMOTE ENTITIES.  Borrower hereby represents,
warrants, agrees and covenants that Borrower and Borrower Representative have,
at all times, from their formation, been, and, at all times will be, a Special
Purpose Bankruptcy Remote Entity. Neither Borrower nor Borrower Representative
will, directly or indirectly, make any change, amendment or modification to its
Organizational Documents or otherwise take any action which could result in
Borrower or Borrower Representative not being a Special Purpose Bankruptcy
Remote Entity.

7.14 ALTERATIONS.  Borrower shall not alter, remove or demolish or permit the
alteration, removal or demolition of, any Improvement except as the same may be
necessary in connection with (i) a Restoration in connection with a taking or
casualty in accordance with the terms and conditions of the Agreement, (ii)
Required Capital Improvements in accordance with the terms and conditions of the
Agreement and (iii) other Alterations permitted in accordance with the terms and
conditions of this Section 7.14. If no Event of Default exists, Borrower may
undertake any alteration, improvement, demolition or removal of Improvements or
any portion thereof (any such alteration, improvement, demolition or removal, an
"ALTERATION") so long as (1) Borrower provides Lender with at least thirty (30)
days' prior notice of any such Alteration, (2) such Alteration is undertaken in
accordance with the applicable provisions of this Agreement, is not prohibited
by, and is in full compliance with, and does not violate, any Material Contracts
or Legal Requirements and does not, during Construction and upon completion,
have a Material Adverse Effect, (3) Borrower provides Lender with evidence,
satisfactory to Lender, that Borrower has sufficient funds to complete and pay
all of the costs of the Alterations, (4) such Alteration does not eliminate or
materially modify any amenity (e.g., health club) available to tenants and their
employees or customers, (5) such Alteration is in the nature of (x) Required
Capital Improvements permitted under this Agreement, (y) a Restoration required
or permitted under the Agreement or (z) if not in the nature of the Alterations
contemplated by (x) or (y), such Alteration has been consented to by Lender
(such consent will not be unreasonably withheld, conditioned or delayed in the
case of Alterations the cost of which, as estimated by Lender, does not exceed
$50,000) and (6) prior to commencement and from time to time upon request from
Lender, Borrower delivers an Officer's Certificate certifying that conditions
(1)-(5), inclusive,


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have been satisfied. Any Alteration shall, unless Lender otherwise approves or
the Agreement otherwise provides, be conducted under the supervision of an
independent architect approved by Lender (an "INDEPENDENT ARCHITECT"). No
Alteration shall be undertaken until Lender has approved plans and
specifications and cost estimates for the Alterations, prepared by such
Independent Architect or another Person approved by Lender, such approvals not
to be unreasonably withheld, conditioned or delayed. Notwithstanding anything
contained in this Section 7.14 to the contrary, Borrower shall have the right to
make non-structural Alterations to the Improvements, the cost of which does not
exceed $500,000 per Alteration, without Lender's consent and without complying
with clauses (3)-(5) set forth above; provided, however, that Borrower shall
provide Lender with prior written notice at least ten (10) days prior to
commencing such Alteration and prior to commencing any permitted Alteration,
Borrower shall have delivered to Lender a copy of the proposed plans and
specifications for such Alteration.

                                    SECTION 8
                            CASUALTY AND CONDEMNATION

8.1 RESTORATION FOLLOWING CASUALTY OR CONDEMNATION.  After the happening of any
casualty or condemnation to the Mortgaged Property or any part thereof, Borrower
shall give prompt notice thereof to Lender.

          (a) In the event of any damage or destruction of all or any part of
     the Mortgaged Property, all Proceeds shall be payable to Lender. Borrower
     hereby authorizes and directs any affected insurance company or condemning
     Governmental Authority or other Persons to make payment of such proceeds
     directly to Lender. Borrower shall obtain Lender's approval prior to any
     settlement, adjustment or compromise of any claims for loss, damage or
     destruction under any policy or policies of insurance or with respect to
     any condemnation, and Lender shall have the right to participate with
     Borrower in negotiation of any such settlement, adjustment or compromise
     provided, however, Borrower shall be permitted, so long as no Event of
     Default exists, to settle insurance claims of $250,000 or less without
     Lender's approval (but with reasonable advance notice to Lender) and
     utilize any such funds for Restoration. Lender shall also have the right to
     appear with Borrower in any action against an insurer based on a claim for
     loss, damage or destruction under any policy or policies of insurance.

          (b) All compensation, proceeds, damages, claims, insurance recoveries,
     rights of action and payments which Borrower may receive or to which
     Borrower may become entitled with respect to the Mortgaged Property or any
     part thereof as a result of any casualty or condemnation, except as set
     forth below in this Section 8.1 (the "PROCEEDS"), shall be paid over to
     Lender and shall be held in an escrow account with an Acceptable Financial
     Institution. The Proceeds shall be applied first toward reimbursement of
     all costs and expenses of Lender in connection with recovery of the same,
     and then, except as set forth below in this Section 8.1, shall be applied
     in the sole and absolute discretion of Lender, without regard to the
     adequacy of Lender's security hereunder, to the payment or prepayment of
     the Obligations in such order as Lender may determine, and any amounts so
     applied shall reduce the Obligations pro tanto (without any Prepayment
     Premium due in connection therewith). Any application of the Proceeds or
     any portion


                                      -61-

<PAGE>

     thereof to the Obligations shall not be construed to cure or waive any
     Default or Event of Default or invalidate any act done pursuant to any such
     Default or Event of Default.

          (c) Subject to the other provisions of this Section 8.1, and provided
     that (i) all Proceeds have been deposited with an Acceptable Financial
     Institution; (ii) no Event of Default shall exist; (iii) a Total Loss with
     respect to the Property shall not have occurred; (iv) the Restoration is
     capable, as reasonably determined by Lender, of being completed before the
     earlier (the "REQUIRED RESTORATION DATE") to occur of (x) the date which is
     six (6) months prior to the Maturity Date, (y) the date on which the
     insurance carried by Borrower pursuant to Section 5.4(a)(ii), with respect
     to the Mortgaged Property shall expire and (z) eighteen (18) months after
     the occurrence of the casualty or condemnation in question; (v) Lender
     shall have been furnished with an estimate of the cost of restoration
     accompanied by an architect's certificate as to such costs and appropriate
     final plans and specifications for reconstruction of the Improvements, all
     of which shall be approved by Lender, which approval shall not be
     unreasonably withheld, conditioned or delayed; (vi) the Improvements so
     restored or rebuilt shall be of at least equal value and substantially the
     same character as prior to the damage or destruction and appropriate for
     the purposes for which they were originally erected (and, if requested by
     Lender, Borrower will furnish, at its expense, an appraisal confirming such
     valuation); (vii) Borrower shall have furnished Lender with evidence
     reasonably satisfactory to Lender that all Improvements so restored and/or
     reconstructed and their use fully comply with all applicable zoning,
     building laws, ordinances and regulations and other Legal Requirements and
     that all required licenses and approvals required for use, operation and
     occupancy of the Improvements can be obtained, to the extent available;
     (viii) if the estimated cost of restoration exceeds the Proceeds available,
     Borrower shall have deposited with Lender such sums or other security as
     may be necessary, in Lender's reasonable judgment, to pay such excess costs
     and (ix) Lender shall have received notice within thirty (30) days of the
     fire or other hazard or of the condemnation proceedings specifying the date
     of such fire or other hazard or the date the notice of condemnation
     proceedings was received and the request to Lender to make said Proceeds
     available to Borrower; then the Proceeds, less the actual costs, fees and
     expenses, if any, incurred in connection with adjustment of loss and
     Lender's reasonable administrative expenses relating to such loss and the
     disbursement of the Proceeds shall be made available by Lender to the
     payment of all the costs of the aforesaid restoration, repairs,
     replacement, rebuilding or alterations, including the cost of temporary
     repairs or for the protection of property pending the completion of
     permanent restoration, repairs, replacements, rebuilding or alterations
     (all of which temporary repairs, protection of property and permanent
     restoration, repairs, replacement, rebuilding or alterations are
     hereinafter collectively referred to as the "RESTORATION"), and shall be
     paid out from time to time as such Restoration progresses upon the request
     of Borrower if the work for which payment is requested has been done in a
     good and workmanlike manner, in compliance with applicable Legal
     Requirements and substantially in accordance with the plans and
     specifications therefor. Each request by Borrower for disbursement of
     Proceeds shall (unless Lender otherwise elects, in its sole discretion,
     with respect to a Restoration estimated by Lender to cost $100,000 or less
     to complete, to waive any of the following requirements) be accompanied by
     the required Lien Waivers, a Request for Release, and, to the extent not
     subsumed within a Request for Release, the following:


                                      -62-

<PAGE>

               (1) A certificate signed by Borrower, dated not more than thirty
          (30) days prior to such request, setting forth the following: (A) That
          the sum then requested either has been paid, or is justly due to
          contractors, subcontractors, materialmen, engineers, architects or
          other persons who have rendered services or furnished materials for
          the restoration therein specified or have paid for the same, the names
          and addresses of such persons, a brief description of such services
          and materials, the several amounts so paid or due to each of said
          persons in respect thereof (together with supporting statements and
          invoices for the same), that no part of such expenditures has been or
          is being made the basis of any previous or then pending request for
          the withdrawal of Proceeds or has been made out of any of the Proceeds
          received by Borrower, and that the sum then requested does not exceed
          the value of the services and materials described in the certificate;
          and (B) That the costs, as estimated by the persons signing such
          certificate, of the Restoration required to be done subsequent to the
          date of such certificate in order to complete and pay for the same, do
          not exceed the Proceeds, plus any amount or security approved by
          Lender and deposited with such Acceptable Financial Institution by
          Borrower to defray such costs and remaining in the hands of Lender
          after payment of the sum requested in such certificate.

               (2) A title insurance report or other evidence satisfactory to
          Lender to the effect that there has not been filed with respect to the
          Mortgaged Property, or any part thereof, any vendor's, contractor's,
          mechanics', laborer's, materialmen's or other Lien which has not been
          discharged of record or bonded or insured over, except such as will be
          disbursed by payment of the amount then requested.

               (3) A certificate signed by the Independent Architect and/or
          engineer in charge of the Restoration, who shall be selected by
          Borrower and approved in writing by Lender, certifying that the
          Restoration is proceeding in accordance with the plans and
          specifications approved by Lender and in accordance with all zoning,
          subdivision and other Legal Requirements. Upon compliance with the
          foregoing provisions, Lender shall, out of Proceeds (and the amount of
          security approved by Lender, if any, deposited by Borrower to defray
          the costs of the Restoration), pay or cause to be paid to Borrower or
          the Persons named (pursuant to clause (1)(A) above) in such
          certificate the respective amounts stated therein to have been paid by
          Borrower or to be due to them, as the case may be.

          (d) If the Proceeds at the time held by the Acceptable Financial
     Institution, less the actual costs, fees and expenses, if any, incurred in
     connection with the adjustment of the loss and Lender's administrative
     expenses relating to such loss and the disbursement of the Proceeds, shall
     be, in Lender's reasonable judgment, insufficient to pay the entire cost of
     the Restoration, Borrower shall deposit with such Acceptable Financial
     Institution any such deficiency prior to disbursement of any additional
     portion of the Proceeds. Lender shall at all times have a perfected
     security interest on all Proceeds and other amounts held by such Acceptable
     Financial Institution pursuant to this Section 8. No payment made prior to
     the final completion of the Restoration shall exceed ninety percent (90%)
     of the value of the work performed from time to time (provided that,
     notwithstanding the foregoing, subcontractors who have completed their


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<PAGE>

     work may be paid in full), and at all times the undisbursed balance of said
     Proceeds remaining in the hands of Lender shall be at least sufficient to
     pay for the cost of completion of the Restoration free and clear of liens.
     In addition to the requirements and conditions set forth in Section 5.19,
     final payment shall be upon an architect's certificate of completion in
     accordance with the final plans and specifications and compliance with all
     applicable zoning, building, subdivision and other governmental laws,
     ordinances, rules, and regulations, the filing of a notice of completion
     and the expiration of the period provided under applicable law for the
     filing of mechanic's and materialmen's liens and delivery to Lender of a
     certified copy of a final unconditional permanent (i) certificate of
     occupancy regarding the Restoration, to the extent available, and (ii)
     certificate of compliance from The Woodlands Community Association and The
     Woodlands Community Owners Association (or their successor entities). To
     the extent available, Lender may, at its option, require an endorsement to
     the Title Policy insuring the continued priority of the lien of the
     Mortgage as to all sums advanced hereunder, such endorsement to be paid for
     by Borrower. Upon completion of the Restoration in a good and workmanlike
     manner in accordance herewith, and provided that Lender has received
     satisfactory evidence that the Restoration has been paid for in full and
     the Mortgaged Property is free and clear of all Liens, other than the Liens
     created in favor of Lender by the Loan Documents and the Permitted
     Encumbrances (including signed lien waivers from all contractors and
     subcontractors conditioned only on payment of amounts specified therein),
     any balance of the Proceeds at the time held by Lender (after reimbursement
     to Lender of all costs and expenses of Lender, including administrative
     expenses, in connection with recovery of the same and disbursement of such
     Proceeds for the Restoration), if any, shall be applied as follows: (i) to
     the extent that such balance of the Proceeds is equal to or less than the
     amount, if any, by which the value of the Mortgaged Property prior to such
     damage or destruction exceeds the value of the Mortgaged Property after
     such Restoration (for these purposes, the value of the Mortgaged Property
     shall be determined by Lender in its discretion), then the portion of the
     balance of the Proceeds equal to such excess amount shall be applied to the
     payment or prepayment of the principal balance of the Obligations in such
     order as Lender may determine, and any amounts so applied shall reduce the
     Obligations pro tanto (without any Prepayment Premium due in connection
     therewith); and (ii) to the extent that the balance of the Proceeds exceeds
     such excess amount, such portion of the balance of the Proceeds shall be
     paid to Borrower.

          (e) Nothing herein contained shall be deemed to excuse Borrower from
     repairing or maintaining the Mortgaged Property as provided in the
     Agreement hereof or restoring all damage or destruction to the Mortgaged
     Property, regardless of whether or not there are insurance proceeds
     available or whether any such Proceeds are sufficient in amount, and the
     application or release by Lender of any Proceeds shall not cure or waive
     any Default or Event of Default or invalidate any other act done by Lender
     to exercise its remedies under this Agreement or the other Loan Documents;
     provided, however, if, prior to the last two (2) years of the term of the
     Loan, Lender elects not to make such Proceeds available to Borrower for
     restoration, then Borrower may prepay the Loan without payment of the
     Prepayment Premium, so long as an Event of Default is not then in
     existence.


                                      -64-

<PAGE>

                                    SECTION 9
                          DEFAULT, RIGHTS AND REMEDIES

9.1 EVENT OF DEFAULT.  "EVENT OF DEFAULT" means the occurrence or existence of
any one or more of the following:

     (A) PAYMENT.  Failure of Borrower to pay (i) on the Maturity Date, the
outstanding principal of, accrued interest in, and other Indebtedness owing
pursuant to the Agreement, the Note and the other Loan Documents, (ii) within
five (5) days after the due date, any installment of principal or interest due
under the Note; provided, however, the aforesaid five (5) day grace period may
be utilized by Borrower no more than once in any consecutive twelve (12) Loan
Month period, or (iii) within five (5) days after the respective due date, any
other amount due under the other Loan Documents, provided, however, the
aforesaid five (5)-day grace period may e utilized by Borrower no more than once
in any consecutive twelve (12) Loan Month period.

     (B) BREACH OF CERTAIN PROVISIONS.

          (i) Failure of Borrower to perform or comply with any term, agreement,
     covenant, representation, warranty or condition contained in Sections
     5.1(E), 5.1(F), 5.1(G), 5.1(H), 5.13, 6.2, 7.2, 7.5, 7.9, 7.12, 7.13, 7.14,
     8.1(a), 8.1(b) or 10 and such failure is not remedied or waived within five
     (5) Business Days after receipt by Borrower of notice from Lender of such
     failure.

          (ii) Failure of Borrower to perform or comply with any term,
     agreement, covenant, representation, warranty or condition contained in
     Sections 5.4 (except any such failure which does not result in any
     insurance coverage required by Section 5.4 not in fact being in place),
     7.1, 7.3, 7.4, 7.10 or 7.11.

     (C) BREACH OF REPRESENTATION AND WARRANTY.  Any representation, warranty,
certification or other statement made by Borrower or Guarantor in any Loan
Document or in any statement or certificate at any time given in writing
pursuant or in connection with any Loan Document (other than occurrences
described in other provisions of this Section 9.1 for which a different grace or
cure period is specified or which constitute immediate Events of Default) is
false in any material respect on the date made which remains uncured for five
(5) Business Days after notice, but no grace or curative period will apply if
the representation, warranty, certification or other statement was known by
Borrower or Guarantor to be false when made or deemed made.

     (D) OTHER DEFAULTS UNDER LOAN DOCUMENTS.  A default by Borrower shall occur
in the performance of or compliance with any term contained in this Agreement or
the other Loan Documents and such default is not remedied or waived within
thirty (30) days after receipt by Borrower of notice from Lender of such default
(other than occurrences described in other provisions of this Section 9.1 for
which a different grace or cure period is specified or which constitute
immediate Events of Default); provided, however, that (i) if such default cannot
be remedied with reasonably diligent effort within a period of thirty (30) days,
but is susceptible to cure within a period of one hundred twenty (120) days and
(ii) the continued default in performance will not have a Material Adverse
Effect, such longer period, not to exceed ninety


                                      -65-

<PAGE>

(90) additional days, as Borrower may need to remedy such default, if Borrower
is proceeding with diligent effort to remedy such default throughout said one
hundred twenty (120)-day period; provided, further, however, that (A) if
Borrower has been, and will continue to be, diligent in its efforts to cure such
default, and (B) the continued default has not, and will not, have a Material
Adverse Effect, Borrower shall have such longer period, not to exceed an
additional sixty (60) days (for a total of one hundred eighty (180) days), as
Borrower may need to remedy such default. The rights to notice and cure periods
granted herein shall not be cumulative with any other rights to notice or a cure
period in any other Loan Document and the giving of notice or a cure period
pursuant to this section shall satisfy any and all obligations of Lender to
grant any such notice or cure period pursuant to any of the Loan Documents.

     (E) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.  (1) A court
enters a decree or order for relief with respect to Borrower, Guarantor or
Borrower Representative in an involuntary case under the Bankruptcy Code or any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, which decree or order is not stayed or other similar relief is not
granted under any applicable federal or state law; or (2) the continuance of any
of the following events for ninety (90) days unless dismissed, bonded or
discharged: (a) an involuntary case is commenced against any Borrower, Borrower
Representative or Guarantor under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect; or (b) a decree or order of a court for
the appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over Borrower, Borrower Representative or
Guarantor or over all or a substantial part of its property, is entered; or (c)
an interim receiver, trustee or other custodian is appointed without the consent
of Borrower, Borrower Representative or Guarantor for all or a substantial part
of the property of Borrower, Borrower Representative or Guarantor; or

     (F) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.  (1) An order for
relief is entered with respect to Borrower, Borrower Representative or Guarantor
or Borrower, Borrower Representative or Guarantor commences a voluntary case
under the Bankruptcy Code or any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case or to the conversion of an involuntary case to a
voluntary case under any such law or consents to the appointment of or taking
possession by a receiver, trustee or other custodian for all or a substantial
part of its property; or (2) Borrower, Borrower Representative or Guarantor
makes any assignment for the benefit of creditors; or (3) partners,
shareholders, or members in Borrower, Borrower Representative or Guarantor
adopts any resolution or otherwise authorizes action to approve any of the
actions referred to in this Section 9.1(F); or

     (G) GOVERNMENTAL LIENS.  Any lien, levy or assessment is filed or recorded
with respect to or otherwise imposed upon all or any part of the Mortgaged
Property by the United States or any department or instrumentality thereof or by
any state, county, municipality or other governmental agency (other than
Permitted Encumbrances) and such lien, levy or assessment is not stayed,
vacated, paid, discharged or insured or bonded over within thirty (30) days;

     (H) JUDGMENT AND ATTACHMENTS.  Any money judgment, writ or warrant of
attachment, or similar process (other than those described in Section 9.1(G))
involving (1) an


                                      -66-

<PAGE>

amount in any individual case in excess of $100,000 or (2) an amount in the
aggregate at any time in excess of $250,000 (in either case not adequately
covered by insurance as to which the insurance company has acknowledged
coverage) is entered or filed against Borrower, Borrower Representative or
Guarantor and remains undischarged, unvacated, unbonded, uninsured or unstayed
for a period of thirty (30) days or in any event later than five (5) days prior
to the date of any proposed sale thereunder;

     (I) DISSOLUTION.  Any order, judgment or decree is entered against
Borrower, Borrower Representative or Guarantor decreeing the dissolution or
split up of Borrower, Borrower Representative or Guarantor and such order
remains undischarged or unstayed for a period in excess of twenty (20) days; or

     (J) INJUNCTION.  Either (i) Borrower, Borrower Representative or any
Guarantor is enjoined, restrained or in any way prevented by the order of any
court or any administrative or regulatory agency from conducting all or any
material part of its business relating to the any Mortgaged Property and such
order continues for more than thirty (30) days; or (ii) any order or decree is
entered by any court of competent jurisdiction directly or indirectly enjoining
or prohibiting Lender, Borrower, Borrower Representative or Guarantor from
performing any of their obligations under this Agreement or any of the other
Loan Documents; or

     (K) INVALIDITY OF LOAN DOCUMENTS.  Any of the Loan Documents for any
reason, other than a partial or full release in accordance with the terms of the
Loan Documents, ceases to be in full force and effect or is declared to be null
and void by a court of competent jurisdiction, or any of Borrower, Borrower
Representative or Guarantor denies that it has any further liability under any
Loan Documents to which it is party, or gives notice to such effect; or

     (L) EVENT OF DEFAULT.  The occurrence of an Event of Default specified
elsewhere in this Agreement or in any of the other Loan Documents or the
occurrence of an Event of Default by Guarantor under the Guaranty; or

     (M) CROSS-DEFAULT.  The occurrence of any of the following with respect to
Guarantor: (i) the acceleration of any Indebtedness in the aggregate amount of
$10,000,000 or more; (ii) the occurrence of a default under any Indebtedness in
the aggregate amount of $10,000,000 or more not cured within the grace or
curative period applicable to such Indebtedness, (iii) the occurrence of a
default or breach under any Material Contracts not cured within any applicable
grace period or notice and cure period, which, in Lender's reasonable judgment,
could have a Material Adverse Effect, or (iv) the loss or termination of any
Proprietary Rights which, in Lender's reasonable judgment, could have a Material
Adverse Effect.

     (N) DEATH, ETC.  Dissolution, cessation of existence or felony or other
criminal conviction or indictment of Borrower, Borrower Representative and/or
Guarantor, a punishment for which could result in forfeiture of any assets of
the Borrower, Guarantor or any direct or indirect equity interest to Borrower or
loss of eligibility for any material Proprietary Rights, which in Lender's
reasonable judgment could have a Material Adverse Effect; or


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     (O) INDEPENDENT PERSON.  Borrower or Borrower Representative shall at any
time cease to have at least one (1) Independent Person or, if requested by
Lender in writing in connection with a contemplated Securitization, two (2)
Independent Persons for more than ten (10) consecutive Business Days; or

     (P) ZONING.  The Land and Improvements or any portion thereof are zoned
either voluntarily or involuntarily, such that the zoning or other applicable
land use restriction prohibits the Borrower from operating the Land and
Improvements or any portion thereof as an office, laboratory, vivarium, life
sciences facility or other facility for similar use;

     (Q) TENANT IMPAIRMENT EVENT.  The occurrence of a Tenant Impairment Event;

     (R) CHANGE IN CONTROL.  The occurrence of any direct or indirect Change in
Control with respect to Borrower or Guarantor, except as permitted pursuant to
Section 7.11; or

     (S) LEASE.  The occurrence of any default by Borrower in any of its
obligations under the Guarantor Lease.

9.2 ACCELERATION AND REMEDIES.  Upon the occurrence of any Event of Default
specified in Sections 9.1(E) and 9.1(F), payment of all Obligations shall be
accelerated without notice, presentment, demand, protest or notice of protest
and shall be immediately due and payable and, in addition, Lender may in
addition to any other rights and remedies available to Lender at law or in
equity or under any other Loan Documents, exercise one of more of the following
rights and remedies as it, in its sole discretion, deems necessary or advisable.
Upon the occurrence of any Event of Default (other than Events of Default
specified in Sections 9.1(E) and 9.1(F)), Lender, in addition to any other
rights or remedies available to Lender at law or in equity, or under any of the
other Loan Documents, may exercise any one or more of the following rights and
remedies as it, in its sole discretion, deems necessary or desirable:

     (a) ACCELERATION.  Declare immediately due and payable, without further
notice, protest, presentment, notice of protest or demand, all Obligations
including all monies advanced under this Agreement, the Note, the Mortgage
and/or any of the Loan Documents which are then unpaid, together with all
interest then accrued thereon and all other amounts then owing (including any
Default Interest, or prepayment premium owed as a result of such acceleration).
If payment of the Obligations is accelerated, Lender may, in its sole
discretion, exercise all rights and remedies hereunder and under the Note, the
Mortgage and/or any of the other Loan Documents at law, in equity or otherwise.

     (b) POSSESSION.  Enter upon and take possession of the Mortgaged Property
and proceed in the name of Lender or Borrower as the attorney-in-fact of
Borrower (which authority, to the extent permitted by law, is hereby granted by
Borrower, is coupled with an interest, and is irrevocable), as Lender shall
elect. If Lender elects to so enter upon and take possession of the Mortgaged
Property, Lender (i) may enforce or cancel all contracts entered into by
Borrower or make other contracts which are in Lender's sole opinion advisable,
and (iii) shall be reimbursed by Borrower upon demand any reasonable amount or
amounts expended by Lender for such performance together with any reasonable
costs, charges, or expenses incident thereto or otherwise incurred or expended
by Lender or its representatives (including an appraisal) on


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<PAGE>

behalf of Borrower in connection with the Mortgaged Property, and the amounts so
expended shall be considered part of the Loan evidenced by the Note and secured
by the Loan Documents and shall bear interest at the Default Rate.

     (c) INJUNCTIVE RELIEF.  Institute appropriate proceedings for injunctive
relief (including specific performance of the obligations of Borrower).

     (d) ACCOUNTS.  Release all funds contained in the Reserve Accounts to be
applied to Borrower's Obligations.

9.3 REMEDIES CUMULATIVE; WAIVERS; REASONABLE CHARGES.  All of the remedies given
to Lender in the Loan Documents or otherwise available at law or in equity to
Lender shall be cumulative and may be exercised separately, successively or
concurrently. Failure to exercise any one of the remedies herein provided shall
not constitute a waiver thereof by Lender, nor shall the use of any such
remedies prevent the subsequent or concurrent resort to any other remedy or
remedies vested in Lender by the Loan Documents or at law or in equity. To be
effective, any waiver by Lender must be in writing and such waiver shall be
limited in its effect to the condition or default specified therein, and no such
waiver shall extend to any subsequent condition or default. It is agreed that
(i) the actual costs and damages that Lender would suffer by reason of an Event
of Default (exclusive of the attorneys' fees and other costs incurred in
connection with enforcement of Lender's rights under the Loan Documents) or a
prepayment would be difficult and needlessly expensive to calculate and
establish, and (ii) the amounts of the Default Rate, the Late Charge, payments
to be made pursuant to Section 2.4(c)(ii) and the Prepayment Premium are
reasonable, taking into consideration the circumstances known to the parties at
this time, and (iii) the Default Rate, the Late Charges and Lender's reasonable
attorneys' fees and other costs and expenses incurred in connection with
enforcement of Lender's rights under the Loan Documents shall be due and payable
as provided herein, and (iv) the Default Rate, Late Charges, Prepayment Premium,
the payments to be made pursuant to Section 2.4(c)(ii) and the obligation to pay
Lender's reasonable attorneys' fees and other enforcement costs do not,
individually or collectively, constitute a penalty.

                                   SECTION 10
                          SECONDARY MARKET TRANSACTION

10.1 SECONDARY MARKET TRANSACTION.  Borrower agrees that Lender has the absolute
right to securitize, syndicate, grant participations in, or otherwise Transfer
all or any portion of the Loan (each such transaction, a "SECURITIZATION").
Lender may determine to Transfer some or all of the Loan or retain title to some
or all of the Loan as part of a Securitization. Borrower further agrees that
Lender may delegate any or all of Lender's rights, powers and privileges to a
servicer ("SERVICER") and Borrower shall, upon notice from Lender, recognize the
Servicer as the agent of Lender. In the event this Loan becomes or is designated
by Lender to become an asset of a Securitization, upon Lender's request,
Borrower shall meet, from time to time, with representatives of the Rating
Agencies in connection with such a Securitization to discuss the business and
operations of the Mortgaged Property and, in that regard, agrees to cooperate
with the reasonable requests of the Rating Agencies. Lender may retain the
Rating Agencies to provide rating surveillance services on any certificates
issued in a Securitization. In no event shall Borrower be required to pay any
servicer fees, Securitization trustee fees or other


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Securitization administrative expenses except as may be expressly provided in
this Agreement. Borrower shall, upon request from Lender, from time to time,
cooperate, and Borrower shall, cause Guarantor and Borrower's partners and/or
members to cooperate, in all reasonable respects in connection with a
Securitization. Such cooperation may, in Lender's discretion, include
documentation changes, changes in organizational documents, changes in Accounts,
Reserves, Payment Dates, Interest Periods, insurance endorsement changes, tenant
payment direction changes, site inspections, updated appraisals, preparation and
delivery of financial information or other diligence requested by Lender and/or
any Rating Agency; provided, however, any third party costs incurred by Borrower
related to such changes shall be reimbursed by Lender and such changes shall not
materially and adversely diminish Borrower's rights under the Loan Documents nor
increase Borrower's burdens and obligations under the Loan Documents. Such
cooperation may include, in Lender's discretion, execution of one or more
promissory notes and the creation of Liens securing such notes of differing
priority and/or the creation of mezzanine debt secured by pledges of all of the
membership interests in the Borrower so long as the principal amount, interest
rate, payment terms and other monetary terms of the Loan do not, in the
aggregate change. Borrower will not be required to incur any expenses or costs
pursuant to this Section 10.1. Borrower will, upon request from Lender, in
connection with a Securitization, enter into such acknowledgments and
confirmations of the applicable assignments as Lender may request. Borrower
shall, subject to the terms and provisions of this Section 10.1, use reasonable
efforts to satisfy the market standards which Lender determines are reasonably
required in the marketplace or by the Rating Agencies in connection with a
Securitization. Notwithstanding anything else contained to the contrary herein,
Borrower will not, pursuant to any of the provisions of this Section 10.1,
incur, suffer or accept (i) any lesser rights or greater obligations as are
currently set forth in the Loan Documents or Borrower's Organizational Documents
(unless Borrower is made whole by the holder of the Note) or (ii) subject to
Section 11.13 hereof, any personal liability other than as set forth in the Loan
Documents. Borrower will also, if requested by Lender, cause independent counsel
to render opinions customary in securitization transactions with respect to the
Mortgaged Property and Borrower and Borrower's and Guarantor's Subsidiaries (but
not a true sale, 10b-5 opinion or nonconsolidation opinion), which counsel and
opinions shall be reasonably satisfactory to Lender and the Rating Agencies and
which shall be addressed to such Persons as shall be reasonably designated by
the holder of the Note. Borrower's failure to deliver the opinions required
hereby within ten (10) Business Days after written request therefore shall
constitute an Event of Default hereunder. If requested by Lender, Borrower's
cooperation will also include (but subject to Section 11.3) certifications and
agreements pursuant to which Borrower will certify that it has examined the
portion of applicable preliminary and final private placement memorandum or
preliminary, final and supplement or prospectus specified by Lender as
pertaining to Borrower, the Loan, Guarantor, the Mortgaged Property and the
Manager, and that each such designated portion, as it relates to Borrower,
Guarantor, the Mortgaged Property, Manager and all other aspects of the Loan,
does not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading. All reasonable
costs of Borrower's cooperation as described in this Section 10.1 shall be at
the expense of Lender, except (a) any costs and expenses for the appointment of
a second Independent Person for Borrower and Borrower Representative, which
costs shall be paid by Borrower, and (b) any reasonable fees and expenses of the
Servicer which


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<PAGE>

Borrower may be obligated to pay based upon actions, consents or waivers
requested by Borrower.

                                   SECTION 11
                                  MISCELLANEOUS

11.1 EXPENSES AND ATTORNEYS' FEES.  Whether or not the transactions contemplated
hereby shall be consummated, Borrower agrees to promptly pay all fees, costs and
expenses (including reasonable attorneys' fees, court costs, cost of appeal and
the reasonable fees, costs and expenses of other professionals retained by
Lender) incurred by Lender in connection with the following, and all such fees,
costs and expenses shall be part of the Obligations, payable on five (5)
Business Days written notice: (A) the examination, review, due diligence
investigation, documentation and closing of the financing arrangements evidenced
by the Loan Documents; (B) the giving or withholding of any consents, approvals,
or permissions, administration of the Loan, disbursements of the Loan and
disbursements from the Accounts and in connection with any amendments,
modifications and waivers relating to the Loan Documents requested by Borrower;
(C) the review, documentation, negotiation and closing of any subordination or
intercreditor agreements, Lease reviews, and subordination, nondisturbance and
attornment agreements; (D) Lender's Representative; and (E) enforcement of this
Agreement or the other Loan Documents, the collection of any payments due from
Borrower or Guarantor under the Loan Documents or any refinancing or
restructuring of the credit arrangements provided under the Loan Document,
whether in the nature of a "workout" or in connection with any insolvency or
bankruptcy proceedings or otherwise; provided, however, in no event shall
Borrower be liable for any fees incurred by Lender in connection with a
Securitization.

11.2 CERTAIN LENDER MATTERS.  Lender may, in accordance with Lender' customary
practices, destroy or otherwise dispose of all documents, schedules, invoices or
other papers, delivered by Borrower to Lender unless Borrower requests, at the
time of delivery, in writing that same be returned. Borrower and Lender intend
that the relationships created hereunder and under the other Loan Documents be
solely that of borrower and lender. Nothing herein or therein is intended to
create a joint venture, partnership, tenancy-in-common, or joint tenancy
relationship between Borrower and Lender nor to grant Lender any interest in the
Mortgaged Property other than that of mortgagee, beneficiary or lender. No
provision in this Agreement or in any of the other Loan Documents and no course
of dealing between the parties shall be deemed to create any fiduciary duty by
Lender to Borrower or any other Person. All attorneys, accountants, appraisers,
and other professional Persons and consultants retained by Lender shall have the
right to act exclusively in the interest of Lender and shall have no duty of
loyalty, duty of care or any other duty to Borrower or any of Borrower's
partners, shareholders, members, managers, Affiliates or any other Person. By
accepting or approving anything required to be observed, performed or fulfilled
or to be given to Lender pursuant to the Loan Documents, Lender shall not be
deemed to have warranted or represented the sufficiency, legality, effectiveness
or legal effect of the same, or of any term, provision or condition thereof, and
such acceptance or approval thereof shall not be or constitute any warranty or
representation with respect hereto or thereto by Lender. Borrower shall rely
solely on its own judgment and advisors in entering into the Loan without
relying in any manner on any statements, representations or recommendations of
Lender or any parent, subsidiary or Affiliate of Lender or their respective
attorneys, advisors,


                                      -71-

<PAGE>

accountants, officers, representatives, directors, employees, partners,
shareholders, trustees, members or managers. Lender shall not be subject to any
limitation whatsoever in the exercise of any rights or remedies available to it
under any of the Loan Documents or any other agreements or instruments which
govern the Loan by virtue of the ownership by it or any parent, subsidiary or
Affiliate of Lender of any equity interest any of them may acquire in Borrower,
and Borrower hereby irrevocably waives the right to raise any defense or take
any action, in either case, on the basis of the foregoing with respect to
Lender's exercise of any such rights or remedies. Borrower acknowledges that
Lender engages in the business of real estate financings and other real estate
transactions and investments which may be viewed as adverse to or competitive
with the business of Borrower or its Affiliates. LENDER SHALL HAVE NO LIABILITY
HEREUNDER FOR ANY CONSEQUENTIAL, SPECIAL, PUNITIVE OR INDIRECT DAMAGES. In the
case of any receivership, insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition or other proceedings affecting Borrower or Borrower
Representative or Guarantor, or their respective creditors or property, Lender,
to the extent permitted by law, shall be entitled to file such proofs of claim
and other documents as may be necessary or advisable in order to have the claims
of Lender allowed in such proceedings for the entire secured Obligations at the
date of the institution of such proceedings and for any additional amount which
may become due and payable by Borrower after such date. Lender shall have the
right from time to time to designate, appoint and replace one or more servicers
and to allow servicer to exercise any and all rights of Lender under the Loan
Documents. All documents and other matters required by any of the provisions of
this Agreement to be submitted or provided to Lender shall be in form and
substance satisfactory to Lender. Borrower shall not be entitled to (and does
hereby waive any and all rights to receive) any notices of any nature whatsoever
from Lender except with respect to matters for which the Loan Documents
expressly provide for the giving of notice by Lender to Borrower. In any action
or proceeding brought by Borrower against Lender claiming or based upon an
allegation that Lender unreasonably withheld its consent to or approval of a
proposed act by Borrower which requires Lender's consent hereunder, Borrower's
sole and exclusive remedy in said action or proceeding shall be injunctive
relief or specific performance requiring Lender to grant such consent or
approval.

11.3 INDEMNITY.  In addition to the payment of expenses pursuant to Section 11.1
and the indemnification obligations set forth in other portions of this
Agreement, the Environmental Indemnification Agreement or the other Loan
Documents, whether or not the transactions contemplated hereby shall be
consummated, Borrower agrees to indemnify, pay, defend and hold Lender, its
officers, directors, members, partners, shareholders, participants,
beneficiaries, trustees, employees, agents, successors and assigns, any
subsequent holder of the Note, any trustee, fiscal agent, servicer, underwriter
and placement agent, (collectively, the "Indemnitees") harmless from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, causes of action, suits, claims, tax liabilities, broker's or finders
fees, costs, expenses and disbursements of any kind or nature whatsoever
(including the fees and disbursements of counsel for such Indemnitees in
connection with any investigative, administrative or judicial proceeding
commenced or threatened, whether or not such Indemnitee shall be designated a
party thereto) that may be imposed on, incurred by, or asserted against that
Indemnitee, based upon any third party claims against such Indemnitees in any
manner related to or arising out of (A) any breach by Borrower or Guarantor of
any representation, warranty, covenant, or other agreement contained in any of
the Loan Documents, (B) the actual or threatened presence, release, disposal,
spill, escape, leakage, transportation, migration, seepage, discharge, removal,


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or cleanup of any Hazardous Material located on, about, within, under,
affecting, from or onto the Mortgaged Property or any violation of any
applicable Environmental Law by Borrower or the Mortgaged Property, or (C) the
use or intended use of the proceeds of any of the Loan (the foregoing
liabilities herein collectively referred to as the "INDEMNIFIED LIABILITIES");
provided that Borrower shall have no obligation to an Indemnitee hereunder with
respect to Indemnified Liabilities arising from the gross negligence or willful
misconduct of that Indemnitee as determined in a final order by a court of
competent jurisdiction. Borrower shall be relieved of its obligation under
clause (B) of this Section 11.3 with respect to Hazardous Materials first
introduced to the Land and Improvements after either (1) the foreclosure of the
Mortgage or (2) the delivery by Borrower to, and acceptance by, Lender or its
designee of a deed-in-lieu of foreclosure with respect to the Mortgaged
Property. To the extent that the undertaking to indemnify, pay, defend and hold
harmless set forth in the preceding sentence may be unenforceable because it is
violative of any law or public policy, Borrower shall contribute the maximum
portion that it is permitted to pay and satisfy under applicable law to the
payment and satisfaction of all Indemnified Liabilities incurred by the
Indemnitees or any of them. If any such action or other proceeding shall be
brought against Lender, upon written notice from Borrower to Lender (given
reasonably promptly following Lender's notice to Borrower of such action or
proceeding), Borrower shall be entitled to assume the defense thereof, at
Borrower's expense, with counsel reasonably acceptable to Lender; provided,
however, Lender may, at its own expense, retain separate counsel to participate
in such defense, but such participation shall not be deemed to give Lender a
right to control such defense, which right Borrower expressly retains.
Notwithstanding the foregoing, each Indemnitee shall, following notice to and
consultation with Borrower, have the right to employ separate counsel at
Borrower's expense if, in the reasonable opinion of legal counsel, a conflict or
potential conflict exists between the Indemnitee and Borrower that would make
such separate representation advisable. Borrower shall have no obligation to
indemnify an Indemnitee for damage or loss resulting from such Indemnitee's
gross negligence or willful misconduct.

11.4 AMENDMENTS AND WAIVERS.  Except as otherwise provided herein, no amendment,
modification, termination or waiver of any provision of this Agreement, the Note
or any other Loan Document, or consent to any departure therefrom, shall in any
event be effective unless the same shall be in writing and signed by Lender
(and, with respect to any amendment or modification, unless also signed by
Borrower). Each amendment, modification, termination or waiver shall be
effective only in the specific instance and for the specific purpose for which
it was given. No notice to or demand on Borrower in any case shall entitle
Borrower, or any other Person to any other or further notice or demand in
similar or other circumstances. To the fullest extent permitted by law,
Borrower, for itself and its successors and assigns, waives all rights to a
marshalling of the assets of Borrower, Borrower's partners or members and others
with interests in Borrower, and of the Mortgaged Property, or to a sale in
inverse order of alienation in the event of foreclosure of all or any of the
Mortgage, and agrees not to assert any right under any laws pertaining to the
marshalling of assets, the sale in inverse order of alienation, homestead
exemption, the administration of estates of decedents, or any other matters
whatsoever to defeat, reduce or affect the right of Lender under the Loan
Documents to a sale of the Mortgaged Property for the collection of the
obligations without any prior or different resort for collection or of the right
of Lender to the payment of the obligations owing Lender on account of the Loan
Documents out of the net proceeds of the Mortgaged Property in preference to
every other claimant whatsoever. In addition, Borrower, for itself and its
successors and assigns, waives in


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the event of foreclosure of the Mortgage, any equitable right otherwise
available to Borrower which would require the separate sale of any of any
portion of the Mortgaged Property or require Lender to exhaust its remedies
against any portion of the Mortgaged Property or any combination of the
Mortgaged Property before proceeding against any other portion; and further in
the event of such foreclosure, Borrower expressly consents to and authorizes, at
the option of Lender, the foreclosure and sale either separately of all or any
portion of the Mortgaged Property. Borrower hereby waives the right to assert a
counterclaim, other than a compulsory counterclaim or defense of performance, in
any action or proceeding brought against it by Lender or its agents. Subject to
the remaining terms of the Loan Documents, Borrower shall have the right to
bring a separate action against Lender for breaches of Lender's obligations
under the Loan Documents. No failure or delay on the part of Lender or any
holder of any Note in the exercise of any power, right or privilege hereunder or
under the Note or any other Loan Document shall impair such power, right or
privilege or be construed to be a waiver of any default or acquiescence therein,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing under this Agreement, the Note and
the other Loan Documents are cumulative to, and not exclusive of, any rights or
remedies otherwise available. Lender shall not be under any obligation to
marshal any assets in favor of any Person or against or in payment of any or all
of the Obligations. To the extent that any Person makes a payment or payments to
Lender, or Lender enforces its remedies or exercise its rights of setoff, and
such payment or payments or the proceeds of such enforcement or setoff or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy law, state or federal law, common law or
equitable cause, then to the extent of such recovery, the Obligations or part
thereof originally intended to be satisfied, and all Liens, if any, rights and
remedies therefore, shall be revived and continued in full force and effect as
if such payment had not been made or such enforcement or setoff had not
occurred. Borrower agrees (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive Borrower from paying all or any portion of the principal of,
premium, if any, or interest on Loan contemplated herein or in any of the other
Loan Documents or which may affect the covenants or the performance of this
Agreement; and Borrower (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
will not hinder, delay or impede the execution of any power herein granted to
the holders, but will suffer and permit the execution of every such power as
though no such law had been enacted.

11.5 NOTICES.  Unless otherwise specifically provided herein, any notice or
other communication required or permitted to be given shall be in writing
addressed to the respective party as set forth below and may be personally
served, telecopied (with request for confirmation) or sent by overnight courier
service or United States registered mail return receipt requested, postage
prepaid. Any notice so given shall be deemed effective upon delivery or on
refusal or failure of delivery during normal business hours. Notices shall be
addressed to the parties at the addresses specified on Schedule 11.5 or to such
other address as the party addressed shall have previously designated by written
notice to the serving party, given in accordance with this Section 11.5.


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11.6 SURVIVAL OF WARRANTIES AND CERTAIN AGREEMENTS.  All agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement, the making of the Loan hereunder and the execution
and delivery of the Notes. Notwithstanding anything in this Agreement or implied
by law to the contrary, the provisions of Sections 2.6, 5.8, 11.1, 11.2, 11.3,
11.12, 11.13 and 11.15 shall survive the payment of the Loan and the termination
of this Agreement. Subject to this Section 11.6, all other representations,
warranties and agreements of Borrower and Lender set forth in this Agreement
shall terminate upon indefeasible payment in full of the Loan and the
termination of this Agreement.

11.7 MISCELLANEOUS.  Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose or be given any substantive effect. All covenants and
agreements hereunder shall be given in any jurisdiction independent effect so
that if a particular action or condition is not permitted by any of such
covenants, the fact that it would be permitted by an exception to, or be
otherwise within the limitations of, another covenant shall not avoid the
occurrence of a Default or an Event of Default if such action is taken or
condition exists. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Agreement, the Note or
other Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
the Note or other Loan Documents or of such provision or obligation in any other
jurisdiction. This Agreement is made for the sole benefit of Borrower and
Lender, and no other Person shall be deemed to have any privity of contract
hereunder nor any right to rely hereon to any extent or for any purpose
whatsoever, nor shall any other person have any right of action of any kind
hereon or be deemed to be a third party beneficiary hereunder. This Agreement,
the Note, and the other Loan Documents referred to herein embody the final,
entire agreement among the parties hereto and supersede any and all prior
commitments, agreements, representations, and understandings, whether written or
oral, relating to the subject matter hereof and may not be contradicted or
varied by evidence of prior, contemporaneous, or subsequent oral agreements or
discussions of the parties hereto. There are no oral agreements among the
parties hereto. Borrower and Lender acknowledge that each of them has had the
benefit of legal counsel of its own choice and has been afforded an opportunity
to review this Agreement and the other Loan Documents with its legal counsel and
that this Agreement and the other Loan Documents shall be construed as if
jointly drafted by Borrower and Lender. If any term, condition or provision of
this Agreement shall be inconsistent with any term, condition or provision of
any other Loan Document, this Agreement shall control. This Agreement and any
amendments, waivers, consents, or supplements may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all of
which counterparts together shall constitute but one and the same instrument.
This Agreement shall become effective upon the execution of a counterpart hereof
by each of the parties hereto.

11.8 APPLICABLE LAW.  THE PARTIES ACKNOWLEDGE AND AGREE THAT THE LOAN AND LOAN
DOCUMENTS HAVE A SUBSTANTIAL NEXUS TO THE STATE OF NEW YORK AND AGREE THAT THIS
AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK.


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11.9 SUCCESSORS AND ASSIGNS.  This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
except that Borrower may not assign its rights or obligations hereunder or under
any of the other Loan Documents without the written consent of Lender. Any
assignee of Lender's interest in the Loan Documents shall take the same free and
clear of all offsets, counterclaims or defenses which are unrelated to the Loan
Documents which Borrower may otherwise have against any assignor of the Loan
Documents.

11.10 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.  BORROWER HEREBY CONSENTS
TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF
NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S
ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS MORTGAGED PROPERTY,
GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO
BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE
NOTE, SUCH OTHER LOAN DOCUMENTS OR SUCH OBLIGATION. BORROWER DESIGNATES AND
APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREAFTER BE
SELECTED BY BORROWER WITH LENDER'S APPROVAL WHICH IRREVOCABLY AGREE IN WRITING
TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY
SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY
BORROWER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY
SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO BORROWER AT ITS
ADDRESS PROVIDED IN SUBSECTION 11.5 EXCEPT THAT UNLESS OTHERWISE PROVIDED BY
APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF
SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY BORROWER AS ITS AGENT FOR SERVICE
OF PROCESS REFUSES TO ACCEPT SERVICE OF PROCESS, BORROWER HEREBY AGREES THAT
SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT SERVICE. NOTHING HEREIN
SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT OF LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE
COURTS OF ANY OTHER JURISDICTION.

11.11 WAIVER OF JURY TRIAL.  BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM
RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND LENDER/BORROWER
RELATIONSHIP THAT IS BEING ESTABLISHED. BORROWER AND LENDER ALSO WAIVE ANY BOND
OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF BORROWER OR LENDER.


                                      -76-

<PAGE>

THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF
THIS TRANSACTION, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS,
AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. BORROWER AND LENDER ACKNOWLEDGE
THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP,
THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND
THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.
BORROWER AND LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

11.12 PUBLICITY.  Lender (and Lender's Affiliates) may, subject to the
applicable limitations on distribution of Confidential Information set forth in
this Section 11.12 and subject to the approval of Guarantor, such approval not
to be unreasonably withheld, and Borrower does hereby authorize Lender (and its
Affiliates) to, refer, in its sole discretion, to the Loan in tombstone
advertisements, offering memoranda in connection with Securitizations and
reports to investors, which references, may include use of photographs, drawings
and other depictions, images of the Land and Improvements (provided that such
photographs, drawings and other depictions, and/or images shall not include
floor plans of the area behind the barrier or other trade secrets), a
description of the Loan, use of Borrower's name, the address of the Mortgaged
Property and the logo of Borrower and/or Guarantor. Borrower shall cause the
owner of such "logo" rights to consent to such use upon request from Lender at
the Closing. Lender hereby agrees that (i) any written information, data,
documents, etc. delivered in connection with the making of the Loan which has
been expressly designated as such by notice to Lender from Borrower, (ii) any
information contained in the books and records of Borrower, Guarantor or
Borrower Representative which is either confidential, proprietary, or otherwise
not generally available to the public (but excluding information Lender has
obtained independently from third-party sources without Lender's knowledge that
the source has violated any fiduciary or other duty not to disclose such
information) and which has been expressly designated as such by notice to Lender
from Borrower, (iii) any financial statements of Borrower provided pursuant to
this Agreement which are not publicly available and which has been expressly
designated as confidential by notice to Lender from Borrower, and (iv) any other
information, data, documents, etc. which are delivered to or received by Lender
and which are conspicuously stamped or marked "CONFIDENTIAL", or, if delivered
or received pursuant to an oral communication, such communication is
subsequently referred to in a writing memorializing such communication delivered
to Lender within thirty (30) days of such communication and marked as
"CONFIDENTIAL" (collectively, the "CONFIDENTIAL INFORMATION"), will be kept
confidential by


                                      -77-

<PAGE>

Lender, using the same standard of care in safeguarding the Confidential
Information as Lender employs in protecting its own proprietary information
which Lender desires not to disseminate or publish. Notwithstanding the
foregoing, Confidential Information may be disseminated (a) pursuant to the
requirements of applicable law, (b) pursuant to judicial process, administrative
agency process or order of Governmental Authority, (c) in connection with
litigation, arbitration proceedings or administrative proceedings before or by
any Governmental Authority or stock exchange, (d) to Lender's attorneys,
accountants, advisors and actual or prospective financing sources who will be
instructed to comply with this Section 11.12, (e) to the Rating Agencies, (f) to
actual or prospective trustees, assignees, pledgees, participants, agents,
servicers, or securities holders in a Securitization, and (g) pursuant to the
requirements or rules of a stock exchange or stock trading system on which the
Securities of Lender or its Affiliates may be listed or traded. In addition,
notwithstanding any other provision, any party (and its employee, representative
or other agent) may disclose to any and all persons, without limitation of any
kind, any information with respect to the tax treatment and tax structure of the
transactions contemplated hereby and all materials of any kind (including
opinions or other tax analyses) that are provided to such party relating to such
tax treatment and tax structure, if required by applicable law. For purposes of
this Section 11.12, Confidential Information will not be deemed to include the
Loan amount and the other terms, conditions and provisions of the Loan
Documents, the street address and common name, if any, of the Land and
Improvements and the name of Borrower and Guarantor, the logo of Borrower and
/or Guarantor and photographs or other depictions of the Mortgaged Property
(provided that such photographs or other depictions shall not include floor
plans of the area behind the barrier or other trade secrets). Notwithstanding
the foregoing, in the event Borrower or Guarantor conspicuously marks specific
information, data, documents, etc. or with respect to an oral communication, in
a subsequent writing memorializing such communication delivered to Lender within
thirty (30) days of such communication marked as, "CONFIDENTIAL: FOR LENDER'S
INTERNAL USE ONLY; NOT FOR DISTRIBUTION," then Lender may only disseminate such
information, data, documents, etc. pursuant to the requirements of applicable
law (including pursuant to an order of a Governmental Authority) or pursuant to
the written consent of Borrower or Guarantor.

11.13 RECOURSE LOAN.  Borrower shall have full personal recourse liability for
the Obligations incurred under this Agreement, this Note or any of the other
Loan Documents.

11.14 PERFORMANCE BY LENDER/ATTORNEY-IN-FACT.  In the event that Borrower shall
at any time fail to duly and punctually pay, perform, observe or comply with any
of its covenants and agreements hereunder or under the other Loan Documents or
if any Event of Default hereunder shall exist, then Lender may (but shall in no
event be required to) make any such payment or perform any such term, provision,
condition, covenant or agreement or cure any such Event of Default. Lender shall
not take action under this Section 11.14 prior to the occurrence of an Event of
Default unless in Lender's good faith judgment reasonably exercised, such action
is necessary or appropriate in order to preserve the value of the Collateral, to
protect Persons or property, or Borrower has abandoned the Mortgaged Property or
any portion thereof. Lender shall not be obligated to continue any such action
having commenced the same and may cease the same without notice to Borrower. Any
amounts expended by Lender in connection with such action shall constitute
additional advances hereunder, the payment of which is additional Indebtedness,
secured by the Loan Documents and shall become due and payable within five (5)
Business Days of written notice by Lender upon demand by Lender, with interest
at the Default


                                      -78-

<PAGE>

Rate from the date of disbursement thereof until fully paid. No further
direction or authorization from Borrower shall be necessary for such
disbursements. The execution of this Agreement by Borrower shall and hereby does
constitute an irrevocable direction and authorization to Lender to so disburse
such funds. To the extent permitted by law, Borrower hereby irrevocably appoints
Lender, as its attorney-in-fact, coupled with an interest, with full authority
in the place and stead of Borrower and in the name of Borrower or otherwise (A)
during the existence of an Event of Default in the discretion of Lender, to take
any action and to execute any instrument which Lender may deem necessary to
accomplish the purpose of this Agreement or any other Loan Document, including
the following: (i) to ask, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for monies due and to become due under
or in respect of the Accounts and/or any of the Reserve Account Collateral; (ii)
to receive, endorse, and collect (x) any Gross Revenues, (y) any instruments
made payable to any Borrower representing any dividend, payment of principal,
interest, redemption price, purchase price or other distribution or payment in
respect of any Reserve Account Collateral, or (z) any other instruments,
documents and chattel paper received in connection with this Agreement or any
other Loan Document; and (iii) to file any claims, or take any action or
institute any proceedings which Lender shall deem necessary or desirable for the
collection of any Gross Revenues in the event Borrower shall fail to do so, or
to otherwise enforce the rights of Lender with respect to this Agreement; (B) to
execute and/or file, without the signature of Borrower any Uniform Commercial
Code financing statements, continuation statements, or other filing, and any
amendment thereof, relating to the Reserve Account Collateral; (C) to give
notice to any third parties which may be required to perfect Lender's security
interest in the Reserve Account Collateral; and (D) during the existence of an
Event of Default, to register, purchase, sell, assign, transfer, pledge or take
any other action with respect to any Reserve Account Collateral in accordance
with this Agreement or any Loan Document. Lender shall notify Borrower of
Lender's taking of any action as attorney-in-fact, or otherwise in Borrower's
name, pursuant to the provisions of this Section.

11.15 BROKERAGE CLAIMS.  Borrower shall protect, defend, indemnify and hold
Lender harmless from and against all loss, cost, liability and expense incurred
as a result of any claim for a broker's or finder's fee against Lender or any
Person, in connection with the transaction herein contemplated, provided such
claim is made by or arises through or under Borrower or is based in whole or in
part upon alleged acts or omissions of Borrower. Lender shall protect, defend,
indemnify and hold Borrower harmless from and against all loss, cost, liability
and expense incurred as a result of any claim for a broker's or finder's fee
against Borrower or any other Person in connection with the transaction herein
contemplated, provided such claim is made by or arises through or under Lender
or is based in whole or in part upon alleged acts or omissions of Lender.

11.16 AGREEMENT.  THE RIGHTS AND OBLIGATIONS OF BORROWER AND LENDER SHALL BE
DETERMINED SOLELY FROM THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS,
AND ANY PRIOR ORAL OR WRITTEN AGREEMENTS BETWEEN LENDER AND BORROWER CONCERNING
THE SUBJECT MATTER HEREOF AND OF THE OTHER LOAN DOCUMENTS ARE SUPERSEDED BY AND
MERGED INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS MAY NOT BE VARIED BY ANY ORAL AGREEMENTS OR DISCUSSIONS
THAT


                                      -79-

<PAGE>

OCCUR BEFORE, CONTEMPORANEOUSLY WITH, OR SUBSEQUENT TO THE EXECUTION OF THIS
LOAN AGREEMENT OR THE LOAN DOCUMENTS. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.

11.17 RELEASE OF EXCESS LAND.  In the event that Borrower wishes to develop an
additional building on a portion of the Excess Land containing not more than
91,000 rentable square feet (the "ADDITIONAL DEVELOPMENT") at any time prior to
the Maturity Date, then Borrower shall deliver written notice (the "ADDITIONAL
DEVELOPMENT NOTICE") to Lender which shall include the following: (i) a
statement of Borrower's intent to construct the Additional Development, (ii) a
statement of Borrower's belief that the Release Conditions (defined below) have
been satisfied, and (iii) a copy of the Appraisal (defined below). During the
thirty (30)-day period following Lender's receipt of the Additional Development
Notice, Lender and Borrower shall negotiate in good faith to arrange
construction and/or permanent financing with respect to the Additional
Development. During such thirty (30)-day period, Borrower shall negotiate
exclusively and in good faith with Lender with respect to said financing. If
Borrower and Lender are unable to agree upon terms with respect to such
construction and/or permanent financing within the aforementioned thirty
(30)-day period, then upon written notice to Lender, Borrower may pursue the
arrangement of construction and/or permanent financing with respect to the
Additional Development from a third party lender.

     Simultaneously with the closing for the construction and/or permanent
financing with respect to the Additional Development, provided that the Release
Conditions have been satisfied and Lender has received the Excess Land Principal
Reduction Amount (defined below), Lender shall release the Excess Land from the
Liens created in favor of Lender pursuant to the Loan Documents and amend the
Loan Documents to exclude the Excess Land from the Mortgaged Property.
Simultaneously with, and in consideration of, Lender's release of the Excess
Land from the Liens created in favor of Lender pursuant to the Loan Documents,
Borrower shall pay to Lender an amount equal to the sum of (A) the Fair Market
Value (as defined below) of the Excess Land ("EXCESS LAND PRINCIPAL REDUCTION
AMOUNT"), which payment shall be used to reduce the then outstanding principal
balance of the Loan, and (B) the Prepayment Premium payable as a result of the
partial prepayment of the Loan by Borrower's delivery of the Excess Land
Principal Reduction Amount to Lender.

     In connection with the Additional Development, Lender hereby agrees that if
same is required by Borrower or Borrower's Mortgagee (defined below), Lender
shall enter into reciprocal easement agreements, temporary construction
easements, and/or other easement agreements reasonably acceptable to Borrower,
Lender and Borrower's mortgagee with respect to the Excess Land (if such
mortgagee is other than Lender ("BORROWER'S MORTGAGEE")), providing for (1)
mutual restrictive covenants regarding the use of each of the Excess Land and
the remaining Mortgaged Property in a manner that does not adversely affect the
operation of the remaining Mortgaged Property and that does not violate any
Permitted Encumbrance; and (2) appropriate rights with respect to access,
egress, utilities and parking, and for the maintenance of


                                      -80-

<PAGE>

access roads, curb cuts, utilities and common facilities (including parking
facilities) to be shared by each of the Excess Land and the remaining Mortgaged
Property.

     Lender hereby acknowledges and agrees that Section 2.4(C) of the Loan
Agreement pertaining to the restriction imposed against Borrower making
non-scheduled principal payments prior to the Lockout Expiration Date shall not
apply to the payment of the Excess Land Principal Reduction Amount by Borrower
prior to said Lockout Expiration Date, nor shall the restriction set forth in
Section 2.4(C) of the Loan Agreement pertaining to partial prepayments of the
Loan apply to the payment of the Excess Land Principal Reduction Amount by
Borrower to Lender. Any and all reasonable costs and expenses approved in
advance by Borrower that are incurred by, or on behalf of Lender in connection
with releasing the Excess Land from the Liens created in favor of Lender under
the Loan Documents or the attempt by Lender to arrange financing with respect to
the Additional Development, shall be reimbursed by Borrower within ten (10)
Business Days following Lender's written request therefore.

     For purposes hereof, "EXCESS LAND" shall mean the portion of the Land
marked as "Excess Land" on Exhibit G hereto.

     For purposes hereof, the following shall constitute the "RELEASE
CONDITIONS" that must be satisfied prior to Borrower having the right to cause
Lender to release the Excess Land from the Liens created in favor of Lender
pursuant to the Loan Documents:

          (i) at the time of Borrower's request for the release of the Excess
     Land, no Event of Default must then exist or be continuing;

          (ii) at the time of Borrower's request for release of the Excess Land,
     Borrower shall have obtained an appraisal of the Excess Land performed by
     an MAI certified appraiser selected by Borrower, and approved by Lender,
     said approval not to be unreasonably withheld, conditioned or delayed,
     which appraisal shall be in a form reasonably acceptable to Lender (the
     "APPRAISAL"), and

          (iii) neither the release of the Excess Land from the Liens created by
     the Loan Documents nor Borrower's development of the Additional Development
     shall result in a Material Adverse Effect.

     For purposes hereof, the "FAIR MARKET VALUE" shall be the fair market value
of the Excess Land as agreed upon by the Borrower and Lender; provided that if
Borrower and Lender are unable to reach an agreement on the fair market value
after reasonable negotiations, the fair market value of the Excess Land shall be
determined by the agreement of two (2) appraisers (each, an "INITIAL
APPRAISER"), one of which shall be selected by Borrower and the other of which
shall be selected by Lender. Each of Borrower and Lender shall direct, in
writing with a copy to the other party, its Initial Appraiser to work with the
other party's Initial Appraiser to endeavor to determine and reach agreement
upon the fair market value of the Excess Land, and thereafter to deliver in
writing to Borrower and Landlord within thirty (30) days (such thirty (30)-day
period, the "VALUATION PERIOD") the agreed-upon fair market value (the
"VALUATION NOTICE"). The costs and expenses of each Initial Appraiser shall be
paid by Borrower.


                                      -81-

<PAGE>

     If the Initial Appraisers are not able to reach agreement upon the fair
market value within the Valuation Period, within ten (10) days after the end of
the Valuation Period each Initial Appraiser shall deliver a written notice to
Borrower, Lender, and the other Initial Appraiser setting forth (i) such Initial
Appraiser's valuation of the fair market value (each, an "INITIAL VALUATION")
and (ii) the name, address and qualifications of a third appraiser selected
jointly by the Initial Appraisers (the "THIRD APPRAISER"); provided that if the
higher of the valuations of the two Initial Appraisers is within ten percent
(10%) of the lower valuation, then the arithmetic average of the valuations of
the Initial Appraisers shall be the "Fair Market Value" for the Excess Land and
the parties shall not be required to engage the Third Appraiser. The Initial
Appraisers shall, in writing with a copy to Borrower and Lender, direct the
Third Appraiser (or substitute Third Appraiser) to determine a valuation of the
fair market value of the Excess Land, and to deliver in writing to Borrower,
Lender and the Initial Appraisers such valuation (the "THIRD VALUATION") within
twenty (20) days of the date of the written direction retaining such Third
Appraiser. The fair market value shall be the arithmetic mean of (A) the Third
Valuation and (B) the Initial Valuation closer to the Third Valuation. If the
Third Valuation is exactly between the two Initial Valuations, then the fair
market value shall be the Third Valuation. If the Initial Appraisers are unable
to agree upon the designation of a Third Appraiser within the requisite time
period or if the Third Appraiser selected does not make a valuation of the fair
market value within twenty (20) calendar days after being directed by the
Initial Appraisers, then such Third Appraiser or a substitute Third Appraiser,
as applicable, shall, at the request of Lender, be appointed by the President or
Chairman of the American Arbitration Association in the area in which the Excess
Land is located. The costs and expenses of the Third Appraiser (and substitute
Third Appraiser and the American Arbitration Association, if applicable) shall
be paid by Borrower.

     All appraisers selected or appointed pursuant to this Section 11.17 shall
be independent qualified appraisers. Such appraisers shall have no right, power
or authority to alter or modify the provisions of this Agreement, and such
appraisers shall determine the fair market value of the Excess Land.


                                      -82-

<PAGE>

     Witness the due execution hereof by the undersigned as of the date first
written above.

                                        BORROWER:

                                        LEX-GEN WOODLANDS, L.P.,
                                        a Delaware limited partnership

                                        By: Lex-Gen Woodlands GP, LLC,
                                            a Delaware limited liability
                                            company, its sole general partner


                                        By:
                                            ------------------------------------
                                            Julia P. Gregory, Vice President


                                        LENDER:

                                        iSTAR FINANCIAL INC.,
                                        a Maryland corporation


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Its:
                                             -----------------------------------

<PAGE>

                                    Exhibit A

                                Legal Description


                                        1

<PAGE>

                                    Exhibit B

                        List of Equipment and Personalty

-    Fisher Hamilton modular lab casework and lab furniture

-    Teknion Altos modular wall system

-    Environmental cold and warm rooms

-    Getinge Castle tunnel cage washers

-    Getinge Castle cage rack washers

-    Getinge Castle bedding disposal and dispensing/filling systems

-    Getinge Castle bulk steam sterilizers/autoclaves

-    AVAYA Definity phone switch

-    Voice and data patch bays

-    Dumpster containers, to the extent owned by Borrower

-    CO(2) distribution piping and regulators at the source

-    Reverse osmosis / de-ionized water systems

-    All fixed mechanical, electrical and plumbing systems, active or redundant,
     including emergency generators, server room AC and UPS units and air
     compressors. - Kitchen and food service equipment, to the extent owned by
     Borrower and affixed to the Improvements, whose removal would require
     material repairs to be made

-    CCTV monitors, multiplexers, recorders, security badge station with
     printer, camera, etc., to the extent required to operate the security
     software system

-    A workstation or server with all peripherals, if and to the extent
     necessary to operate the software systems listed in Exhibit C.

-    All red-line, and/or as-built system and facility drawings

-    All facility and equipment installation and operation and maintenance
     books, drawings, special tools and materials

-    Biological materials digester and Bio-hazard dumpster disposal unit


                                       2

<PAGE>

                                    Exhibit C

                           List of General Intangibles

-    Edstrom vivarium environmental monitoring software and installed database

-    Teletrol HVAC controls software and installed database

-    CCure 800 security software, including ID, NETVUE, etc (if installed) and
     installed database

-    Micromain work order software and installed database


                                       3

<PAGE>

                                    Exhibit D

                             Permitted Encumbrances

     a.   Restrictions as set out under File Nos. 8624668, 8647645, 2000-084612,
          9353446, 9886434, 2000-090175, 9357930, 2000-090176 and 2000-090177 in
          the Official Public Records of Real Property of Montgomery County,
          Texas, and Cabinet O, Sheet 180, Cabinet E, Sheet 193A and Cabinet G,
          Sheet 68B of the Map Records of Montgomery County, Texas

     b.   Restrictions as set out under File Nos 8610313, 8620448, 9429755,
          9445768 and 2000-104003 of the Real Property of Montgomery County,
          Texas, and in Cabinet E, Sheet 163B and 164A of the Map Records of
          Montgomery County, Texas.

     c.   Restrictions as set out under File Nos 8807519, 9429754, 9445769 and
          9445792 of the real Property of Montgomery County, Texas, and in
          Cabinet F, Sheet 24 of the Map Records of Montgomery County, Texas.

Deleting from each of a, b and c above any covenant or restriction based on
race, color, religion, sex, handicap, familial status, or national origin.

     d.   Easements and Building lines as shown on maps filed of record in
          Cabinet E, Sheet 193, Cabinet O, Sheet 180 and Cabinet G, Sheet 68B
          all of the Map Records of Montgomery County, Texas.

     e.   Easement 10 feet wide along the front and rear property line and 5
          feet wide along the side property lines of the property as reserved by
          instrument recorded under County Clerk's File No. 8624668 of the Real
          Property Records of Montgomery County, Texas. Partial Release as to
          strip 10 feet wide along the northeast boundary line of subject
          property recorded under Clerk's File No. 2000-086442 of the Real
          Property Records of Montgomery County, Texas. (Applies to 6.1797 acres
          of Tract I)

     f.   Forest preserves and Pathway easements as imposed by instrument
          recorded under Clerk's File Nos. 2000-090175 and 2000-09177 of the
          Real Property Records of Montgomery County, Texas.

     g.   Easement 10 feet wide along the front and rear property lines and 5
          feet wide along the side property lines of the subject property as
          reserved for public utilities by instrument recorded under Clerk's
          File No. 9357930, annexed by File No. 2000-090176 of the Real Property
          Records of Montgomery County, Texas. Partial Release as to strip of
          land 10 feet wide running along and adjacent to the southwest boundary
          line of subject property as recorded under Clerk's File No.
          2000-090190 of the Real Property Records of Montgomery County, Texas.
          (As to 5.5921 acres of Tract I)

     h.   Easement 5 feet wide along the southeast property line of the
          property, as reserved for public utilities by instrument recorded
          under County Clerk's File No. 9353446 and annexed by County Clerk's
          File No. 9886434 of the Real Property Records of


                                       4

<PAGE>

          Montgomery County, Texas. Partial release as to 10 foot wide strip
          along the southwest and northeast boundary lines of subject property
          and 5 foot wide strip along the northwest boundary line of subject
          property as recorded under Clerk's File No. 2000-086441 of the Real
          Property Records of Montgomery County, Texas. (As to a 0.588 acre
          portion of Tract I)

     i.   Utility easement Ten (10) feet in width along the Southeasterly
          property line granted to Entergy Gulf States, Inc. recorded under
          Montgomery County Clerk's File No. 2001-081155.

     j.   An undivided 8.74098% interest of the oil, gas and other minerals, as
          conveyed to Gloria Harris and Faye M. Monroe by Mineral Deed recorded
          under Clerk's File No. 8011718 of the Real Property Records of
          Montgomery County, Texas. Title to said interest has not been
          investigated subsequent to the date of the aforesaid instrument. (As
          to that portion of the property lying in the Henry Applewhite Survey,
          A-51)

     k.   All of the oil, gas and other minerals, the royalties, bonuses,
          rentals and all other rights in connection with same, and all
          subterranean waters including without limitation all percolating
          waters and underground reservoirs are expressly excepted here from as
          the same are reserved by The Woodlands Commercial Properties Company,
          L.P., by instrument recorded under File Nos. 2000-090175 and
          2000-090177 of the Real Property Records of Montgomery County, Texas.
          Surface rights waived therein. Title to said interests have not been
          investigated subsequent to the execution date of cited instrument.

     l.   Annual Maintenance Charge payable to The Woodlands Community
          Association, Inc., secured by a Vendor's Lien retained in
          instrument(s) filed for record under Montgomery County Clerk's File
          No(s) 8624668 and 9353446, annexed under Clerk's File No. 9886434.
          Said maintenance assessments are subordinated to first liens and
          improvement liens.

     m.   Terms, conditions and stipulations in that certain Non-Exclusive
          Reciprocal Access Easement., as described by instrument filed for
          record under Montgomery County Clerk's File No(s). 8647647, amended
          under Clerk's File No. 8713940.

     n.   Easement for utility purposes 10 feet wide adjacent to, parallel with,
          and extending the full length of the northwest, southeast, northeast
          and southwest boundary lines of the property as imposed by instrument
          recorded under Clerk's File No. 2000-090177 of the Real Property
          Records of Montgomery County, Texas. (As to 5.5921 acres of Tract I)

     o.   Terms, conditions and stipulations in that certain Non-Exclusive
          Reciprocal Access Easement., as described by instrument filed for
          record under Montgomery County Clerk's File No(s). 8647647, amended
          under Clerk's File No. 8713940.

     p.   Terms, conditions and stipulations in that certain Reciprocal Easement
          Agreement dated December 8, 2000, recorded under Clerk's File No.
          2000-104008 of the Real Property Records of Montgomery County, Texas,
          by and between Woodlands Office Equities-'95


                                       5

<PAGE>

          Limited and First Security Bank, National Association, not
          individually, but solely as Owner Trustee under the Lexi Trust 2000-1.

     q.   All of the oil, gas and other minerals, the royalties, bonuses,
          rentals and all other rights in connection with same, and all
          subterranean waters including without limitation all percolating
          waters and underground reservoirs are expressly excepted here from as
          the same are reserved by instrument recorded under File Nos. 9445792
          and 2000-104003 of the Real Property Records of Montgomery County,
          Texas. Surface rights waived therein. Title to said interests have not
          been investigated subsequent to the execution date of cited
          instruments.

     r.   Building lines and easements as shown on map recorded in Cabinet E,
          Sheet 164-A of the Map Records of Montgomery County, Texas.

     s.   Forest preserves and Pathway easement as reserved by instrument
          recorded under County Clerk's File No. 9445792 and 2000-104003 of the
          Real Property Records of Montgomery County, Texas.

     t.   Easement 10 feet wide along the front and rear property lines and 5
          feet wide along the side property lines as reserved for public
          utilities by instruments recorded under County Clerk's File Nos.
          8610313 and 8620448 of the Real Property Records of Montgomery County,
          Texas.

     u.   Utility Easement 10 feet wide adjacent to, parallel with, and
          extending the full length of each boundary line as reserved by
          instrument recorded under County Clerk's File Nos. 9445792 and
          2000-104003 of the Real Property Records of Montgomery County, Texas.

     v.   Annual Maintenance Charge payable to The Woodlands Community
          Association, Inc., secured by a Vendor's Lien retained in
          instrument(s) filed for record under Montgomery County Clerk's File
          No. 8610313. Said maintenance assessments are subordinated to first
          liens and improvement liens.

     w.   Terms, conditions and stipulations in that certain Reciprocal Easement
          Agreement dated December 8, 2000, recorded under Clerk's File No.
          2000-104008 of the Real Property Records of Montgomery County, Texas,
          by and between Woodlands Office Equities-'95 Limited and First
          Security Bank, National Association, not individually, but solely as
          Owner Trustee under the Lexi Trust 2000-1.

     x.   Building set-back lines as reflected by Cabinet F, Sheet 24A of the
          Map Records of Montgomery County, Texas.

     y.   Forest preserve and Pathway easement as reserved by instrument
          recorded under County Clerk's File No. 9445792 of the Real Property
          Records of Montgomery County, Texas.

     z.   Easement 10 feet wide along the southwesterly property line and 5 feet
          wide along the side property lines as reserved for public utilities by
          instruments recorded under County


                                       6

<PAGE>

          Clerk's File No. 8807519 of the Real Property Records of Montgomery
          County, Texas.

     aa.  Utility Easement 10 feet wide adjacent to, parallel with, and
          extending the full length of each boundary line as reserved by
          instrument recorded under County Clerk's File No. 9445792 of the Real
          Property Records of Montgomery County, Texas.

     bb.  All oil, gas and other minerals, the royalties, bonuses, rentals and
          all other rights in connection with same and all subterranean waters
          including without limitation all percolating waters and underground
          reservoirs and all other rights in connection with same are reserved
          by The Woodlands Corporation by instrument filed for record under
          Montgomery County Clerk's File No.9445792. Surface rights waived
          therein.

     cc.  Maintenance assessment payable to the Woodlands Community Association,
          Inc. as set forth in instrument recorded under County Clerk's File No.
          8807519 of the Real Property Records of Montgomery County, Texas.


                                        7

<PAGE>

                                    Exhibit E

                          Required Capital Improvement

<TABLE>
<CAPTION>
Required Capital Improvement       Required Completion Date
--------------------------------   ------------------------
<S>                                <C>
Replace Roof at Building 1              April 21, 2009
Replace HVAC units at Building 3        April 21, 2009
</TABLE>


                                        8

<PAGE>

                                 PROMISSORY NOTE

$34,000,000                                                       April 21, 2004

     FOR VALUE RECEIVED, LEX-GEN WOODLANDS, L.P., a Delaware limited partnership
("Borrower"), promises to pay to iSTAR FINANCIAL, INC., a Maryland corporation
("Holder"), or order, at 1114 Avenue of the Americas, 27th Floor, New York, New
York 10036, or at such other place as Holder may from time to time in writing
designate, in lawful money of the United States of America, the principal sum of
THIRTY FOUR MILLION AND NO/100 DOLLARS ($34,000,000.00) or such other sum as may
be the total amount outstanding pursuant to this Note (the "Loan"), payable at
such rates and at such times as are provided in the "Loan Agreement" (as
hereinafter defined).

     Payments of both principal and interest are to be made in lawful money of
the United States of America.

     This Promissory Note (this "Note") evidences Indebtedness incurred under,
and is subject to the terms and provisions of, that certain Loan and Security
Agreement of even date herewith, by and among the Borrower and the Holder
(herein, as the same may be further amended, modified or supplemented from time
to time, called the "Loan Agreement"). The Loan Agreement, to which reference is
hereby made, sets forth said terms and provisions, including those under which
this Note may or must be paid prior to its due date or may have its due date
accelerated or extended. The Loan Agreement also contains provisions for the
payment of late charges and interest at the Default Rate, all as more
specifically set forth therein. Repayment of the Indebtedness evidenced by this
Note is secured by the Mortgage and the other Loan Documents referred to in the
Loan Agreement, and reference is made thereto for a statement of terms and
provisions.

     Terms used but not otherwise defined herein are used herein as defined in
the Loan Agreement.

     This Note may only be prepaid in whole or in part in accordance with the
terms of Section 2.4 of the Loan Agreement (or as otherwise expressly provided
elsewhere in the Loan Agreement or the other Loan Documents). Any payments of
the outstanding principal balance of the Loan evidenced by this Note, whether
voluntary or involuntary, shall be accompanied by interest accrued to the date
of prepayment and the Prepayment Premium, to the extent, if any, provided in
Section 2.4 of the Loan Agreement (except to the extent any other provision of
the Loan Agreement expressly provides otherwise, including, without limitation,
Section 2.2(C) of the Loan Agreement).

     EXCEPT AS OTHERWISE EXPRESSLY PERMITTED IN THIS NOTE OR THE OTHER LOAN
DOCUMENTS, BORROWER HEREBY EXPRESSLY (i) WAIVES ANY RIGHTS IT MAY HAVE UNDER LAW
TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PENALTY, UPON ACCELERATION OF
THE MATURITY DATE, AND (ii) AGREES THAT IF, FOR ANY REASON, A PREPAYMENT OF ALL
OR ANY PORTION OF THE PRINCIPAL AMOUNT OF THIS NOTE IS MADE, INCLUDING, WITHOUT
LIMITATION, UPON OR FOLLOWING ANY ACCELERATION OF THE

<PAGE>

MATURITY DATE BY HOLDER ON ACCOUNT OF THE OCCURRENCE OF ANY EVENT OF DEFAULT,
INCLUDING, WITHOUT LIMITATION, ANY TRANSFER, DISPOSITION, OR FURTHER ENCUMBRANCE
PROHIBITED OR RESTRICTED BY THE LOAN AGREEMENT, THEN BORROWER SHALL BE OBLIGATED
TO PAY CONCURRENTLY WITH SUCH PREPAYMENT THE PREPAYMENT PREMIUM TO THE EXTENT
REQUIRED UNDER SECTION 2.4 OF THE LOAN AGREEMENT. BY INITIALING THIS PROVISION
IN THE SPACE PROVIDED BELOW, BORROWER HEREBY DECLARES THAT (1) EACH OF THE
MATTERS SET FORTH IN THIS PARAGRAPH IS TRUE AND CORRECT, (2) HOLDER'S AGREEMENT
TO MAKE THE LOAN EVIDENCED BY THIS NOTE AT THE INTEREST RATES SET FORTH IN THE
LOAN AGREEMENT AND FOR THE TERM SET FORTH IN THIS NOTE CONSTITUTES ADEQUATE
CONSIDERATION FOR THIS WAIVER AND AGREEMENT, AND HAS BEEN GIVEN INDIVIDUAL
WEIGHT BY BORROWER AND HOLDER, (3) BORROWER IS A SOPHISTICATED AND KNOWLEDGEABLE
REAL ESTATE INVESTOR WITH COMPETENT AND INDEPENDENT LEGAL COUNSEL, AND (4)
BORROWER FULLY UNDERSTANDS THE EFFECT OF THIS WAIVER AND AGREEMENT.


                                                       -------------------------
                                                       On behalf of the Borrower

     The remedies of Holder, as provided in this Note, the Loan Agreement and
the other Loan Documents, shall be cumulative and concurrent and may be pursued
singularly, successively or together, at the sole discretion of Holder, and may
be exercised as often as occasion therefor shall occur; and the failure to
exercise any such right or remedy shall in no event be construed as a waiver or
release thereof. In any action, sale of collateral, or other proceedings to
enforce this Note, the Loan Agreement or any other Loan Document, Holder need
not file or produce the original of this Note, but only need file or produce a
photocopy of this Note certified by Holder to be a true and correct copy of this
Note.

     In the event of any dispute, action or lawsuit regarding the terms hereof,
subject to the provisions of the Loan Agreement, the prevailing party will have
the right to recover from the other party all court costs and reasonable
attorneys' fees and disbursements incurred with respect thereto, in addition to
all other applicable damages and costs.

     BORROWER WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, DILIGENCE,
PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF PROTEST, NOTICE OF
NONPAYMENT OR DISHONOR, NOTICE OF INTENTION TO ACCELERATE, NOTICE OF
ACCELERATION, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALL OTHER NOTICES
(OTHER THAN AS EXPRESSLY PROVIDED IN THE LOAN AGREEMENT OR OTHER LOAN DOCUMENTS)
IN CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT
OF THE PAYMENT OF THIS NOTE. BORROWER FURTHER WAIVES, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, ALL VALUATION AND APPRAISEMENT PRIVILEGES, CLAIMS OF LACK OF
DILIGENCE OR DELAYS IN COLLECTION OR ENFORCEMENT OF THIS NOTE, THE RELEASE OF
ANY PARTY LIABLE, THE RELEASE OF ANY SECURITY FOR THE DEBT, THE TAKING OF ANY
ADDITIONAL SECURITY AND ANY OTHER INDULGENCE OF FORBEARANCE.


                                        2

<PAGE>

     Holder shall not be deemed, by any act of omission or commission, to have
waived any of its rights or remedies hereunder unless such waiver is in writing
and signed by Holder, and then only to the extent specifically set forth in the
writing. The acceptance by Holder of any payment hereunder which is less than
payment in full of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the foregoing options at
that time or at any subsequent time or nullify any prior exercise of any such
option without the express consent of Holder, except as and to the extent
otherwise provided by law. A waiver with reference to one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy as to a
subsequent event.

     PURSUANT TO SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF
NEW YORK, BORROWER AND ANY GUARANTOR OF THIS NOTE AGREE THAT THIS NOTE AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE LAWS OF THE
STATE OF NEW YORK.

     Whenever used, the singular number shall include the plural, the plural
shall include the singular, and the words "Holder" and "Borrower" shall be
deemed to include their respective heirs, executors, successors and assigns.

     All notices which Holder or Borrower may be required or permitted to give
hereunder shall be made in the same manner as set forth in Section 11.5 of the
Loan Agreement.

     In the event any one or more of the provisions hereof shall be invalid,
illegal or unenforceable in any respect, the validity of the remaining
provisions hereof shall be in no way affected, prejudiced or disturbed thereby.

     Borrower acknowledges that Holder may, in its sole discretion, sell all or
any part of its interest in the Loan evidenced by this Note, including, without
limitation, for purposes of effecting a Securitization.

     Notwithstanding anything to the contrary contained in this Note or any
other Loan Documents, to the fullest extent permitted by applicable law, the
Holder's rights hereunder shall be reinstated and revived, and the
enforceability of this Note and the other Loan Documents shall continue, with
respect to any amount at any time paid on account of the Loan which thereafter
shall be required to be restored by Holder pursuant to a court order or judgment
(whether or not final or non-appealable), as though such amount had not been
paid. The rights of Holder created or granted herein and the enforceability of
the Loan Documents at all times shall, to the fullest extent permitted by
applicable law, remain effective to cover the full amount of the Loan even
though the Loan, including any part thereof or any other security or guaranty
therefor, may be or hereafter may become invalid or otherwise unenforceable as
against any other party and whether or not any other party shall have any
personal liability with respect thereto.

     Borrower and Holder, by acceptance of this Note, hereby agree that the Loan
Documents supersede any prior oral or written agreements of the parties; without
limiting the generality of


                                       3

<PAGE>

the foregoing, in the event of conflict between the terms of this Note and the
terms of the Loan Agreement, the terms of the Loan Agreement shall prevail.

     Time is of the essence for the performance of each and every covenant of
the parties hereunder or under the other Loan Documents. No excuse, delay, act
of God, or other reason, whether or not within the control of Borrower or Holder
(as the case may be), shall operate to defer, reduce or waive Borrower's or
Holder's (as the case may be) performance of any such covenant or obligation.

                                  (END OF PAGE)


                                       4

<PAGE>

     IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
duly executed this Note the day and year first above written.

                                        BORROWER:

                                        LEX-GEN WOODLANDS, L.P., a
                                        Delaware limited partnership

                                        By: Lex-Gen Woodlands GP, LLC, a
                                            Delaware limited liability company
                                            and its sole general partner


                                        By:
                                            ------------------------------------
                                            Julia P. Gregory, Vice President

<PAGE>

                                    GUARANTY

     THIS GUARANTY (this "GUARANTY"), dated as of April 21, 2004, is made and
entered into by LEXICON GENETICS INCORPORATED, a Delaware corporation
("GUARANTOR"), in favor of iSTAR FINANCIAL INC., a Maryland corporation
("LENDER"), with an address for notice hereunder of 1114 Avenue of the Americas,
27th Floor, New York, New York 10036.

     WHEREAS, Lex-Gen Woodlands, L.P., a Delaware limited partnership
("BORROWER"), and Lender have entered into a certain Loan and Security Agreement
of even date herewith (as the same may be amended, modified, supplemented or
restated from time to time, the "LOAN AGREEMENT").

     WHEREAS, Lender has required, as a condition to making the Loan and
entering into and executing the Loan Agreement and the other Loan Documents,
that Guarantor enter into this Guaranty.

     WHEREAS, Guarantor directly or indirectly owns all of the ownership
interests in the Borrower and will benefit from the making of the Loan and the
financial accommodations extended to Borrower pursuant to the Loan Agreement and
the other Loan Documents.

     NOW, THEREFORE, in consideration for the extension of credit and other good
and valuable consideration, the receipt, sufficiency and adequacy of which are
hereby acknowledged, and to induce Lender to extend credit to Borrower,
Guarantor does hereby unconditionally, absolutely and irrevocably guarantee to
Lender, its successors and assigns, the due payment, fulfillment and performance
of the "GUARANTEED OBLIGATIONS" (as hereinafter defined). Guarantor, hereby
irrevocably and unconditionally covenants and agrees that it is liable for and
shall pay, the Guaranteed Obligations as primary obligor, this Guaranty being
upon the following terms and conditions:

     1. Definitions.  All capitalized terms used but not otherwise defined
herein shall have the meanings ascribed thereto in the Loan Agreement. As used
herein, the term "GUARANTEED OBLIGATIONS" means the full, complete and punctual
observance, performance, payment and satisfaction of all of the Borrower's
Obligations. The failure by Guarantor to pay or perform any Guaranteed
Obligations, after expiration of any applicable notice and cure periods provided
to Borrower, without duplication thereof, or any other covenant, agreement or
obligation of Guarantor under this Guaranty or the inaccuracy when made, or
deemed made, of any representations, certifications and warranties of Guarantor
in this Guaranty or in any certificate, agreement or document provided by, or on
behalf of Guarantor, pursuant to this Guaranty or any of the other Loan
Documents shall constitute an "Event of Default" for purposes of this Guaranty
and the Loan Agreement.

     2. Continuing Guaranty.  This is an irrevocable, absolute, continuing
guaranty of payment and performance. This Guaranty may not be revoked by
Guarantor and shall continue to be effective with respect to the Guaranteed
Obligations arising or created after any attempted revocation by Guarantor and
after Guarantor's dissolution (in which event this Guaranty shall be binding
upon Guarantor's successors and assigns). It is the intent of Guarantor that the

<PAGE>

obligations and liabilities of Guarantor hereunder are absolute and
unconditional under any and all circumstances and that until the Guaranteed
Obligations are fully, finally and indefeasibly satisfied, such obligations and
liabilities shall not be discharged or released in whole or in part, by any act
or occurrence which might, but for the provisions of this Guaranty, be deemed a
legal or equitable discharge or release of Guarantor. Each and every default in
payment of any amounts due or performance of any obligation required under this
Guaranty shall give rise to a separate cause of action hereunder, and separate
suits may be brought hereunder as each cause of action arises, or, in the
discretion of Lender, may be brought as a consolidated suit or suits.

     3. Waivers.

          (a) Guarantor hereby assents to all terms and agreements heretofore or
hereafter made by Borrower with Lender, and, to the fullest extent permitted by
applicable law, waives notice of:

               (i) Any loans or advances made by Lender to Borrower under the
Loan Documents;

               (ii) The present existence or future incurring of any of the
indebtedness pursuant to the Note or any future modifications thereof or any
terms or amounts thereof or any Guaranteed Obligations or any terms or amounts
thereof;

               (iii) The obtaining or release of any guaranty or surety
agreement (in addition to this Guaranty), pledge, assignment, or other security
for any of the indebtedness evidenced by the Note, or any Guaranteed
Obligations; and

               (iv) Notice of protest, default, notice of intent to accelerate
and notice of acceleration in relation to any instrument relating to the
indebtedness evidenced by the Note or any Guaranteed Obligations.

          (b) Guarantor hereby waives, to the fullest extent permitted by
applicable law, any rights and defenses which such Guarantor might have as a
result of any representation, warranty or statement made by Lender or its agents
to such Guarantor in order to induce Guarantor to execute this Guaranty.

          (c) Regardless of whether Guarantor may have made any payments to
Lender, until the Loan is indefeasibly paid in full and except as set forth in
Section 10 hereof, Guarantor hereby waives, to the fullest extent permitted by
applicable law: (i) all rights of subrogation, indemnification, contribution and
any other rights to collect reimbursement from Borrower or any other party for
any sums paid to Lender, whether contractual or arising by operation of law
(including the United States Bankruptcy Code or any successor or similar
statute) or otherwise, (ii) all rights to enforce any remedy that Lender may
have against Borrower, and (iii) all rights to participate in any security now
or later to be held by Lender for the Loan.


                                       -2-

<PAGE>

          (d) Guarantor further waives, to the fullest extent permitted by
applicable law, any defense to the recovery by Lender against Guarantor of any
deficiency or otherwise to the enforcement of this Guaranty or any security for
this Guaranty based upon Lender's election of any remedy against Guarantor or
Borrower, including the defense to enforcement of this Guaranty by virtue of any
"anti-deficiency" statutes and their application following a non-judicial
foreclosure sale.

     4. Events and Circumstances Not Reducing or Discharging Guarantor's
Obligations.  Guarantor hereby consents and agrees to each of the following, and
agrees that Guarantor's obligations under this Guaranty shall not be released,
diminished, impaired, reduced or adversely affected by any of the following, and
waives, to the fullest extent permitted by applicable law, any rights and
defenses (excluding the rights to notice, if any, as herein provided or as
required by law) which Guarantor might have otherwise as a result of or in
connection with any of the following:

          (a) any and all extensions, modifications, adjustments, indulgences,
forbearances or compromises that might be granted or given by Lender to
Borrower, including, without limitation, any and all amendments, modifications,
supplements, extensions or restatements of any of the Loan Documents;

          (b) the insolvency, bankruptcy, rearrangement, adjustment,
composition, liquidation, disability, dissolution or lack of power of Borrower
or any other party at any time liable for the payment of all or part of the
indebtedness evidenced by the Note or any Guaranteed Obligations; or any
dissolution, consolidation or merger of Borrower or Guarantor, or any sale,
lease or transfer of any or all of the assets of Borrower or Guarantor, or any
changes in the ownership, partners or members of Borrower or Guarantor;

          (c) the invalidity, illegality or unenforceability of all or any part
of the indebtedness evidenced by the Note or any Guaranteed Obligations, or any
document or agreement executed in connection with the indebtedness evidenced by
the Note or any Guaranteed Obligations, for any reason whatsoever, including,
without limitation, the fact that the indebtedness evidenced by the Note, or any
part thereof exceeds the amount permitted by law, the act of creating the
indebtedness evidenced by the Note or any Guaranteed Obligations or any part
thereof is ultra vires, the representatives executing the Note or the other Loan
Documents or otherwise creating the indebtedness evidenced by the Note or any
Guaranteed Obligations acted in excess of their authority, the indebtedness
evidenced by the Note violates applicable usury laws, Borrower has valid
defenses, claims or offsets (whether at law, in equity or by agreement) which
render the indebtedness evidenced by the Note or any Guaranteed Obligations
wholly or partially uncollectible from Borrower, the creation, performance or
repayment of the indebtedness evidenced by the Note or any Guaranteed
Obligations is illegal, uncollectible, legally impossible or unenforceable, or
any of the other Loan Documents pertaining to the indebtedness evidenced by the
Note or any Guaranteed Obligations are irregular or not genuine or authentic;
provided, however, the foregoing shall not prohibit Guarantor from (i) asserting
a defense of performance, (ii) asserting a compulsory counterclaim on an action


                                       -3-

<PAGE>

brought under this Guaranty, or (iii) subject to the remaining terms of the Loan
Documents, bringing a separate action against Lender for breaches of Lender's
obligations under the Loan Documents;

          (d) the taking or accepting of any other security, collateral or
guaranty, or other assurance of the payment, for all or any of the indebtedness
evidenced by the Note or any Guaranteed Obligations;

          (e) any release, surrender or exchange of any collateral, property or
security, at any time existing in connection with, or assuring or securing
payment of, all or any part of the indebtedness evidenced by the Note or the
Guaranteed Obligations;

          (f) the failure of Lender or any other party to exercise diligence or
reasonable care in the preservation, protection, enforcement, sale or other
handling or treatment of all or any part of such collateral, property or
security;

          (g) the fact that any collateral, security, security interest or lien
contemplated or intended to be given, created or granted as security for the
repayment of the indebtedness evidenced by the Note or Guaranteed Obligations
shall not be properly perfected or created, or shall prove to be unenforceable
or subordinate to any other security interest or lien, it being recognized and
agreed by Guarantor that Guarantor is not entering into this Guaranty in
reliance on, or in contemplation of the benefits of, the validity,
enforceability, collectibility or value of any of the collateral for the
indebtedness evidenced by the Note or the Guaranteed Obligations; or

          (h) any payment by Borrower to Lender is held to constitute a
preference under the Bankruptcy Code, or for any reason Lender is required to
refund such payment or pay such amounts to such Borrower, or any other Person.

     It is the unambiguous and unequivocal intention of Guarantor that Guarantor
shall be obligated to pay and perform the Guaranteed Obligations when due,
notwithstanding any occurrence, circumstance, event, action or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of all Guaranteed Obligations.

     5. Payment by Guarantor.  If the Guaranteed Obligations, or any part
thereof, are not punctually paid or performed (following the expiration of any
applicable notice and cure periods), as the case may be, Guarantor shall,
immediately on demand and without protest or notice of protest, pay the amount
due thereon to Lender, at its address set forth above or as otherwise designated
by Lender. Such demand(s) may be made at any time coincident with or after the
time for payment or performance of all or part of the Guaranteed Obligations.
Such demand shall be deemed made if given in accordance with Section 18 hereof.
It shall not be necessary for Lender, in order to enforce such payment or
performance by Guarantor, first to institute suit or exhaust its remedies
against Borrower, or others liable to pay or perform such Guaranteed
Obligations, or to enforce its rights against any security which shall ever have
been


                                       -4-

<PAGE>

given to secure the Guaranteed Obligations. Lender shall not be required to
mitigate damages or take any other action to reduce, collect or enforce the
indebtedness evidenced by the Note or Guaranteed Obligations.

     6. Indebtedness or Other Obligations of Guarantor.  If Guarantor is or
becomes liable for any indebtedness owed by Borrower to Lender by endorsement or
otherwise than under this Guaranty, such liability shall not be in any manner
impaired or affected by this Guaranty, and the rights of Lender hereunder shall
be cumulative of any and all other rights that Lender may ever have against
Guarantor. The exercise by Lender of any right or remedy hereunder or under any
other instrument or at law or in equity shall not preclude the concurrent or
subsequent exercise of any other instrument or remedy at law or in equity and
shall not preclude the concurrent or subsequent exercise of any other right or
remedy. Further, without in any way diminishing or limiting the generality of
the foregoing, it is specifically understood and agreed that this Guaranty is
given by Guarantor as an additional guaranty to any and all guarantees hereafter
executed and delivered to Lender by Guarantor in favor of Lender relating to the
indebtedness and obligations of Borrower to Lender, and nothing herein shall
ever be deemed to replace or be in lieu of any other of such previous or
subsequent guarantees.

     7. Application of Payments.  If, at any time, there is any indebtedness or
obligations (or any portion thereof) of Borrower to Lender which is not
guaranteed by Guarantor, Lender, without in any manner impairing its rights
hereunder, may, at its option, apply all amounts realized by Lender from
collateral or security held by Lender first to the payment of such unguaranteed
indebtedness or obligations, with the remaining amounts, if any, to then be
applied to the payment of the indebtedness or obligations guaranteed by
Guarantor.

     8. Suits, Releases of Settlements with Others.  Guarantor agrees that
Lender, in its sole discretion, may bring suit against any other guarantor
without impairing the rights of Lender or its successors and assigns against
Guarantor or any other guarantor of the Guaranteed Obligations; and Lender may
settle or compromise with such other guarantor for such sum or sums as Lender
may see fit and release such other guarantor from all further liability to
Lender, all without impairing its rights against Guarantor.

     9. Warranties, Representations and Covenants.

          (a) Guarantor warrants and represents, as follows:

               (i) Guarantor has received, or will receive, direct or indirect
benefit from the making of this Guaranty, the making of the Loan and the
entering into and execution of the Loan Agreement and the Loan Documents in
connection therewith;

               (ii) Guarantor is familiar with, and has independently reviewed
the financial condition of the Borrower and is familiar with the value of any
and all collateral intended to be created as security for the payment and
performance of the indebtedness evidenced by the Note and the Guaranteed
Obligations, and Guarantor assumes full responsibility for keeping fully
informed as to such matters in the future; however, Guarantor is


                                       -5-

<PAGE>

not relying on such financial condition or the collateral as an inducement to
enter into this Guaranty; and

               (iii) All financial statements concerning Guarantor which have
been or will hereafter be furnished by Guarantor or Borrower to Lender pursuant
to the Loan Documents, have been or will be prepared in accordance with GAAP
consistently applied (except as disclosed therein, to the extent Lender approves
such disclosure; provided that Lender's approval shall not be required so long
as (a) Guarantor is a reporting company under the Exchange Act, and (b)
Guarantor's financial statements are audited by a so-called "Big-4" accounting
firm) and, in all material respects, present fairly the financial condition of
the Persons covered thereby as at the dates thereof and the results of their
operations for the periods then ended.

               (iv) No ERISA Affiliate of Guarantor maintains or contributes to,
or has any obligation under, any Employee Benefit Plans. Guarantor is not an
"employee benefit plan" (within the meaning of section 3(3) of ERISA) to which
ERISA applies and Guarantor's assets do not constitute plan assets. No actions,
suits or claims under any laws and regulations promulgated pursuant to ERISA are
pending or, to Guarantor's knowledge, threatened against Guarantor. Guarantor
has no knowledge of any material liability incurred by Guarantor which remains
unsatisfied for any taxes or penalties with respect to any employee benefit plan
or any Multiemployer Plan, or of any lien which has been imposed on Guarantor's
assets pursuant to section 412 of the Code or sections 302 or 4068 of ERISA. The
Loan, the execution, delivery and performance of the Loan Documents and the
transactions contemplated by this Guaranty do not constitute a non-exempt
prohibited transaction under ERISA or the Code. Guarantor is an "operating
company" as defined in ERISA.

               (v) As of the date hereof, and after giving effect to this
Guaranty and the contingent obligations evidenced hereby, Guarantor is and
expects to be solvent at all times, and has and expects to have assets at all
times which, fairly valued, exceed his or its obligations, liabilities and
debts, and has and expects to have property and assets at all times sufficient
to satisfy and repay its obligations and liabilities.

          (b) Guarantor covenants and agrees that, for so long as this Guaranty
remains in effect, Guarantor shall not liquidate, wind-up or dissolve itself (or
suffer any liquidation or dissolution).

     10. Subordination.  If, for any reason Borrower is now or hereafter becomes
indebted to Guarantor (such indebtedness and all interest thereon being referred
to as the "AFFILIATED DEBT"), such Affiliated Debt shall, at all times, be
subordinate in all respects to the full payment and performance of the
obligations evidenced by the Note, and Guarantor shall not be entitled to
enforce or receive payment thereof until all of the obligations evidenced by the
Note have been fully paid. Guarantor agrees that any liens, mortgages, deeds of
trust, security interests, judgment liens, charges or other encumbrances upon
Borrower's assets securing payment of the Affiliated Debt shall be and remain
subordinate and inferior to any liens, security interests, judgment liens,
charge or other encumbrances upon Borrower's assets securing the payment of


                                       -6-

<PAGE>

the obligations evidenced by the Note and Guaranteed Obligations, and without
the prior written consent of Lender, Guarantor shall not exercise or enforce any
creditor's rights of any nature against Borrower to collect the Affiliated Debt
(other than demand payment therefor). In the event of the receivership,
bankruptcy, reorganization, arrangement, debtor's relief or other insolvency
proceedings involving Borrower as a debtor, to the fullest extent permitted by
law, Lender shall have the right and authority, either in its own name or as
attorney-in-fact for Guarantor, to file such proof of debt claim, petition or
other documents and to take such other steps as are necessary to prove its
rights hereunder.

     11. Waiver of Subrogation.  Notwithstanding any other provision of this
Guaranty to the contrary, until the Loan is indefeasibly paid in full, Guarantor
hereby waives any claim or other rights which Guarantor may now have or
hereafter acquire against Borrower or any other guarantor of all or any of the
obligations that arise from the existence or performance of Guarantor's
obligations under this Guaranty (all such claims and rights are referred to as
"GUARANTOR'S CONDITIONAL RIGHTS"), including, without limitation, any right of
subrogation, reimbursement, exoneration, contribution, or indemnification, any
right to participate in any claim or remedy of Lender against Borrower or any
security or collateral which Lender now has or hereafter acquires, whether or
not such claim, remedy or right arises in equity or under contract, statute
(including the Bankruptcy Code or any successor or similar statute) or common
law, by any payment made hereunder or otherwise, including without limitation,
the right to take or receive from Borrower, directly or indirectly, in cash or
other property or by setoff or in any other manner, payment or security on
account of such claim or other rights. If, notwithstanding the foregoing
provisions, any amount shall be paid to Guarantor on account of Guarantor's
Conditional Rights and either (i) such amount is paid to Guarantor at any time
when the Guaranteed Obligations shall not have been paid or performed in full,
or (ii) regardless of when such amount is paid to Guarantor, any payment made by
Borrower to Lender is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid by Lender or paid over to a
trustee, receiver or any other entity, whether under any bankruptcy act or
otherwise (such payment, a "PREFERENTIAL PAYMENT"), then such amount paid to
Guarantor shall be held in trust for the benefit of Lender and shall forthwith
be paid to Lender to be credited and applied upon the Guaranteed Obligations,
whether matured or unmatured, in such order as Lender, in its sole and absolute
discretion, shall determine. The foregoing waivers shall be effective until the
Guaranteed Obligations have been paid and performed in full.

     12. Impairment of Subrogation Rights; Waivers of Rights Under the
Anti-Deficiency Rules.

          (a) Guarantor agrees that upon the occurrence and during the
continuance of an Event of Default under the Loan Documents, Lender in its sole
discretion, without prior notice to or consent of Guarantor, may elect to (i)
foreclose either nonjudicially or judicially against any real or personal
property security (including, without limitation, the Mortgaged Property) it
holds for the obligations evidenced by the Note or any Guaranteed Obligations,
or any part thereof, (ii) accept any transfer or assignment of any such security
in lieu of foreclosure, (iii) compromise or adjust any part of such obligations,
or (iv) make any other accommodation


                                       -7-

<PAGE>

with Borrower or Guarantor, or exercise any other remedy against Borrower or any
collateral or security. No such action by Lender will release or limit the
liability of Guarantor to Lender, who shall remain liable under this Guaranty
after the action, even if the effect of that action is to deprive Guarantor of
the right to collect reimbursement from Borrower or any other person for any
sums paid to Lender or Guarantor's rights of subrogation, contribution, or
indemnity against Borrower or any other person. Without limiting the foregoing,
it is understood and agreed that on any foreclosure or assignment in lieu of
foreclosure of any collateral or security held by Lender, such security will no
longer exist and that any right that Guarantor might otherwise have, on full
payment of the Guaranteed Obligations by Guarantor to Lender, to participate in
any such security or to be subrogated to any rights of Lender with respect to
any such security will be nonexistent; nor shall Guarantor be deemed to have any
right, title, interest or claim under any circumstances in or to any real or
personal property held by Lender or any third party following any foreclosure or
assignment in lieu of foreclosure of any such security.

          (b) Guarantor understands and acknowledges that if Lender forecloses
judicially or nonjudicially against any real property security for Borrower's
obligations, such foreclosure could impair or destroy any right or ability that
Guarantor may have to seek reimbursement, contribution, or indemnification for
any amounts paid by Guarantor under this Guaranty.

          (c) Without limiting the foregoing, Guarantor waives, to the fullest
extent permitted by applicable law, all rights and defenses arising out of an
election of remedies by Lender, even though that election of remedies, such as
nonjudicial foreclosure with respect to security for a guaranteed obligation,
may adversely affect Guarantor's rights of subrogation and reimbursement against
Borrower.

          (d) Guarantor intentionally, freely, irrevocably and unconditionally
waives and relinquishes, to the fullest extent permitted by applicable law, all
rights which may be available to it under any provision of applicable law to
limit the amount of any deficiency judgment or other judgment which may be
obtained against Guarantor under this Guaranty to not more than the amount by
which the unpaid Guaranteed Obligations plus all other indebtedness due from
Borrower under the Loan Documents exceeds the fair market value or fair value of
any real or personal property securing said obligations and any other
indebtedness due from Borrower under the Loan Documents, including, without
limitation, all rights to an appraisement of, judicial or other hearing on, or
other determination of the value of said property. Guarantor acknowledges and
agrees that, as a result of the foregoing waiver, Lender may be entitled to
recover from Guarantor an amount which, when combined with the value of any real
or personal property foreclosed upon by Lender (or the proceeds of the sale of
which have been received by Lender) and any sums collected by Lender from
Borrower or other Persons, might exceed the amount of the Guaranteed Obligations
plus all other indebtedness due from Borrower under the Loan Documents.

          (e) Guarantor understands and agrees that Lender may have the ability
to pursue Guarantor for a judgment on the Guaranteed Obligations without having
first foreclosed


                                       -8-

<PAGE>

on the real property security for such Guaranteed Obligations, that Lender may
have the ability to sue Guarantor for a deficiency judgment on the Guaranteed
Obligations after a non-judicial foreclosure sale or, regardless of any election
of remedies by Lender, if the Guaranteed Obligations or any of the other
indebtedness of Borrower to Lender under the Loan Documents is considered to
have been provided by a vendor to a buyer and to evidence part of the purchase
price for the real property security, and that Lender may be able to recover
from Borrower an amount which, when combined with the fair market value of the
property acquired by Lender in a foreclosure sale or the proceeds of the
foreclosure sale received by Lender, might exceed the amount of the Guaranteed
Obligations due and owing by Guarantor and the amounts payable under the Loan
Documents.

          (f) Without limiting any of the other waivers and provisions set forth
in this Guaranty, Guarantor waives all rights and defenses that Guarantor may
have because Borrower's debt is secured by real property; this means, among
other things: (a) Lender may collect from Guarantor without first foreclosing on
any real or personal property collateral pledged by Borrower; (b) the amount of
the Guaranteed Obligations may be reduced only by the price for which that
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price; (c) Lender may collect from Guarantor even if Lender, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower. This is an unconditional and irrevocable
waiver of any rights and defenses Guarantor may have because the indebtedness
evidenced by the Note is secured by real property.

     Notwithstanding the foregoing or any provisions of Section 12(a) hereof,
nothing contained in this Guaranty shall in any way be deemed to imply that any
other state's law other than the law of the State of New York shall govern this
Guaranty or any of the Loan Documents in any respect, except as expressly set
forth therein, including with respect to the exercise of Lender's remedies under
the Loan Documents.

     Notwithstanding any other provision herein to the contrary, upon the
indefeasible payment in full of the Note, Guarantor shall have all rights of
subrogation available at law or in equity.

     13. Benefit.  This Guaranty is for the benefit of Lender, its successors
and assigns, and in the event of an assignment by Lender, its successors and
assigns, of the obligations evidenced by the Note, or any part or parts thereof,
the rights and benefits hereunder, to the extent applicable to the obligations
so assigned, shall be transferred with such obligations.

     14. No Release if Preference, Refund, Etc.  In the event any payment by
Borrower to Lender is determined to be a preferential payment under any
applicable bankruptcy or insolvency laws, or if for any reason Lender is
required to refund part or all of any payment or pay the amount thereof to any
other party, such repayment by Lender to Borrower shall not constitute a release
of Guarantor from any liability hereunder, and Guarantor agrees to pay such
amount to Lender upon demand to the extent such amount constitutes a Guaranteed
Obligation.


                                       -9-

<PAGE>

     15. Right of Set-Off.  In addition to any other rights now or hereafter
granted under applicable law and not by way of limitation of any such rights,
upon Guarantor's failure to pay the Guaranteed Obligations, after demand by
Lender, Lender is hereby authorized at any time and from time to time, without
notice to Guarantor or to any other person, to set off and to appropriate and to
apply any and all deposits (general or special) and any other indebtedness at
any time held or owing by Lender to or for the credit or the account of
Guarantor against or on account of the obligations evidenced by the Note.

     16. Consent to Use of Logo.  Guarantor hereby consents to the use by Lender
of Guarantor's logo, solely for the purpose specified, and in accordance with
the terms and conditions set forth, in Section 11.12 of the Loan Agreement.

     17. GOVERNING LAW.  PURSUANT TO SECTION 5-1401 OF THE GENERAL OBLIGATIONS
LAW OF THE STATE OF NEW YORK, GUARANTOR AGREES THAT THIS GUARANTY AND ALL
RIGHTS, OBLIGATIONS AND LIABILITIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     18. Notices.  Unless otherwise specifically provided herein, any notice or
other communication required or permitted to be given shall be in writing
addressed to the respective party as set forth below and may be personally
served, telecopied (with request for confirmation) or sent by overnight courier
service or United States registered mail return receipt requested, postage
prepaid. Any notice so given shall be deemed effective upon delivery or on
refusal or failure of delivery during normal business hours. Notices shall be
addressed to the parties at the following addresses or to such other address as
the party addressed shall have previously designated by written notice to the
serving party, given in accordance with this Section 18.

     If to Guarantor:   Lexicon Genetics Incorporated
                        8800 Technology Forest Place
                        The Woodlands, Texas 77381-1160
                        Attn: General Counsel
                        Telephone: 281-863-3000
                        Facsimile: 281-863-8010

     With a copy to:    Andrews Kurth LLP
                        600 Travis, Suite 4200
                        Houston, Texas 77002
                        Attn: Michael A. Boyd, Esq.
                        Telephone: 713-220-3921
                        Facsimile: 713-238-7138

     If to Lender:      iStar Financial Inc.
                        1114 Avenue of the Americas, 27th Floor
                        New York, New York 10036


                                      -10-

<PAGE>

                        Attn: Chief Operating Officer
                        Telephone: 212-930-9400
                        Facsimile: 212-930-9494

     With a copy to:    iStar Financial Inc.
                        1114 Avenue of the Americas, 27th Floor
                        New York, New York 10036
                        Attn: Nina B. Matis, Esq./General Counsel
                        Telephone: 212-930-9406
                        Facsimile: 212-930-9492

     With a copy to:    iStar Asset Services Inc.
                        180 Glastonbury Boulevard, Suite 201
                        Glastonbury, Connecticut 06033
                        Attn: President
                        Telephone: 860-815-5900
                        Facsimile: 860-815-5901

     With a copy to:    Katten Muchin Zavis Rosenman
                        525 West Monroe Street, Suite 1600
                        Chicago, Illinois 60661-3693
                        Attn: Gregory P.L. Pierce, Esq.
                        208972-002289
                        Telephone: 312-902-5541
                        Facsimile: 312-902-1061

     19. Consent of Jurisdiction/Service of Process.  IN ACCORDANCE WITH SECTION
5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, GUARANTOR HEREBY
CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
COUNTY OF NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREES THAT, SUBJECT TO
LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
GUARANTY OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS.
GUARANTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH THIS GUARANTY AND THE OTHER
LOAN DOCUMENTS, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES
ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS GUARANTY, THE NOTE, SUCH OTHER
LOAN DOCUMENTS OR SUCH OBLIGATION. GUARANTOR ACKNOWLEDGES AND AGREES THAT
SERVICE OF PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING WILL BE DEEMED
EFFECTIVE. SERVICE OF PROCESS ON GUARANTOR IF PERSONALLY SERVED OR SERVED IN
ACCORDANCE WITH SECTION 17 ABOVE OR AT SUCH OTHER ADDRESS AS SUCH GUARANTOR


                                      -11-

<PAGE>

MAY HAVE FURNISHED AS TO ITSELF TO THE SERVING PARTY BY LIKE NOTICE, OR TO THE
LAST KNOWN ADDRESS OF SUCH GUARANTOR PROVIDED THEREUNDER.

     20. WAIVER OF JURY TRIAL.  GUARANTOR AND LENDER HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS GUARANTY, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN
THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP
THAT IS BEING ESTABLISHED. GUARANTOR AND LENDER ALSO WAIVE ANY BOND OR SURETY OR
SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF
GUARANTOR OR LENDER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE
SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS. GUARANTOR AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY
RELIED ON THE WAIVER IN ENTERING INTO THIS GUARANTY AND THAT EACH WILL CONTINUE
TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. GUARANTOR AND LENDER
FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS GUARANTY, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE LOAN. IN THE EVENT OF LITIGATION, THIS GUARANTY MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.

     21. Expenses.  Guarantor agrees to fully and punctually pay all costs and
expenses, including, without limitation, reasonable attorneys' fees, court costs
and costs of appeal, which Lender may incur in enforcing and collecting the
Guaranteed Obligations.

                  [Remainder of Page Intentionally Left Blank;
                             Signature Page Follows]


                                      -12-

<PAGE>

     IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of the
day and year first above written.

                                        GUARANTOR:

                                        LEXICON GENETICS INCORPORATED, a
                                        Delaware corporation


                                        By:
                                            ------------------------------------
                                            Julia P. Gregory, Chief Financial
                                            Officer and Executive Vice President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>4
<FILENAME>h23229exv21w1.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
<PAGE>
                                                                    EXHIBIT 21.1

                  SUBSIDIARIES OF LEXICON GENETICS INCORPORATED

     The subsidiaries of Lexicon Genetics Incorporated set forth below each do
business under the name stated.

<TABLE>
<CAPTION>
                                             State of Incorporation or
            Name of Subsidiary                       Formation
------------------------------------------   -------------------------
<S>                                          <C>
Lexicon Pharmaceuticals (New Jersey), Inc.            Delaware
Lex-Gen Woodlands GP, LLC                             Delaware
Lex-Gen (Delaware), LLC                               Delaware
Lex-Gen Woodlands, L.P.                               Delaware
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>h23229exv23w1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
<TEXT>
<PAGE>
                                                                    EXHIBIT 23.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

         We consent to the incorporation by reference in the previously filed
Registration Statements on Form S-8 (Registration Nos. 333-41532 and 333-66380)
pertaining to the 2000 Equity Incentive Plan, the 2000 Non-Employee Directors'
Stock Option Plan and the Coelacanth Corporation 1999 Stock Option Plan and on
Form S-3 (Registration Nos. 333-67294, 333-101549, 333-108855, 333-111821 and
333-122214) of Lexicon Genetics Incorporated, and in the related prospectus, of
our reports dated February 25, 2005, with respect to the consolidated financial
statements of Lexicon Genetics Incorporated, management's assessment of the
effectiveness of internal control over financial reporting, and the
effectiveness of internal control over financial reporting of Lexicon Genetics
Incorporated, included in this Annual Report (Form 10-K) for the year ended
December 31, 2004.


                                     /s/ ERNST & YOUNG LLP

Houston, Texas
March 8, 2005

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>6
<FILENAME>h23229exv31w1.txt
<DESCRIPTION>CERTIFICATION OF CEO PURSUANT TO SECTION 302
<TEXT>
<PAGE>
                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

I, Arthur T. Sands, certify that:

     1.   I have reviewed this Annual Report on Form 10-K of Lexicon Genetics
          Incorporated;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
          control over financial reporting (as defined in Exchange Act Rules
          13a-15(f) and 15d-15(f)) for the registrant and have:

          a)   designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b)   designed such internal control over financial reporting, or
               caused such internal control over financial reporting to be
               designed under our supervision, to provide reasonable assurance
               regarding the reliability of financial reporting and the
               preparation of financial statements for external purposes in
               accordance with generally accepted accounting principles;

          c)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          d)   disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

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

          a)   all significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

Date: March 11, 2005

                                                    /s/ Arthur T. Sands
                                           -------------------------------------
                                               Arthur T. Sands, M.D., Ph.D.
                                           President and Chief Executive Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>7
<FILENAME>h23229exv31w2.txt
<DESCRIPTION>CERTIFICATION OF CFO PURSUANT TO SECTION 302
<TEXT>
<PAGE>
                                                                    EXHIBIT 31.2

                                 CERTIFICATIONS

I, Julia P. Gregory, certify that:

     1.   I have reviewed this Annual Report on Form 10-K of Lexicon Genetics
          Incorporated;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
          control over financial reporting (as defined in Exchange Act Rules
          13a-15(f) and 15d-15(f)) for the registrant and have:

          a)   designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b)   designed such internal control over financial reporting, or
               caused such internal control over financial reporting to be
               designed under our supervision, to provide reasonable assurance
               regarding the reliability of financial reporting and the
               preparation of financial statements for external purposes in
               accordance with generally accepted accounting principles;

          c)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          d)   disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

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

          a)   all significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

Date: March 11, 2005

                                              /s/ Julia P. Gregory
                                 -----------------------------------------------
                                                Julia P. Gregory
                                 Executive Vice President, Corporate Development
                                           and Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>8
<FILENAME>h23229exv32w1.txt
<DESCRIPTION>CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906
<TEXT>
<PAGE>
                                                                    EXHIBIT 32.1

                                  CERTIFICATION

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350,
as adopted), Arthur T. Sands, M.D., Ph.D., Chief Executive Officer of Lexicon
Genetics Incorporated ("Lexicon"), and Julia P. Gregory, Chief Financial Officer
of Lexicon, each hereby certify that:

     1.   Lexicon's Annual Report on Form 10-K for the year ended December 31,
          2004, and to which this Certification is attached as Exhibit 32.1 (the
          "Periodic Report"), fully complies with the requirements of section
          13(a) or section 15(d) of the Securities Exchange Act of 1934, and

     2.   The information contained in the Periodic Report fairly presents, in
          all material respects, the financial condition and results of
          operations of Lexicon.

     IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the
11th day of March, 2005.


                            By:  /s/ Arthur T. Sands
                                ------------------------------------------------
                                 Arthur T. Sands, M.D., Ph.D.
                                 President and Chief Executive Officer


                            By:  /s/ Julia P. Gregory
                                ------------------------------------------------
                                 Julia P. Gregory
                                 Executive Vice President, Corporate Development
                                 and Chief Financial Officer

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