Amended and Restated Note and Security Agreement

Exhibit 10.4

Amended and Restated Note and Security Agreement

Winston-Salem. North Carolina

FOR VALUE RECEIVED, Targacept, Inc., a corporation organized and existing under the laws of the State of Delaware with its principal executive office located at 200 East First Street, Suite 300, Winston-Salem, North Carolina 27102-1465 (hereinafter the “Borrower”), hereby promises to pay to the order of R.J. Reynolds Tobacco Holdings, Inc. (hereinafter the “Lender”) at its office where borrowed, or at such other place as Lender hereafter may direct from time to time in writing, in immediately available funds of lawful money of the United States, the sum of Four Million Five Hundred Thousand Dollars (or the unpaid principal amount of all advances which the Lender actually makes hereunder to the Borrower, whichever is less) together with any unpaid interest hereon from date of advance, in accordance with the terms contained in this Amended and Restated Note and Security Agreement (hereinafter referred to as this “Note”). The principal evidenced by this Note shall be advanced periodically from time to time in accordance with the terms of this paragraph in up to four disbursements (each such disbursement is referred to herein as a “Tranche”). The first Tranche is in the amount of $2,500,000, was advanced to the Borrower on May 1, 2002 and is payable in accordance with the terms set forth herein (the “First Tranche”). The Lender acknowledges that the Borrower is current as of the date of this Note with all payments due with respect to the First Tranche. The remaining principal amount evidenced by this Note may be advanced in up to three Tranches, the aggregate principal amount of which shall not exceed $2,000,000 (referred to herein individually as an “Additional Tranche” and collectively referred to herein as the “Additional Tranches”).

Upon written request of the Borrower, which shall be made in writing and delivered to the Lender on a business day not more than 45 nor fewer than 5 business days prior to the desired date of disbursement the Lender shall, subject to the terms and conditions set forth herein, advance an Additional Tranche to the Borrower provided that: (1) such written request shall set forth the principal amount of the proposed Additional Tranche, the proposed date of disbursement of the Additional Tranche and a description of the equipment, goods and other property purchased or to be purchased with the proceeds of such Additional Tranche; (2) in no event shall the Lender be obligated to advance more than three Additional Tranches or shall the aggregate initial principal amount of the First Tranche and all Additional Tranches exceed $4,500,000; (3) the Borrower’s written request may be made only so long as an Event of Default has not occurred hereunder and must be delivered to the Lender such that the date that such Additional Tranche is disbursed occurs on or before December 31, 2004. The Collateral securing the Tranches shall be evaluated by Lender at the time of each requested disbursement of an Additional Tranche to determine whether the Collateral has sufficient value to secure such Additional Tranche. In the event Lender makes a good faith determination that the Collateral is not of sufficient value to secure such Additional Tranche, Lender shall postpone disbursement of the Additional Tranche until such time that Lender determines in good faith that the Collateral has sufficient value to secure it. Lender shall use its best efforts to make such determinations in a timely manner. On the date that each Additional Tranche is advanced, the Borrower and the Lender shall execute a schedule supplementing Exhibit A to this Note, as the Lender shall reasonably request, to add additional Collateral that is to secure the Tranches, if any, confirm the outstanding principal amount of the outstanding Tranches and to evidence the rate of interest applicable to the Additional Tranche and the repayment dates for the Additional Tranche, and each such supplemental schedule shall thereupon become part of this Note.

Repayment:

x The First Tranche shall be paid in 48 equal monthly payments of $59,402.75 beginning June 1, 2002 and continuing on the first day of each month thereafter until May 1, 2006 when the entire outstanding principal amount of such First Tranche then outstanding and all accrued but unpaid interest shall be paid in full. Each Additional Tranche shall be repaid in 48 equal monthly payments based on a 48-month amortization schedule beginning on the first day of the first calendar month that begins after the date such Additional Tranche is advanced and continuing on the first day of each month thereafter until the 48 ^th month thereafter when the entire outstanding principal amount of such Additional Tranche then outstanding and all accrued but unpaid interest shall be paid in full.

If advances of the principal amount hereof are to be made by Lender to the Borrower after the date of this Note, Lender, at its sole discretion, is hereby authorized to make such advances under this Note upon telephonic or written communication of a borrowing request from any person representing himself or herself to be the Borrower or, in the event the Borrower is an organization, a duly authorized officer or representative of Borrower.

Interest:

Payable:

x in arrears.

x At the fixed rate per annum of 6.6% for the First Tranche.

x At an interest rate(s) per annum for each Additional Tranche established on the date such Applicable Tranche is advanced that approximates the hypothetical 4-year U.S. Treasury rate (determined as of the day the Applicable Tranche is advanced) plus 3.5%.

In no case shall interest exceed the maximum rate permitted by applicable law.

In addition to any other collateral specified herein, to secure the indebtedness evidenced by this Note, together with any extensions, modifications, or renewals thereof, in whole or in part, as well as all other indebtedness, obligations and liabilities of the Borrower to the Lender, now existing or hereafter incurred or arising, (hereinafter sometimes referred to as the “Obligations”), but excluding any obligations to Lender in its capacity as a holder of equity securities of Borrower, the Borrower does hereby grant to the Lender a security interest in and to, and does hereby assign, pledge, transfer and convey to Lender, the property set forth on Exhibit A hereto, as such Exhibit shall be supplemented from time to time, together with any and all additions and accessions thereto or replacements thereof and any products and/or proceeds of any of the foregoing (the “Collateral”). If, with respect to any Collateral in the form of investment securities, a stock dividend is declared or any stock split-up made or right to subscribe issued, all the certificates for the shares representing such stock dividend or split-up or right to subscribe will be immediately delivered, duly endorsed, to the Lender as additional Collateral.

The Lender shall have, but shall not be limited to, the following rights, each of which may be exercised at any time or from time to time: (i) to transfer this Note and the Collateral, and any transferee shall have all the rights of the Lender hereunder and the Lender shall be thereafter relieved from any liability with respect to any Collateral so transferred; and (ii) to vote any investment securities forming a part of the Collateral.

Borrower will at Lender’s request maintain insurance on the Collateral in amounts at least equal to the fair market value of the Collateral and against casualty, public liability and property damage risks and such other risks as Lender may request. Borrower will pay all premiums for insurance when due. Unless and until requested by Lender, Borrower shall not be required to name Lender as additional insured in such policy or to provide Lender a copy of the policy for or certificate evidencing such insurance, but when and if requested by Lender, the Borrower shall as promptly as reasonably practicable: (i) cause all policies of such insurance to specify that Lender is an additional insured as its interests may appear and to provide that such insurance shall not be cancelable by Borrower or the insurer without at least 30 days advance written notice to Lender and that proceeds are payable to Lender regardless of any act or omission of Borrower which would otherwise result in a denial of a claim; and (ii) deliver all policies or certificates thereof (with copies of such policies) to Lender. In the event any or all of such insurance is cancelled, any returned premium thereon may be collected by Lender and applied by Lender to any part of the Obligations, either matured or unmatured. Lender is authorized to receive the proceeds of any insurance loss and at the option of Lender shall apply such proceeds toward either the repair or replacement of the Collateral or the payment of the Obligations secured hereby. Borrower will also pay all taxes and other impositions on the Collateral as well as the cost of repairs or maintenance to the Collateral. The loss, injury or destruction of the Collateral, with or without the fault of Borrower, shall not release the Borrower from any liability hereunder or in any way affect Borrower’s liability hereunder.

The occurrence of any one or more of the following conditions or events shall constitute an “Event of Default” hereunder: (i) any failure of Borrower to pay any of the Obligations when due or to observe or perform any agreement, covenant or promise hereunder; (ii) any default of Borrower in the payment or performance of any other liabilities, indebtedness or obligations to Lender or to allow or permit any other liabilities, indebtedness or obligations to Lender to be accelerated; (iii) any failure of Borrower to observe or perform any agreement, covenant or promise contained in any agreement, instrument or certificate executed in connection with the granting of a security interest in property to secure the Obligations; (iv) any warranty, representation or statement made or furnished to the Lender by or on behalf of Borrower in connection with the loan evidenced by this Note proving to have been f